Date 7/18/07 Yahoo!
(YHOO):2Q07 Earnings
Current Price $28.18
analysis, maintain sell rating.
52WK HI $33.61 • Industry: Internet Services
52WK LO $22.65 • YHOO: NASDAQ; $27.53
EPS (TTM) $0.51 • 12-month price target: $26.00
Shares Outstanding 1.4B Buy initiated 7/14/06: $32.23 Downgrade to Hold 7/19/06: Hold 12/14/06: $26.60 Target:
Target: $37.00 $32.24 Target: $33.00 $26.00
Market Cap. $37B
Dividend Yield NA
Price/Earnings (TTM) 53X
Price/Sales (TTM) 5.5X
EV/Revenue (TTM) 5.2X
EV/EBITDA (TTM) 16.7X
EBITDA (TTM) $2B
Downgrade to Sell 5/4/07:
$28.18 Target: $26.00
Brian Bolan
Director of Research
Company Description
Technology Yahoo! is an internet search and technology platform for all media that has
Jackson Securities, LLC established itself as the leader in its growing market. Yahoo! has transitioned to
300 S. Wacker Dr., Suite 2450 more than just a search engine to become a destination site and platform for new
Chicago, IL 60606 media delivery.
Ph: (312) 253-0578
Valuation and Recommendation:
Fax: (312) 986-0560
Following speculation of a buyout from Microsoft, we lowered our rating to Sell
bbolan@jacksonsecurities.com
from hold. Within weeks, Yahoo! CEO Terry Semel announced his resignation
and the appointment of Co-founder Jerry Yang as CEO. On his first earnings
call, Yang did little to shore up the concerns we have about the direction of the
company. His 100 day plan to develop a plan leads us to believe the stock will
trade through our target price in the coming months. We maintain our sell rating.
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Yahoo! (YHOO)
Yahoo! Earnings overview
Yahoo! reported revenues of $1.243B and earnings of $0.11 per
share. This was roughly inline with our expectations of revenues
of $1.255B and $0.11 on the bottom line. In the middle of the
quarter the company notified Wall Street that they would come in
at the middle to bottom end of the expected range.
We note that management has decided to change the way revenues
are reported. We have adapted the numbers to reflect the how the
market would have viewed the 2Q07 numbers. In the future we
will adjust our model to provide a better apples to apples
comparison.
Semel Out, Yang In, still waiting for the real change to come
On the conference call, Jerry Yang noted that he and the
management team will spend the next 100 days to map out a
strategy for success. After only being on board as CEO for the last
month or so, we see why Mr. Yang needs another 100 days.
Investors, however, will point to the fact that Mr. Yang has been
associated with the company in the role of Chief Yahoo! for more
than the last 12 years. Once again, we see this as Yahoo! being
Yahoo! and working at their own timetable. Wall Street will likely
have harsh reactions to the idea of having to wait another 100 days
to hear what the plan will be.
Mr. Yang did give us some hints as to where he sees the company
heading, but nothing that would give us much hope. Moving
quickly and finding your own path are certainly cornerstones to
success, but in internet time (yes, a phrase few have spoken since
1999) 100 days is too slow. Its 100 days for Google to increase the
gap it now enjoys over Yahoo!. Its 100 days Microsoft has to
narrow the gap between their online properties (including the
newly acquired aQuantive property). In short its 100 days that
investors may not want to own the stock.
The outline that Mr. Yang delivered has four key elements. The
first being to focus on areas of greater growth and profitability.
Second is an emphasis on technology to create platforms that can
easily scale with use. Faster decision making and better execution
Brian Bolan 2
Director of Research
Yahoo! (YHOO)
was third. Finally, a new and improved culture of winning for
Yahoo! rounded out the temporary keys to success at Yahoo!. We
like what we heard from this outline, but with no meat on the bone,
its still just a skeleton.
Where they can do better, organizational structure and areas of
strength – new conference call bullet points.
Mrs. Decker stated that there will be three areas she will address in
future conference calls. The first segment, areas of improvement
basically highlights past failures and notes that lessons have been
learned. In the inaugural installment of this new feature, Mrs.
Decker stated that Overture was allowed to operate as a stand
alone business. Its integration (years later) has allowed for
improvements such as Panama. The feature also noted that the
company has failed to drive innovation for customers, and as a
result has seen customers move on and faces inventory challenges
on the low end.
The second segment addressed the organizational structure of the
company. The December 2006 re-org was highlighted and the
subsequent management changes were also addressed. The
changes in human resources were categorized as “regrettable, yet
necessary” as the company strives to move forward.
Finally, areas of strength were mentioned. One doesn’t have to
look to hard to find the clear cut gem of the quarter, RPS (Revenue
Per Search). RPS increased 15-20% in the quarter as Panama
showed that it may even be worth the wait. Future RPS increases
are almost a certainty given that Panama is still in the process of
being rolled out world wide. Without a doubt, this was the
strongest point made on the call.
SmartAds
SmartAds are advertisements that rely on the depth of knowledge
that Yahoo has on its users. A tool that only recently has been
released, SmartAds are a source of high expectations from
management. Currently, SmartAds are only found in the travel
section of Yahoo!. SmartAds will integrate the company's
Brian Bolan 3
Director of Research
Yahoo! (YHOO)
demographic, geographic and behavioral targeting capabilities with
an ad construction platform that customizes ads in real time.
Reducing the load, building for the future
CEO Jerry Yang noted during the conference call that management
would be looking to close down segments that are
underperforming. This comment was closely followed by a notion
that the company is still in “investment mode”. It appears as
though management is saying that they will continue on their
strategy of propagating verticals and expanding their presence
within them. The expansion of presence could likely mean more
applications developed within specific verticals.
Valuation
Prior to the release of earnings, the stock ran up above $27 a share.
Following the conference call the stock slid back to $26.40. We
changed our rating from Hold to Sell on May 4, 2007 at the height
of the Microsoft buyout craze. At the time, the stock was trading
around $32 a share. We are maintaining our target price of $26
even though we believe that the stock may trade lower than that in
the coming months. The price target of $26 represents 52x
multiple of this years earnings estimate.
Brian Bolan 4
Director of Research
Yahoo! (YHOO)
Yahoo! 2Q07 Earnings Performance against Jackson Securities Estimates.
Source: Company reports and Jackson Securities estimates.
Brian Bolan 5
Director of Research
Yahoo! (YHOO)
Disclosures:
Analyst Certification
I, Brian Bolan, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities
and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or
views expressed in this research report. I may be compensated in part based on the overall profitability of Jackson Securities, LLC, which
includes earnings from investment banking and all other aspects of the firm’s business.
Conflicts of interest:
Neither Jackson Securities nor any of its publishing analysts or their immediate family members has a position in the securities described
herein.
Compensation:
• The research analyst has not received compensation based upon investment banking revenues or from the subject company in the last
12 months.
• Jackson Securities has not in the last 12 months managed or co-managed a public offering of securities, received compensation for
investment banking services from the subject company or any compensation for products or services other than investment banking
• Jackson Securities will seek investment banking compensation from the subject company in the next 3 months.
Position as Officer or Director:
Neither the research analysts nor members of their immediate households occupy positions as an officer or director with the
company/companies mentioned in this report.
Market Making:
Jackson Securities does not make a market in this stock
Explanation of Ratings:
Buy - Expected 12-month absolute performance of +10% or higher than the market price at which time the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from the price at the time the rating was issued.
Sell - Expected 12-month absolute performance of –10% or lower than the market price at which time the rating was issued.
Distribution of Ratings:
Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:
Buys – 52.8% (19 of 36 active recommendations)
Holds – 38.9% (14 of 36 active recommendations)
Sells – 8.3% (3 of 36 active recommendations)
Jackson Securities has provided investment banking services within the previous 12 months with the following percentage of the companies
they have rated:
Buys – 0.0% (0 of 36 active recommendations)
Holds – 0% (0 of 36 active recommendations)
Sells – 0% (0 of 36 active recommendations)
Risks: General economic conditions, economic slowdown/recession, adverse industry news.
Other Important Disclosures and Disclaimers
Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy any securities mentioned herein. This material should not be construed as an offer to sell or the solicitation of an offer
to buy any securities mentioned herein in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. This document is for general information only,
and it does not constitute a personal recommendation or take into consideration the particular investment objectives, financial condition or financial needs of any clients. Before acting on any advise or
recommendation in this research report, clients should consider seek professional advice. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may
occur.
The information contained herein has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. Any opinions expressed herein are statements of our judgment
on the date appearing on this material only and are subject to change without notice. We endeavor to provide updates on a reasonable basis of the information discussed in research reports, but there may be reasons
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Brian Bolan 6
Director of Research
Yahoo! (YHOO)
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Brian Bolan 7
Director of Research
