Jeff Minich is a former Yahoo and an ad-tech industry veteran who has held product management and marketing roles at Adobe, OptiMine, and most recently AdRoll.
Given all the talk about Alibaba, acquisitions, capital allocation for investors, and the standard regulatory financial disclosures, it was easy to miss one very big piece of news from Yahoo’s Q3-14 earnings call: It now has a $1B+ line of business in mobile.
In my last piece for Business Insider, I defended Marissa Mayer from one of her biggest critics, Eric Jackson. One of Eric’s biggest criticisms of Marissa, and one that is now echoed by major shareholder Starboard Value Fund, was that Marissa has not been a good steward of capital, having wasted over $1.6 billion on frivolous acquisitions.
My counter-point to Eric was Marissa’s acqui-hire strategy was a critical cornerstone for the turnaround at Yahoo because it “accelerated the process of rewriting Yahoo’s core engineering DNA,” which, in turn, would serve as a catalyst to Marissa’s declared model of hiring great people who then build great products, which then leads to more users and ultimately revenue growth.
Jackson, and investors like Starboard, seem to believe that high-growth technology products can be engineered from the balance sheet, significantly underestimating the people factor when it comes to building great tech businesses. To put the importance of people in perspective, Google is so selective in choosing talent that it hires only 7,000 people from among over 3 million applicants each year. To become competitive again, particularly in mobile, Yahoo needed great people and high-functioning teams, and it needed them fast. The mega-shift in mobile threatened to wash away most of Yahoo’s core PC-centric business, yet the company was sitting completely flat-footed when Marissa arrived two years ago. As she often cites, at the time of her arrival there were less than 50 of the company’s 12,000 or so employees dedicated to mobile products.
Now with the Q3 2014 Yahoo earnings, we have a stunning disclosure from Marissa: Yahoo mobile is now forecast to be a $1.2 billion line of business in 2014 (when including mobile traffic acquisition costs), growing in Q3-14 at what Yahoo CFO Ken Goldman claims is a 100%+ growth rate vs. the same quarter in 2013. That number puts Yahoo in third place for mobile ad revenues behind Google and Facebook. And, at least by the latest numbers, it also displaces Twitter from the No. 3 spot.
Let me repeat: Yahoo is now bigger by revenue in mobile than Twitter and growing its mobile business at nearly the same rate (in its most recent earnings report Twitter’s YoY revenue growth rate was 124%). Here are the latest annualized revenue numbers for the leaders in mobile advertising (with eMarketer estimates for Google, which does not breakout mobile revenue):
Mobile Advertising Leaders by Revenue (based on latest earnings and/or industry estimates)
- $14.7B - Google (eMarketer estimate)
- $6.64B – Facebook (Run Rate based on Q2-14 Earnings Report)
- $1.2B – Yahoo (2014 Forecast from Q3-14 Earnings Report, includes Mobile TAC)
- $1.04B Twitter (Mobile Run-rate based Q2-14 Earnings Report)
While still far behind Google and Facebook, there are two pieces of good news here for Yahoo investors.
First, Yahoo is catching the shift in usage from PC to mobile devices. As Kara Swisher recently reported, comScore reports show that PC visitors on Yahoo sites declined 16%, while Mobile visitors to Yahoo sites increased 34% in Q2-14. Given the macro-trends in mobile, Yahoo investors should be thrilled to take that tradeoff.
Second, Yahoo is starting to monetize Mobile in a very significant way. How is this happening? Marissa shared some other interesting facts about Yahoo mobile in the Q3 earnings call:
- Across Yahoo and Tumblr on a device basis Yahoo now sees more than 0.5 billion, 550 million monthly active users on mobile, up 17% year over year.
- Mobile monthly active users have more than doubled since Marissa began investing in mobile products in October 2012
- Mobile search GAAP revenue more than doubled year-over-year
Marissa’s strengths in Mobile and Search are starting to show up on Yahoo’s income statement in a very convincing way. Should the trend in mobile monetization and usage continue, Yahoo investors should be very encouraged. Indeed many already appear to be, with the stock up 6% since the earnings announcement.
Conversely, Marissa’s seeming weakness in display advertising is also evident in the Q3 results, with a further 5% year-over-year decline in display revenue. Looking at the latest numbers, one thing that’s obvious is that it appears yield, or price per ad, for native advertising is creating quite a bit of drag on growth for the overall display business.
Native ads made up 44% of all impressions sold in Q3-14 (up 10% from Q2-14) but only 14.5% of display revenue. If you do the math, this implies that native impressions are yielding a price per ad that is less than one-fifth of Yahoo’s other inventory sources. That’s a big gap to make up (but also a key revenue lever going forward) and thus investors should be watching the action here very closely in the coming quarters.
It’s my understanding that the majority of Yahoo’s targeting products available for premium display buys are not enabled for native ad buyers, leading to less valuable placements and lower yields for native inventory. Marissa seems keenly aware of this shortcoming, mentioning targeting as a key next step to getting price per ad up for native inventory. The integration of Yahoo Ad Manager Plus’s targeting capabilities with Yahoo Gemini, the native ad platform, should solve this problem. At that point, I would argue, Marissa will have all sides of Yahoo monetization (mobile, search, and display) firing on almost all cylinders, with a return to top-line growth imminent thereafter.
So the question remains, should investors be patient? Given where she started, I think it's no small feat for Marissa to have transformed Yahoo into a major mobile player in just over two years. With more innovation (and higher prices) for mobile ads, products like Aviate that promise to unlock much greater mobile usage, and what appears to be an extremely tenacious commitment by Marissa to, in her words, “return an iconic company to greatness,” Yahoo may now actually have a chance to engineer a comeback on the global tech scene. That is, of course, if the financial engineers on Wall Street can stay out of Marissa’s way.
