Zacks_Analysts' Blog : Earnings Preview: Yahoo! Inc. - Analyst Blog

Yahoo! Inc. (YHOO) is scheduled to announce its fourth-quarter 2011 results on January 24, 2012. We witness limited movements in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

Yahoo’s third-quarter non-GAAP earnings were up 17.8% sequentially and 38.0% year over year, which was encouraging and much better than what most investors were expecting. The primary reasons for the earnings growth were lower-than-expected operating expenses, a lower tax rate and lower share count.

Revenue was down 1.0% sequentially and 24.0% year over year to $1.22 billion, due to lower-than-expected Display and Search revenue. However, gross margin was up 67 basis points (bps) sequentially and 1,299 bps year over year to 70.5%. Besides, lower cost of sales from both the previous and year-ago quarters and solid cost control measures supported the gross margin in the last quarter.

Fourth Quarter Guidance

Yahoo expects revenue (ex-TAC) of $1.14 billion, or up 16.2% sequentially. TAC is expected to be $150-160 million and other costs are anticipated to be $925-975 million. This is expected to generate operating income of $200-260 million.

(Detailed earnings results can be viewed in the blog titled: Yahoo Results Better Than Expected

Agreement of Analysts

Out of the 24 analysts providing estimates for the fourth quarter, one analyst made an upward revision in the last 30 days. Over the same period, 2 analysts made upward revisions while one made a downward revision for fiscal 2011.

A handful of analysts expect a decent fourth quarter, with revenue coming in line with the Street Consensus Estimate of $1,193 million. They also expect strong margins due to solid cost control and restructuring initiatives taken by management.

On the contrary, the majority expect Yahoo to report below consensus fourth-quarter results due to share losses in its core business lines, display and search, and poor execution. They expect continued turmoil in Display ad sales due to the changing leadership and believe that the recent change in selling strategy, which denies access of certain Yahoo! class 2 inventory to resellers, might lead to a revenue shortfall in the near term. Additionally, the analysts believe that Yahoo! will continue to lose share in the paid search market to its competitors, Google Inc. (GOOG) and Microsoft Corp. (MSFT).

Magnitude of Estimate Revisions

In the past 30 days, there was no change in the Zacks Consensus Estimate for the fourth quarter and fiscal year 2011.

Over the 90-day period, the Zacks Consensus Estimate increased a penny to 24 cents for the fourth quarter but remained unchanged at 80 cents for fiscal 2012.

Our Recommendation

Though Yahoo remains one of the biggest Internet names and also has a position in online search, we remain uncertain about Yahoo!'s strategic direction. Further, the Microsoft Search transition is not going smoothly and YHOO’s Display segment is also facing significant competition.

As the search-related issues are likely to continue for a few more quarters, we are unlikely to see very strong revenue growth in the near term. Though gross margin numbers could improve due to solid cost control measures, continued investment in the business (particularly product development and sales), is likely to be a pressure on operating margins.

With the new CEO Scott Thompson, we believe YHOO will be a wait-and-see turn-around story. Though Thompson’s appointment has potentially sealed the door for any further sale of the company as a whole, we are now more optimistic about the possibility of Yahoo! divesting its stake in Alibaba as well as a sizeable share in Yahoo Japanafter the departure of Jerry Yang. We believe that Yahoo’s shareholder meeting on February 24 and the liquidation of its Asiaassets could be near-term catalysts for the shares.

Yahoo shares carry a Zacks #3 Rank, implying a Hold rating in the near term (1-3 months).