BUSINESS BLOGS
BUSINESS BLOGS
category: business
29 Jan 2008
related tags: Internet & Web | Search Wars | Investing | Yahoo! |

Part 1: Yahoo! on Deck

There will be more than enough people dissecting Yahoo!’s Q4 2007 earnings report. I will say this, however, Yahoo!’s brass is making it very easy for a hostile takeover to take place.  For all of YHOO’s options:

Related:

- status quo (a $100B market cap by 2010?)
- merger with eBay
- merger with Viacom
- merger with CBS
- acquisition by/merger with Microsoft
- taken private
- sale to AT&T
- can Google buy Yahoo!?
- Spin off ad network unit

While previously some shareholders would have preferred to “wait it out” I think the blazeness in today’s press release speaks volume:

“We are pleased with our results this quarter and believe we are prioritizing and investing appropriately to achieve our strategic objectives,” finance chief Blake Jorgensen said. “As we operationalize our strategy in 2008, we will remain focused on generating long-term shareholder value.”

Operationalize? I know that’s a word. But don’t use it. As a shareholder I do not see for the life of me how the current people running this ship have any clue of what they are doing. Billionaire and out-of-touch management at the top, turf-protecting, career-focused senior executive VPs below… way too many managers in the middle and everyone in the bottom updating their resumes instead of working.

Once the rumors got out that Yahoo! might be laying off 5, 10 or 20% of their staff, the right call would have been to make the move quickly, I called this the Band-Aid manifesto. Instead of Yahoo! flipped-flop a few times. Adding insult to injury, in today’s press release, nary a word.

The stock will now hover down to value Yahoo! at $25B or so. Remove the value of Alibaba, Yahoo! Japan and the world’s largest and worst-managed new media company could be yours for $10B net.

You have to ask yourself: How many private equity firms do you think are plotting for Yahoo! right now?

Fiduciary Duty:

I respect and understand that it’s hard for Yang - a billionaire times many times over - to lay off even 1% of the staff knowing that the company is generating hundreds of millions of dollars in profits. But if that is the case, then he has no business running a publicly traded company. Take your company private, in which case you sell your shares and are no longer the owner. Is Yang willing to let go? I doubt it.

But the flip side is that Yang is the largest individual shareholder and if a PE firm steps and offers $40/share, could Yang really say no, knowing that it would bring back most of the employees’ options back above water? I’m not so sure he could. So his supposed desire to avoid layoffs hurts his company, making it vulnerable to a hostile takeover… which would actually help the nest-egg of his employees… but in turn he won’t be open to that.

Disconnect with Marco Environment and Reality

Sue Decker just started talking. Everyone talks about progress, excitement and what not () but the financials don’t convey that, at all.

Yahoo! should have killed Q4 numbers as 2007 was the first year that online ads in the US crossed $5B per quarter, yet Yahoo! is declining as a business. This is unacceptable. It’s impossible to trust the company’s management when you hear such disconnect with reality.

On a positive note, Yahoo! has discontinued weak units, such as photos (I suppose she means they now focus on Flickr, and not Yahoo! Photos). But the disconnect theme is recurring. As Decker talks about search, I wonder, has she seen the time of day? Yahoo!’s share of the market is anemic, why does she speak as if she has any authority or knowledge of the matter. I might as well be listening to my grandmother…

As she skips from misfiring unit to misfiring unit, she moves on to email: “forefront of innovation.” Really? I have not used Yahoo! mail in some time.

Display: Yahoo!’s “strength”

Yahoo! has partnerships with eBay, Comcast and 550 newspapers. Yahoo! here is king, in theory.

Non-premium inventory is migrated to Right Media. That’s good, but I’m surprised we did not see more upside. Display had a good revenue: up 20%.

Premium vs. non-premium inventory went from a 10x price discrepancy to a 3x range. This is good and bad: it’s bad in that I was expecting a bigger dent in revenues, yet that did not convert to the income statement.

Decker says the year has started well, though they are looking at the macro environment. If so, then why is your stock down 10%?

Panama

She mentions the P-word. Will we hear more about Panama? Let’s see where this Alice in Wonderland tale aka Yahoo! Q4 Earnings Call goes. Oh, “we need to catch up in some areas”… this should be Panama and grid computing, yep…

I’m a BS artist when need be, and I’ve worked in search and consider myself well-versed in search lingo. Right now, she’s speaking Chinese to me. I have no idea what she’s referring to. Oh, I heard a buzzword, product excellence. Let the buzzwords continue.

She is referring to Google’s acquisition of Doubleclick to get into display. I suppose, as opposed to Yahoo!’s strategy:

“We’re executing a build strategy to profit from search and display…” - suggesting that advertisers see the advantage of this strategy.

Really?

“We’re streamlining operations, empowering leaders…”

I don’t think so. That’s a lie, twice. Yet to see it. Heard lots about it.

“Yahoo! is moving from catchup mode to differentiation”.

Now the CFO’s time, Blake.

As Senor Charisma takes us through the financials, in after hours trading, Yahoo! hits a new 52-week low.

Business Outlook

A few trends and one-time trends. Oh-oh, that’s not good.

GAAP revenue would decrease $100-110M due to sale of Overture Japan to Yahoo! Japan. But the sale would be modestly accretive and grow profitably over life of deal due to reduction in payroll expense, basically.

Broadband: BT and Rogers renewed on revenue share deals. AT&T renewed today… “market has changed to ad-share and revenues would reduce $150-200M compared to 2007 run-rate, but anticipate $300-400M upfront from AT&T, along with Rogers upfront $52M and booked over lifetime of deals (…) we expect the overall contribution to be positive.”

[Maybe, but if this team of managers had any credibility left, I’d believe them. Right now, I doubt it.]

“Our outlook: mid-February ‘we will let go approximately 1,000 people.’ This is outside of today’s forecast.”

Alibaba: $400-500M windfall, not included in today’s outlook.

Beyond Q1, we do not report pre-TAC (traffic acquisitions costs)

GAAP: $1.6 - 1.84B for Q1 2008.

Revenues ex-TAC: $1.2B - $1.3B which is basically a +12% growth rate.

FY GAAP: $7.2B - $8B (so 50% of Google’s revenue, basically).

Revenues ex-TAC: $5.3B - $5.95B which is + 10.5%

Operating Cash Flow (OCF): $400M - $450M for Q1 and $1.275 - $1.795B FY 2008

Free Cash Flow (FCF): FY 2008 will come in at $850M - $1B

“This outlook does not anticipate expected payment from AT&T” adds Blake.

“Our outlook reflects strong growth: mid to high teens,” hopefully your stock won’t be in the mid to high teens, pal… though in all fairness, Yahoo! remains a formidable profit machine.

Jerry’s Back in the House

To recap, Yang concludes:

- Pivotal time in industry.
- Profound changes, significant and game changing changes.
- Increase investments…
- Executing aggressively.
- Laying out benchmarks… to better gauge prospects.
- Exit 2008 stronger and more competitive to close out 2009.

Question-time…

Q1 - Why is YHOO’s revenue per employee lower than peers?

A1 - Answer was lame. Not worth reprinting, frankly. My two cents: Yahoo! has as many employees as Google, Google automates everything, Yahoo! has human layers over everything.

Q2 - How does economic slowdown affects display ad sales?

A2 - “Too early to tell. We’re not economists.”

No shit Sherlock. We’re asking for your opinion.

I hear “the next question will be from Mary Meeker…”

I think: WTF? She still around? False alarm. It’s not Mary, it’s some guy (no, not Henry Blodget).

Q3 - Exposure to display vs. search

A3 - No visibility. But our investments will yield results in Q3 and Q4.

Q4 - Are CTRs going up thanks to Panama?

A4 - “CTR improvements have been primary driver of RPS (revenue per search) gains.”

Methinks, too bad Yahoo! has a crappy market share in search to make those increases material.

It’s funny to hear Sue say that she lacks “any more visibility than [analysts] do.” Is it just me or is she not an insider while analysts are outsiders. What kind of backwards comment is that?

Q5 - How would you build opportunities and inventory on high-yield inventory?

A5 - Sue is mentioning that the company is actually leading in many of the key areas, such as finance. She’s right, but this also highlights the bigger problem: Yahoo!’s management is clueless. I don’t think how Yahoo! could be so huge yet they fail to grow despite online advertising getting bigger and bigger. Something is off… I also have never seen anyone be so proud of lacking visibility. Get a clue people…

That’s akin to me meeting an investor who asks me where I think online video will be and be saying: “you know what, couldn’t tell you.” What would that do to their confidence.

Yahoo! now has 14,730 people… I can think of the first people to go. Care to guess who?

And we’re out. Analyst call is over.

Conclusion:

Yahoo! is now worth less than $25B.

They’re feasting in Redmond.

Private equity investors around the world rejoice.

Lights out. Yahoo! will not be independent by year’s end, I think by Independence Day, Yahoo! will be a ravaged apart. To whom shall the spoils go? Time will tell.

[Memo to self: check for Yahoo!’s poison pill provisions.]