Internet

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Market analysis

Overall, Internet sector growth is slowing, as investors are interestingly now focusing on net income in addition to revenue growth, especially for the mature companies.

Social media has emerged as an attractive Internet subsector, with positive revenue growth reported by both LinkedIn and Facebook.

Despite the market challenges, the Internet subsector in Q1 2016 reported year-over-year revenue growth of 18%, led by LinkedIn (+35%) and Yelp (+34%); Yahoo (-11%) was the only laggard. Amazon (+28%), Netflix (+24%) and Google (+17%) also reported positive growth.

However, on a quarter-over-quarter basis, the Internet subsector reported a 5% decline in revenue due primarily to seasonality. All the Internet companies except for Netflix and Yelp reported sequential drops in revenue. Amazon had the biggest loss, at 19%, followed by Yahoo with a drop of 15%. eBay and Google revenues declined by 8% and 5%, respectively. In terms of net income, performance was subpar as most of the companies reported a decline, with LinkedIn having the sharpest drop in profits. LinkedIn, Yahoo and Yelp all reported negative net income of (-US$46mn), (-US$99mn) and (-US$15mn), respectively.

On a company level, LinkedIn delivered strong financial results and growth across core product lines. As a result of its new mobile experience, members are increasing their activity on LinkedIn, helping drive strong levels of engagement across the platform. Revenue increased 35% year over year to US$861 million. Talent Solutions revenue increased 41% year over year to US$558 million. Hiring revenue contributed US$502 million in revenue, up 27% year over year. Adjusted EBITDA was US$222 million, or 26% of revenue. Engagement materially strengthened across the member platform, driven by the new flagship mobile experience. In addition, core monetization products—Recruiter and Sponsored Updates—showed continued growth, while emerging strategic investments, such as Sales Navigator and Learning & Development, continued to show progress. Finally, the company has shown significant improvements in its ability to increase ROI across the business.

Amazon partnered with Comcast Corp. Comcast has begun selling its TV, Internet and phone service through Amazon.com, creating a high-profile online retail partnership. A new landing page on Amazon.com now welcomes visitors to the "Amazon Cable Store," which sells Comcast's Xfinity-branded bundles, including dedicated customer service for Amazon customers. The two companies created a way to sell TV, Internet and phone service in a way that simplifies the process. Amazon helped Comcast reduce the number of clicks that it takes for a customer to complete a transaction. Amazon will take a fee each time a customer signs up for a Comcast subscription through its site. Going forward, Comcast could sell other products, like its home security service, through Amazon as well.1

Yahoo is in the process of finalizing several asset sales, including Internet websites, patents and real estate. Various bidders, including US telecommunications rivals Verizon Communications and AT&T, are set to go through to the third and final round of bidding in the auction for Yahoo's core Internet assets. A consortium led by Quicken Loans founder Dan Gilbert, and backed by Berkshire Hathaway Chairman Warren Buffett, is also expected to make it through to the final round. It is indicated that all offers do not involve exactly the same assets, with some bidders indicating that they are interested in only certain patents and real estate. Verizon is primarily interested in Yahoo's advertising technology tools. It has been examining how the other assets up for sale, such as search, mail and messenger services, could be combined with the corresponding businesses of AOL, which it acquired last year for US$4.4 billion.2 AT&T has been trying to compete with Verizon in advertising technology as it seeks to expand in mobile video offerings. A sale of Yahoo's Internet assets would leave the company owning just a 35.5 percent stake in Yahoo Japan, as well as a 15% stake in Chinese e-commerce company Alibaba, which accounts for most of its value.3

 

1. Dow Jones News, April 2016
2. CNBC.com, June 2016
3. The Wall Street Journal , April 2016