EUR 850.00 For Business Accounts Only

Morningstar | Yahoo Japan’s Margin Recovery May be Slower than Anticipated Because of Increasing Marketing Costs. See Updated Analyst Note from 05 Nov 2018

We trim our fair value estimate to JPY 400 from JPY 420, as we are concerned about the increasing costs, and lowered our operating margin assumptions. We are encouraged that: 1) the solid KPIs are showing the strong user engagement; and 2) paid search advertising revenue is maintaining robust growth momentum. However, the media segment operating margin dropped approximately 5 points from the previous year, suggesting that the marginal cost to achieve the ad revenue growth is becoming larger than in the past. Therefore, our operating margin assumption on fiscal 2023 is revised to 16.5% from 17.3%. While we are somewhat disappointed with the reported numbers, we view that the current share price, which dropped approximately 8% after the earnings announcement, is underestimating the rich cash flow from its ad business, underpinned by the brand power of Yahoo Japan portal.

Yahoo Japan’s media business revenue increased 4.8% from the previous year, driven by the 13.2% growth of its paid search advertising revenue, as the company has redesigned the portal site, which contributed improving ad performance. Meanwhile, the operating income of the media business dropped 5.2% from the previous year, owing to the increasing promotion costs. In addition, we assume that increasing R&D costs, because of: 1) the redesign of the portal; 2) introduction of video ads; and 3) introduction of countermeasures to ad frauds, dragged down the profitability. As diffusion of Internet and smartphones reached a plateau, we doubt that more investment will be necessary to maintain the revenue growth of ad business.

Yahoo Japan has launched its mobile payment service, PayPay, from this October. While we acknowledge that the company can leverage its ecosystem to expand market share, we are concerned Yahoo Japan needs to spend more marketing expense to catch up with preceding competitors, Line and Rakuten, and to compete with NFC chip payment, which is quite popular in Japan.