Yahoo: Q1 Fine, Here's Our Awesome Plan!
The plan calls for revenue and cash flow acceleration in 2009 and 2010 (after a retrenchment in 2008). It also provides support for Yahoo's argument that it's worth at least $40 a share.
We think the plan is more of a "best case" scenario than a "most likely" case (analysis below), but at least we now have concrete assumptions on which to evaluate Yahoo's evaluation of itself.
If nothing else, the release of this plan should give Yahoo some leverage to extract a couple more dollars out of Microsoft (in part by helping Yahoo's shareholders dream about a possible alternate future).
SUMMARY
Here's the release.
The plan calls for 2010 revenue of $8.8 billion (ex-TAC) and operating cash flow of $3.7 billion. This is up from $5 billion of revenue and $2 billion of operating cash flow in 2007.
WHAT YAHOO SAYS IT'S WORTH
Before analyzing the sanity of the plan, let's look at valuation:
Operating cash flow is not the same as "free cash flow." Let's assume that Yahoo will spend at least $700 million in capital expenditures in 2010, so that the company's plan calls for Free Cash Flow of about $3 billion in 2010 ($3.7 billion of operating cash flow minus $700 million of CAPEX).
What would that be worth? As long as Yahoo's growth prospects remained strong, the market would likely pay 20X-25X that expected 2010 free cash flow by the end of 2009, or $60-$75 billion. Add in, say, $10 billion of off-balance-sheet assets, and you're left with a total market cap of about $70-$85 billion in early 2010, or about $50-$60 per share.
Discount that back to today and you're looking at about $40-$50 a share. Thus Yahoo's assertion that it's worth at least $40 a share.
IS YAHOO'S PLAN REASONABLE?
Yahoo's plan has three key assumptions:
- Display+video revenue grows $1.9 billion ex-TAC over the next three years (with company gaining market share).
- Search revenue grows $1.4 billion, in line with the search-market growth rate.
- Operating Cash Flow Margin increases about 4 points, from 38% of revenue in 2007 to about 42% in 2010.
Feasibility:
- Display+video: We think Yahoo's assumption is reasonable. Yahoo should gain share in display and video revenue (not versus Google, but versus the rest of the industry). One caveat: This absolute growth would almost certainly not be possible in a recession.
- Search: We're far more skeptical here: Yahoo continues to lose query share in search, and we think it is reasonable to assume that Google will eventually capture 80%-90% of global query share. Given that Google's growth rate is essentially the market growth rate, we don't see how Yahoo can expect to grow search in line with the market rate.
- Margin: Reasonable--as long as Yahoo commits to running a leaner, meaner operation than it has in the past two years.
Bottom line: We think the operating plan is closer to a "best case" scenario than a "most likely" scenario. Unlike Yahoo's previous puffery about its value, however, this plan does contain concrete assumptions, some of which are reasonable. The plan should give Yahoo leverage to extract at least a couple more dollars per share out of Microsoft.
See Also:
Yahoo Disaster Scenario: Blowing Q1
Sorry, But $31 Does Not "Massively Undervalue" Yahoo
The inherent message is "Do you shareholders want to let MSFT steal Yahoo and reap the benefits we're detailing in this non-press press release?"
Jerry's just taken a MSFT bishop...
MSFT's move.
--
Silence broken, Henry.
"Yeah... we got'cho 'Vision' RIGHT HERE, Big Boy!... Come and get it!"
What's MSFT going to say?... "We don't believe the rosy picture." You think they'll say that?
That rosy picture is part of the reason they're trying to acquire Yahoo... and trying to deny it would even cast more negative focus on their own 31 proposal.
No, this is getting interesting again.
We got game!
Many a wise adviser tells us that we should do at least two thing we dislike to do every day. This will make life meaningful and productive, they say. I would timidly suggest that each day we should also do at least two things we really want to do. This makes it worth living.
--Sylvia Bremer
Quoting from Benjamin Pimentel’s story as he in turn quotes Leland Westerfield:
"'Normally, reaffirmed guidance would be a positive news event; however, our interpretation of the decision to issue the release is that Yahoo sees fewer ways that it can gain leverage over Microsoft to force a raised bid,' analyst Leland Westerfield of BMO Capital said in a research note.”
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That may be true, Ben and Leland, but Yahoo’s only got one shareholder to convince, and if they manage it, the quarter (and likely next quarter to follow it) will just get sent to my described “Magical Mystical Land of PROFEEO.”
PROFEEO – Pro-forma EBITDA Extraordinary Oblivion; it’ll disappear to the Land Of PROFEEO faster than the Fed shit-canned Bear (I’m only kidding, they SCed themselves).
Say it ain’t so, Henry. Tell ‘em about PROFEEO… You’re way better qualified than I.
Yahoo's quarter won’t amount to more than a pimple on MSFT’s butt if they sink the putt.
http://us.ft.com/ftgateway/superpage.ft?news_id=fto031820082102234619&referrer_id=yahoofinance
...or can it be finessed?
http://yhoo.client.shareholder.com/sec.cfm?DocType=
You once asked about and I rendered my opinion of a potential tactical flanking maneuver.
[Quoting myself from then]:
[Peter, they almost have to approach this as though they were anticipating an original IPO of all of Yahoo’s properties, the entire company. That separates the true value of the company from the market value, and I’ve also addressed that element of failed market pricing. That’s the only way to defeat MSFT’s assertion that it is paying a premium.
“Hold that line, men!… Fill in that breach!… Counterattack by the left flank, on my command… ready yourselves, men!… ready… Now! Hurl yourselves on them!… Hit ‘em, turn ‘em and push ‘em back!”]
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That 8K is almost as good as the typical 300 page Pro-Forma glossy telephone books that often accompany IPO roadshows, don’t you think?
Yahoo! can't execute for jack ***t, sorry to say.
AT&T, News Corp, etc.. what are these guys smoking? Do they really think any of those guys are can do Yahoo better than MSFT? Is that air you're breathing?
They've been on a downward spiral ever since GOOG's star started rising, and it's clear where they're going. Only MSFT can save their asses, and they're boring that company to death with all the hemming and hawing that isn't going anywhere.
So, Yang is one of 4 board members of Alibaba. Big deal... he's only a figurehead anyway. He's like the Kings or Queens of England after Magna Carta... just big landowners with funny crowns, spoiled f'n brat kids and with a Parliament to feed money to them whilst playing like they give a shit what they say or want.
I'm not saying he doesn't contribute, but only that the Chinese government will protect Alibaba's independence regardless of who owns that stake. China stands to gain a lot in the moral suasion of trade reciprocity discussions with the US from a partnership with MSFT. They have zero fear of MSFT dominating Alibaba. They've got a far bigger Sweet Kiss of Death than even Nellie does, and that babe can PUT ONE ON YOU!... She's merely got a socialist's perspective. They've got a totalitarian state.
No, I figure MSFT was aware of this possibility and it's likely being put forth by Ma in an attempt to both assist Yahoo in its campaign to get MSFT to raise the bid and to highlight Alibaba's value as well. I guestimate that MSFT has a work-around and can sell the merger to Ma.
I've long now speculated that Yahoo might be given far more independence than many pundits now assume... and that independence would likely soothe Ma's jittery nerves.
It can only be good for him. He probably knows it.
Too, he doesn't have to mark-to-market 39% of Alibaba anytime soon. Trading shares at the margin is one thing... getting the backing to buy back 39% from Yahoo is another, and from the way the market is responding lately, Alibaba may be missin' a few of the 40 thieves lately.
Dear Ma - Don't leave Pa and break up a happy home.