Yahoo Earnings Preview: Focus on Revenue Growth and Margin Improvement

Yahoo (YHOO) is scheduled to announce its Q1 2011 earnings on April 19th, 2011. We believe the main questions to emphasize during the earnings call will be centered around the company’s ability to expand its position in the online advertising business. More specifically, we anticipate an emphasis on revenue growth opportunities and margin improvement. We will be keenly watching Yahoo’s top-line growth and operating margins for both its display and search advertising businesses. Yahoo has faced recent struggles in the online advertising market at the hands of increased pressure from players like Facebook, Google (GOOG), Microsoft (MSFT) and AOL (AOL).

We currently maintain $17.88 price estimate for Yahoo stock, which is about 10% above market price.

Yahoo Needs to Demonstrate Top-Line Growth

The U.S. online advertising market has made a comeback since the recessionary period of 2009, growing by 14% from about $23 billion in 2009 to $26 billion in 2010. [1] We anticipate continued growth in this market going forward.

However, Yahoo’s U.S. online ad revenues actually dropped in 2010 as the company saw a down-tick in its market share. [2] Yahoo seemed to be unable to leverage growth in the overall ad market, lagging behind peers like Google and Facebook. This adds a bit of risk to our forecast estimates for Yahoo’s display ad revenues per 1,000 page views.

Earnings results for Q1 2011 could set the pace for the direction of Yahoo’s top-line advertising growth in the years ahead.

(Chart created by using Trefis' app)

Yahoo Also Needs Operating Margin Improvement

Over the past year or so, Yahoo has increased focus on cost cutting (in part through layoffs). The company also reached a revenue sharing arrangement with Microsoft under which Microsoft will provide the search technology to to power Yahoo’s search engine. According to the arrangement, Yahoo will share 12% of the search advertising revenue with Microsoft, while Microsoft will bear most of the associated expenses. [3]

These initiatives should boost Yahoo’s operating margins in the short term. However, it will be interesting to see if Yahoo leans more on cost cutting or top-line revenue growth going forward.

(Chart created by using Trefis' app)

Notes:

eMarketer: U.S. online ad market, March 14th 2011

Yahoo’s revenues estimated from its market share as compiled by eMarketer, April 4th 2011

See SeekingAlpha: Yahoo Q4 2010 earnings conference call transcript, January 2011

Disclosure: No position