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Time For Private Equity At Yahoo

Posted on Wednesday, Jan 30th 2008

Predictably, Yahoo (Nasdaq: YHOO) posted a 23% drop in its 4Q07 profit and forecasted 2008 revenues that were below the Street’s expectation. The stock was down over 10% in after-hours trading. The market cap has eroded to the tune of $25 Billion in the last two years.
So how do we play the stock going forward?

Revenues in 4Q07 were up 8% y-o-y at $1.832 billion. Marketing services revenues were $1,590 million in 4Q07, a 7% increase y-o-y. Marketing services revenues from Owned and Operated (OSO) sites were $1,035 million in 4Q07, a 21% increase y-o-y. Marketing services revenues from Affiliate sites were $555 million in 4Q07, a 13% decrease y-o-y. Fees revenues were $242 million in 4Q07, a 14% increase y-o-y. Revenue ex-TAC were $1.403 billion, an incrrease of 14% y-o-y. Marketing services revenues ex-TAC was $1.161 billion, up 14% y-o-y. [ex-TAC is excluding traffic acquisition costs, a metric that analysts track.]

Gross profit in 4Q07 was $1,130 million, a 12% increase y-o-y. Operating income in 4Q07 was $191 million, a 38% decrease y-o-y. Operating income before depreciation, amortization, and stock-based compensation expense in 4Q07 was $527 million, a 2% percent decrease y-o-y.

Net income in 4Q07 was $206 million or $0.15 per diluted share. Cash flow from operating activities in 4Q07 was $657 million, a 293% increase y-o-y. Free cash flow for the fourth quarter of 2007 was $330 million, a 19% increase y-o-y.

A tough quarter for sure and the outlook is not great.

The Company expects to earn ex-TAC Revenues of $5.35 – $5.95 billion in 2008 lower than the Street’s expectation of $5.9 billion (according to Thomson Financial). Jerry Yang warned that Yahoo could face “headwinds” in 2008, hinting at the rough times ahead. With majority of its revenues coming from display advertising the slowing economy is expected to hit the company adversely.

Yahoo! is looking at restructuring its business to focus on its core internet properties, cut jobs to reduce costs, and invest in advertising platforms, new technologies and consumer experiences to drive business growth. Talk about a wishy-washy vision. The only “interesting” piece of Jerry Yang’s soundbytes is that Yahoo wants to be “the starting point of our lives” using its MyYahoo service.

The Company can turnaround provided it is able to get a good understanding of and commitment to the activities people perform during the course of their lives–and it needs to understand how to monetize them.

I have advocated a Web 3.0 based verticalization strategy for Yahoo for almost a year now.

Yahoo shares fell to $19.40 in the after-hours trading. And with the bleak outlook it could slide quite a bit more. However, I see immense value in the company with unique users now topping 500 million and page views about 4 billion per day. There is, however, more pain for the investors, who have already lost over 50% of their investment since 2005 while the management fumbles further.

Investors with nerve could buy the stock based on the thesis that a private equity transaction is in the works. There is clearly value in the company, but the current management does not know how to extract it.

I don’t see a better leverage opportunity than Yahoo in the market today!

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[…] Original post by Sramana Mitra on Strategy […]

Affiliate Marketing » Blog Archive » Time For Private Equity At Yahoo Wednesday, January 30, 2008 at 12:06 PM PT

You have my complete attention with Yahoo.

But this would be a big deal. I thought that the liquidity crisis dried up most of private equity for this type of deal.

Blackstone and Apollo have been pulling out of deals left and right because they can’t line up the financing from Wall Street. And if they’re having trouble lined up private equity, who would you recommend?

May I point out that you favor internet organizations (Yahoo, Netflix, ZipRealty) that need have a large challenge ahead; that need to improve their strategy/operations; and that you feel are undervalued but with a good strategic reorganization could improve their results?

I am seeing a pattern here, or do you just rent Netflix movies, bought a house with Zip and use Yahoo services?

Realtosh Wednesday, January 30, 2008 at 12:54 PM PT

Have you all forgotten Asia? Who bought Citigroup,Merrill Lynch and UBS? Certainly not cash strapped Americans. Look east, dudes!

Asia Mogul Wednesday, January 30, 2008 at 1:34 PM PT

Sramana,
Just curious… why do you think a PE buyout is more likely here than getting bought by a strategic acquirer?

Sudarshan Dharmapuri Wednesday, January 30, 2008 at 2:26 PM PT

I just don’t want to see the Yahoo brand getting mushed up into Microsoft or New Corp.

It’s a great company, and should be allowed to survive as an independent brand.

All it needs is cleaning up.

Sramana Mitra Wednesday, January 30, 2008 at 6:11 PM PT

Sramana
Why do you think that Yahoo would loose its brand if it went to MSFT or News Corp or other techs? I do agree there is massive value hidden, they need to change a lot but focus needs to be on revenue growth, not cutting 1 or 10k jobs or whatever the figure should be to put them in line with others. Private equity would just jump into cost cutting and focus 100% on cash, cannot imagine that the financial gurus with PE would run Yhoo better than MSFT or other techs.

Greg Wednesday, January 30, 2008 at 7:35 PM PT

Yhoo is going thru a very painful rebirthing! Tobe a “born again” tech stoch ,the company has to purge a lot of dead weight and bad practices. Be patient and we’ll all be rewarded!

Gil C. Thursday, January 31, 2008 at 7:37 AM PT

[…] company for a year (see the letter from Ballmer to Yang in the WSJ). I was hoping against hope that Private Equity would step up to the plate, recognizing the leverage opportunity, but it has not […]

Microsoft to Rescue the Yahoo Damsel in Distress - Sramana Mitra on Strategy Friday, February 1, 2008 at 9:29 AM PT

It seems pretty doubtful that PE firms would consider a buyout in this debt market. As the Prez of THLee said “In 2009 I will tell my LPs that we did no deals last year, and they will applaud.”

harsh Friday, February 1, 2008 at 6:42 PM PT