Yahoo Earnings Disappoint, But Search And Mobile Revs Up

Yahoo’s second quarter earnings disappointed investors who had expected somewhat higher numbers. However, there were a number of encouraging spots around product and user metrics and isolated revenue improvements.

First the top-line numbers:

• The company had $1.04 billion in revenue ex-TAC, down 3 percent year over year (YoY).
• Display revenue came it an $394 million, ex-TAC, down  7 percent YoY
• Search revenue was $428 million, ex-TAC, up 6 percent YoY

As indicated search revenues were up and so were CPCs. This was the 10th quarterly increase in search revenue for Yahoo, said  CEO Marissa Mayer on the earnings telecast.

While Yahoo sold more display ads the price per ad was down. It’s going to be very challenging for Yahoo to regain revenue momentum in PC display. However Mayer said that there were specific, internal (not market) problems this quarter related to Yahoo’s PC display business that “can be corrected” and would be in the next “one to two quarters.”

During the telecast, Mayer stressed improvements in the company’s four key business areas: search, communications (e.g., Mail), digital magazines and video.  In the first category, she focused on the Android launcher Aviate, which she said were part of Yahoo’s “mobile search” efforts. (She also said that as of last quarter there are no more search revenue guarantees coming from Microsoft.)

Mayer said the Aviate app was being quickly adopted and showed very high rates of engagement: more than 50 user interactions daily on average. She added, that “For the very first time since 2010, we are serving our own mobile search ads in the United States.”

The dual search-display (native) ad platform Gemini represents 50 percent of Yahoo’s mobile display revenue in the United States, Mayer revealed. She pointed out that mobile display and mobile search revenue each grew 100 percent year over year (impressive but from a small base).

Speaking briefly about Mail and some positive time spent figures (one minute more per month) she moved on to digital magazines, of which Yahoo now has several: Tech, Movies, Travel, Beauty and, launching today, Yahoo Health. Mayer said that engagement rates and content sharing were higher for these verticals than other areas on the site.

Mayer further explained that the digital magazines are a “driving force” in the company’s effort to jumpstart display growth, especially native ads. She said that the magazines/verticals have been attractive to brand advertisers, “eager to see themselves next to premium content.” She also discussed the monetization of Tumblr with native Tumblr sponsored posts (“the creativity of Tumblr with the scale of Yahoo”).

The message about video was similar to that surrounding digital magazines. The company is investing in original and premium content (see the renewal of canceled sitcom Community and Live Nation concert partnership). Mayer asserted that “premium content brings premium advertisers.”  She also cited a 22 percent increase quarter over quarter in daily active users of Yahoo Screen.

Near the end of the telecast, Mayer thanked Yahoo co-founder Jerry Yang for investing in Alibaba (you can say that again), which some believe has been the sole reason behind Yahoo’s share gains in the past year or so. She also thanked Alibaba CEO Jack Ma for allowing Yahoo to “participate in the journey that has been Alibaba.”

The latter is allowing Yahoo to sell fewer shares than previously required, retaining millions of shares representing billions of dollars.

Partly fueled by Alibaba cash, it’s certain that Yahoo will continue to acquire companies. But there will likely be one or two major acquisitions in the coming quarters in the area of programmatic display and/or mobile display. Mobile offers a real opportunity for display revenue growth, which is now harder on the PC side.

Yahoo will need to buy more reach/scale and possibly technology, which would likely mean a mobile ad exchange (including programmatic) or large scale network. Millennial Media, for example, is now worth less than $400 million — putting it on the short list. However it might prefer a more global player, ultimately offering a larger revenue opportunity.

Stepping back, Mayer is reversing almost everything that former Yahoo CEO Carol Bartz did when she downsized, dismantled and outsourced most of Yahoo’s content and marketing platforms to third parties.