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.
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!