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.]
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WatchMojo NewsletterFor the longest time, I’ve been hinting at private equity firms to give me a call so we can rescue Yahoo! That might happen, it might not. But to pull that off, you need a good $40B or so. With Yahoo! at $25B - and reporting earnings as we speak - it might happen.
But today, an easier target. No, I’m not talking about CNET - though I’d love to manage CNET and whip it into shape, too. CNET is in fact facing a hostile takeover from Jana Partners, who has built up a 20% stake in the company.
I’m talking about About.com, the company founded by Scott Kurnit, first sold to Primedia for $690M, then unloaded to the New York Times for $410M in 2005.
Just this past Sunday, I mentioned that I was surprised at how little NYT had invested in developing the videos on About.com. I mentioned that with much lesser resources, we had built a video library twice the size of About.com.
Anyway, Alley Insider is now reporting that NYT wants to sell About.com :
It’s on track to do about $100 million in revenue for 2007, and perhaps $30 million in operating profit, up from $44 million and $11.7 million in 2005 (those numbers include results from recent acquisitions like ConsumerSearch–$33 million purchase price–and UCompareHealthCare.com, $2.3 million). At a 15x Ebitda multiple, About could fetch $450 million. Bump that up to 20x, and it looks a little better: $600 million.
I think About.com will have a hard time finding a buyer because big buyers won’t know what to do with it. With so much focus on social media and networking, an old school Web 1.0 company such as About.com won’t be able to command $500M from many obvious buyers because such companies would rather spend $500M on more high growth opportunities - basic risk and return.
So devoid of such upside, here’s my two not-so-subtle suggestion:
- Lend me $500M.
- We’ll buy About.com for $500M
- We’ll leverage our expertise and library at WatchMojo.com and invest some of that $30M in profits in developing About.com in a video content powerhouse to match its text content strength.
- We’ll integrate our MetaMojo.com vertical search technology to better develop and profit from niche vertical opportunities.
- We’ll let About.com’s columnists use the BloggerMojo.com blog network to publish timely pieces that drive traffic back to the millions of pages deep within About.com.
- We’ll use the StreetMojo.com application and create mini comminities matching users with marketers (b2c) and users with users (c2c).
Overnight - or in 1 quarter - About.com goes from a really useful but stagnant old, new media company, to a rapidly growing company with considerable exposure to both social media and video.
Adding our existing video content alone on About.com’s thousand of SEO-optimized pages alone would reap considerable strategic value. But with video advertising set to cross $1B in 2008 - and cross $7B in 2012 in the US alone - I am pretty sure that I can make About.com be a $10B market cap company in 5 years (7x growth in video market alone in 4 years).
Let’s face it, About.com can attempt to build up video alone etc., but within About.com, that will be hard. With About.com being a part of NYT, it’s impossible.
Something tells me that making a run at CNET is counter-productive. They don’t seem to be a willing, motivated seller. But NYT Company? I think they’d sell that puppy to me in a heartbeat.
Now all I need is a banker. A private banker with $500,000,000.00. Hmm. Where can I find that?
Any takers?
Related:
Rupert Murdoch struck gold when he acquired Intermix - parent of MySpace - for $580M in 2005. Subsequently, he bundled all of his digital assets into Fox Interactive Media, headed up by the man who urged him to buy Intermix in the first place, Ross Levinsohn.
A year later, he sold rights to power search results and serve up contextual ads on the FIM network to Google for a cool $900M. News Corp. had to guarantee minimum impressions, and given MySpace’s massive growth (the site tripled in size since the acquisition), it’s fair to assume he’s met those guarantees on his way to earn the $45M monthly earn-out (the deal was $900M over approximately 2 years). FIM will do $800M in revenues this year.
We partner with News Corp. today by way of providing video content to MySpace TV. I also used to work for News Corp. briefly, but I don’t claim to have any inside information on Google’s $900M deal with FIM. The following is strictly me pontificating.
What I think is genius is the fact that News Corp. today signed a deal for its new unit, Dow Jones, with Microsoft, granting MSFT the right to power search and contextual ads. Google and MSFT are sworn enemies.
While some folks at Google might say “what the…” over this deal, I think Murdoch is showing once again that he gets the last laugh while giving his critics the one-finger salute.
Here’s why: when Murdoch was trying to acquire Dow Jones, everyone warned him to keep Dow Jones separate, at least from an editorial perspective.
By signing this deal with MSFT, Murdoch - it could be argued - is doing just that, by keeping Dow Jones separate from Fox Interactive Media, it gives Murdoch to ability to work with both Google and Microsoft, test both companies’ monetization engines and ultimately walk away with a far better from both when the deals expire.
Genius, pure genius.
Disclaimer: News Corp. was my former employer from Sept. to Dec. 2006; WatchMojo.com partners with MySpace TV.
I don’t like to go to the casino, but by virtue of buying stock, I know the feeling.
Yahoo! is on deck in what is arguably the single biggest earnings report in the company’s history (to jump straight to our post-report thoughts, click here for a no-holds barred commentary). It’s funny because while the company’s long term outlook remains bright, what will happen to Yahoo! tomorrow (on the stock market and in boardrooms around the world) will be determined by the Street’s reaction to Yahoo!’s Q4 2007 earnings report. In fact, it’s not even what’s in the report, but what Yahoo! guides to for 2008.
In other words:
- if the company pleases the Street: it lives to see another day.
- if the company disappoints, the stock will fall and the company’s market cap will fall below $25B, which if you subtract its stakes in other companies means Yahoo! - as a stand alone entity - will be trading at about $10B or so… low enough to a myriad of companies - eBay, MSFT, AT&T, CBS, News Corp., - or a private equity firm or two to make a move. The latter, of note, is becoming more and more of a possibility. YHOO has options, no doubt. They include:
- 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
But time is running out as a go-it-alone play.
A few additional storylines?
Is Meg Whitman Heading to Yahoo! as CEO?
The timing of Meg Whitman’s resignation from eBay is interesting. Jerry Yang has spent his first 100 days realizing that the value of his holdings have dwindled since April 2003, when Yahoo! reported Q1 2003 figures and returned to its heady days. Chairman and CEO Terry Semel announced a 2-for-1 stock split, YHOO stock was pushed up 16% after-hours. But since then, the company has been caught in a $22-34 range, and in 2008 the stock hit a new 52-week low at $18 and change, valuing the company at $25B.
If the goal is to buy low and sell high, then no wonder that Jerry Yang does not want to sell now. Using that same mindset, maybe then Meg Whitman believes that coming on board now (at a low price and with low expectations) she can repeat history and double the success she had at eBay. Of course, bear in mind that at eBay, Whitman - a former consultant and executive at Hasbro and Walt Disney - was employee #40 at the onset of eBay’s massive growth; at Yahoo!, saying that it’s a different environment is a mild understatement.
Is Yahoo! Going to Lay off 1,200 or more?
The second storyline is how deep will Yang cut. First it was reported to be 10-20%, then 5%, now it’s back up to 10%.
So long as Yang cuts more than 10% of headcount, then the market will welcome this as it affects the company’s decision making prowess and process and improves profitability.
If it’s closer to 20% then the stock might even bounce because it shows that Yang is willing to make the tough calls needed to divest from weak areas and double-up on strong growth opportunities.
If it’s closer to 5%, the stock should go down, because the price assumes a 10% or more cut.
Of course, Yahoo!’s stock price already reflects every imaginable bad news. So technically I do not see how Yahoo! can go lower, but never say never.
But it’s not all doom and gloom: Rob Sanderson, analyst at American Technology Research, has a “buy” rating on the stock along with a $41 target by year’s end. That is literaly a 100% growth rate, and considering that Yahoo! was at $34 last November (2-3 months ago) it’s not unimaginable, but right now, it is unlikely.
Is it?
Hidden Value?
Global advertising is set to increase to $531B in 2011 from $407B in 2006.
By 2011, US online advertising will be a $50.1B market, global online advertising will soar to $81.1B by 2011. Much of that growth will come from Asia, where unlike Google, eBay and company Yahoo! is very well positioned via investments in Yahoo! Japan and Alibaba (in China).
Lastly, broadband households will grow by 300 million to 540 million subscribers and wireless subscribers will increase by 1.1 billion to 3.4 billion. These are all big numbers, and despite Google’s mammoth size and momentum, I reiterate that Yahoo! remains the best positioned media company.
Google is the leader of the one-dimensional, text-based universe. Yahoo! is better attuned to the multi-dimensional, broadband multimedia universe. Maybe it’s for that reason I keep Yahoo! in my portfolio. It’s the closest thing I can imagine to being a lifelong holding. I’ve always added and reduced shares here and there, depending on where the price is, but I think that when the dust settles, Yahoo! - as a company and a stock - will return to being in vogue. Whether or not that period resumes today remains to be seen… sometime at 4:15pm EST or so.
Note: Long YHOO
Forbes.com has an interesting piece on Yahoo! - breaking up the sum of the parts and stacking each one up to the market it competes in.
The author, Sramana Mitra, compares Yahoo! to newspapers because both strive to be the starting point of readers/visitors’ days.
She writes:
Newspapers are organized in sections: news, including politics, business and finance; sports; and classifieds, including real estate, personals, jobs and autos. On weekends, highlights include travel, arts and entertainment.
Yahoo!’s market cap has fallen to $27.85 billion–more than a $20 billion drop in three years. The widespread speculation about how many people Yahoo! will be laying off this week is keeping Wall Street busy. Wrong thing to focus on, if you ask me.Forget about how many people get laid off. Forget about how Yahoo! reports its numbers. Analysts should be asking Yahoo! for the minute details of the verticals–and their workings, including leadership, organization structure, profit and loss statements, market share and acquisition strategy.
The Web is broken down in the following categories:
She offers some good tidbits on Yahoo!’s key verticals (I presume jobs would be under Finance, and Real Estate other etc. if I were to transpose the graph I added above with her analysis and Yahoo!’s structure).
Sports
Yahoo! has also cornered a big share of the $548 million market for online ad revenues for sports sites in 2007, beating both ESPN and Sports Illustrated. According to eMarketer, this market is expected to grow to $1.1 billion by 2011.
Finance
Yahoo! Finance, in particular, is a starting point for our days. We check market information, our portfolio movements and related news. UBS media analyst Michael Morris estimates Yahoo! Finance should log $250 million to $300 million in ad revenue this year.
Jobs
The online jobs market has continued to grow rapidly: Online recruitment advertising ($5.9 billion) surpassed newspaper job ads ($5.4 billion) in 2006, according to media research firm Borrell Associates. Yahoo! bought HotJobs, thwarting Monster’s effort to consolidate the space.
Today, employment ads are one of the top online segments, constituting around 25% of U.S. Internet ad revenues. The top players in the online jobs market are CareerBuilder, Monster, Yahoo!’s HotJobs and vertical search engines like Indeed and SimplyHired. HotJobs has approximately 9% of today’s market.
Monster, meanwhile, is an independent, public company, with a market cap of $3.5 billion and revenue of $997 million for the nine months ended Sept. 30, 2007; Rupert Murdoch is rumored to be mulling an acquisition of it. Monster had 60% market share in 2001, but fell to roughly 30% in 2007. Still, put HotJobs and Monster together, and Yahoo! would have close to 40% market share in this important vertical.
Pictures
In the U.S., the top 10 photo-sharing sites draw around 50 million visitors each month. Monetization happens primarily through hosting fees and photo printing and merchandising services.
Flickr, a wonderful property that Yahoo! already owns, has figured out the hosting bit, but its monetization strategy does not include an in-house printing and photo merchandising service. To close this gap, Yahoo! should buy publicly traded Shutterfly, which expects to post revenue of $180 million for the full-year 2007 period, but whose market cap has recently dropped to around $500 million.
Travel
Yahoo! has also made a move in online travel, but is not a top performer. Priceline.com, Expedia and Orbitz are all monetizing the segment. Yahoo! should acquire one of them, and become a serious player. Or it can buy Kayak.
Real Estate
Yet another segment that is moving online is real estate classifieds. Borell Associates predicts that by 2012, newspaper real estate ad revenue will hit $3.2 billion, while online real estate ad revenue will surpass that at $3.4 billion. In 2007, total ad spending on real estate dropped 3%, but online advertising soared 25.8% to $2.6 billion, due to a shift to online from print. Yahoo doesn’t have much of a presence in online real estate–ZipRealty is a ripe and cheap acquisition target.
Online Personals
Buy eHarmony.
I’ve read the odd piece by Mitra here and there, while I don’t always agree with everything she says (and not everyone agrees with me all the time, etc.) I do find her analysis interesting in a landscape of bloggers who simply regurgitate what others publish. Her piece on IAC, for example, was particularly prescient since Barry Diller went on to smash IAC into five smaller pieces. But having looked at Yahoo!’s options, a few things are bizarre in her assessment (but bizarre is good and that’s the kind of thinking Yahoo! needs more of).
By the end, Mitra seems to get tired of writing and simply suggests that Yahoo! acquire eHarmony… which is odd for three reasons:
- Subscription services is not where the action is at (and eHarmony is not a free site) in online advertising, the action is in free, ad-supported plays. Why not buy PlentyofFish.com? See more of my comments on the online personals space here and a write up on Plenty of Fish here.
- It’s interesting and odd that she starts off saying that analysts are focusing on people (layoffs) whereas they should be focusing on their verticals, only to conclude that it boils down to… people (management).
Can Yang and Yahoo! do this on their own? I’m not convinced. Private-equity investors might be better suited to step in and make some hard calls–including recruiting a turnaround CEO of the caliber of Mark Hurd, who’s done a splendid job at Hewlett-Packard.
- Third, she was right to suggest that IAC was a vast and complex mess that should be smaller and less complex, I find it surprising that she’s advising Yahoo! to get more complex via acquisitions. Sure, what applies to IAC and Yahoo! should be different remedies, and IAC was far more convoluted than Yahoo! is today or would be after a handful of acquisitions… but Yahoo!’s problem is that it’s a big machine taking on more nimble competitors in high-growth and dynamic segments…
I’ve looked at every conceivable option for Yahoo! (see below) and I too think that a PE acquisition is easier and cleaner while the end-result will be a much leaner and smaller company, but potentially, a more valuable sum of the parts.
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
Disclaimer: I own shares in YHOO
