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Yahoo! Inc. (YHOO) Q4 Earnings Preview: All Ads Up To A Good Quarter

 January 24, 2013 02:12 PM

(By Rich Bieglmeier) Yahoo! Inc. (YHOO) is expected to report earnings after the market closes on Monday, January 28 at 2:00 p.m. Pacific/5:00 p.m. Eastern. Wall Street anticipates that Yahoo! will earn $0.28 for its 4th quarter. iStock expects internet service provider to report earnings that will exceed Wall Street's consensus number. The iEstimate is $0.33 –  a 5 cents upside surprise.

Yahoo! Inc., together with its subsidiaries, operates as a digital media company that delivers personalized digital content and experiences worldwide. It offers online properties and services to users in three categories, including communications and communities, search and marketplaces, and media. In case you didn't know.

[Related -Yahoo! Inc. (NASDAQ:YHOO): What Will Drive Future Revenue For Yahoo!?]

In the most recently completed quarter, 80% of YHOO's revenue was derived from advertising: 42% from Display and 38% from Search. Display ads are the flashy ones you see on the top or in the sidebars; whereas, search ads are the pay-per-click (ppc) results you see when searching keywords.

They key driver for both is web-traffic. The more people on Yahoo, the more pages that are viewed (creatively named pageviews); more pageviews equals more display ads, which equals more ad revenue from advertisers.

Fortunately, there are some online tools we can use to get a sense of YHOO's traffic trends. Here, we see a mixed picture. According to Alexa.com, Yahoo visitors have dipped in 2012 relative to 2011, but were flat during the last three months of 2012, and up 1% in December. That's part of the bad; Google Trends reveal that searches for the keyword "Yahoo" were up 9.63% from October – December 2012 versus the same timeframe in 2011. Quarter-over-Quarter, "Yahoo" was also Googled 9.6% more than in Q3.

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For Q4 2011, YHOO earned 24 cents and 35 cents for Q3 2012. With the Alexa and Google Trends data in hand, EPS could range between 26 and 38 cents for Monday's profit scorecard.

iStock would expect to see an increase in display and search ads served. Part two is what advertisers pay for those ads. Undoubtedly, Google is the KING of search and its cost-per-click (CPC) rose 2% from the 3rd quarter; however, CPC was still down 6% year-over-year (YoY). We'd expect to see a similar result from Yahoo.

Although we expect to see the number of display ads served up in Q4, Google Trends show targeted searches for "Yahoo Finance," "Yahoo Sports," and "Yahoo Travel" are down YoY, and mostly flat quarter-over-quarter. Targeted ads that appeal to specific readers i.e. ETF ads on the ETF page will generate higher fees than general ads served on the home page.  If general traffic increased while targeted visits declined, we'd expect to see flat display ad rates, at best, most likely a small tick down.

Management's guidance on mobile advertising will likely hold the key to Wall Street's reaction. According to Gartner research, "Worldwide mobile advertising revenue is forecast to reach $11.4 billion in 2013, up from $9.6 billion in 2012."

It's also estimated that one out of every five online dollars will be spent on mobile advertising in the year ahead. Either be big in mobile, or you could see money walk out the door.

We'll also watch to see if Yahoo's revenue per search ("RPS Guarantee") with Microsoft is re-upped. The deal between the two is scheduled to expire March 2013, which accounted for $17 million (1.5 cents per/share) and $51 million (5 cents per/share) for the three and nine months ended September 30, 2012, respectively. Although it is a relatively small amount, analysts would have to adjust EPS for 2013 down a few pennies if the deal dies.

Overall, Google's results, plus search trends suggest a strong possibility that Yahoo! Inc. (YHOO) will bypass Wall Street's consensus estimate Monday night.


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