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Earnings Analysis: 
Yahoo! Q3 Earnings Call
Author: Albena Toncheva
Last Update: 6:29 AM EDT October 25 2005

Yahoo! currently has 11.4 million fee-paying customers, compared with 7.6 million a year ago. Advertising and listing-related revenue climbed 46% to $1.16 billion, accounting for 87% of total revenue. Fees from premium offerings rose 55% to $170 million in the quarter. International revenue rose 62% to $407 million, representing 31% of sales.


This summary is based on the third-quarter earnings call conducted on October 18th, 2005.

Key Investors Issues

- Yahoo’s revenues were $1.33 million for the third quarter, a 47% increase compared to $907 million for the same period of 2004.
- Net income was unchanged at $254 million, or 17 cents a share, compared with $253 million, or 17 cents a share, a year earlier.
- Operating income before depreciation and amortization in the quarter was Yahoo!'s highest ever at $385 million, up 48% from a year ago.

Third-Quarter Financial Results Review

Yahoo’s earnings in the quarter contained a non-operating pre-tax gain of $27 million, from the disposal of two non-strategic investments, which has been recorded in the other income.

The effective tax rate for the quarter was unusually low.

Earlier in the year, Yahoo had estimated a full year effective tax rate of 41% to 42%. The company now believes that rate will be about 100 basis points lower, owing to greater use of tax credits than originally planned.

In order to adjust the company’s nine months tax rate to the level expected for the full year, Yahoo’s third-quarter effective rate was 34%. Excluding these items and assuming an effective tax rate of approximately 40% in the quarter, consistent with the company’s revised expected effective tax rate for the year, the company’s earnings for the quarter would have been $221 million or 15 cents per diluted share, up 77% from a year ago and up 15% from the 13 cents earned in the second quarter.

Free Cash Flow was $345 million in the quarter, up 71% from a year ago, advancing the company’s trailing 12-months free cash flow to over $1.2 billion.

The quarterly free cash flow represented 37% of revenue ex-TAC (( Traffic Acquisition Cost)) and a conversion rate of 89% of operating cash flow.

Third-quarter free cash was 45% larger than the company’s normalized earnings, whereas for most companies free cash flow is less than earnings. The company continues to benefit economically from large tax loss carry forwards even though the company’s earnings are fully taxed for GAAP purposes and from relatively limited requirements to invest in the company’s balance sheet.

Balance Sheet Details

The company’s ending cash and marketable securities balance for the quarter was $4.8 billion, up almost $1.7 billion from a year ago and down about $116 million from last quarter.
The company’s primary sources of cash, in addition to the free cash flow, collectively amounted to about $220 million.

In the third quarter the company invested over $700 million.

- The company repurchased $208 million of Yahoo! stock at an average price of $32.89 per share.

- The company entered into $500 million in structured stock repurchase transactions, which mature in two tranches through April of 2006. At the final maturity, depending on the price of the company’s stock, Yahoo! will have either repurchased up to 16.3 million shares with these funds or will have received up to its initial $500 million investment plus an annualized premium of 18.5%.

The company’s ending cash balance of $4.8 billion is net of both the $500 million in structured share repurchase transactions referenced before and also of $350 million in similar transactions that were previously entered into, all of which mature over the next three quarters.

Product & Leverage

Third-quarter revenue ex-TAC advanced 42% from a year ago and 7% from the previous quarter despite normal adverse seasonality in the brand side of marketing services. The 42% growth broke down into 40% growth in underlying organic revenue, particularly strong considering tough comparisons against strong year-ago gains and 2% related to acquired companies owned for less than a year.

Global marketing, the company’s largest service, generated $762 million of revenue ex-TAC for the quarter.


Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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