Wednesday, February 3, 2010

Whats the Hook going to be with Yahoo?

Yahoo! [morgan stanely]
CQ4: ‘Display’ Strength
Revenue / adj. EBITDA above estimates driven by outperformance of Display advertising - Gross revenue of $1.73B (-4% Y/Y, +10% Q/Q) beat our / consensus estimates and delivered the fastest sequential growth rate since CQ4:05. Adj. EBITDA of $457MM (-16% Y/Y, +14% Q/Q excluding one-time charges) was ~5% above our / consensus of $441 / $435MM. Management highlighted that “Yahoo! continues to be the place that marketers come for unique, high-quality ad placements that are scarce on the Internet.”

Demand for Display ad rebounded – With much of Yahoo!’s premium display inventory sold out during CQ4, we believe the “[online] ad market recovery is underway” and Yahoo! is well positioned to command higher market share as well as better pricing in the premium display segment given its strong brand + large / broad audience + deep relationships with the largest
advertisers + continued investment in content optimization. [morgan stanley]

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Thesis Jan. 27, 2010 [Morningstar]

Yahoo remains one of the most heavily trafficked sites in the world. However, despite secular tail winds for online advertising, we think industry dynamics (search market share, audience fragmentation, and pricing power) will prevent Yahoo from achieving robust revenue growth. In
addition, an investor must consider the company's other assets, as we estimate that Yahoo's core business represents less than 40% of its total equity value.

In the early days of the Internet, Yahoo's strategy was simple: Attract as many users as possible and sell display ads. This strategy was largely successful, as the firm developed a number of highly trafficked sites, including Yahoo Finance, Yahoo News, and Yahoo Sports, while revenue growth (including acquisitions) averaged 55% annually from 2001 to 2006. However, new advertising models, increased competition, and an economic slowdown led to slower growth in revenue (3% in 2008, negative 10% in 2009) and traffic over the past few years.

Bulls Say
•The market for online advertising is taking share from traditional media as large advertisers are increasingly attracted by its measurability and its high returns on investment.
•Yahoo is focused on becoming a larger seller of ads on third-party sites. This will provide the company with much-needed diversification.
•Yahoo is becoming a portal for advertisers, as its new advertising platform will give advertisers access to its plethora of offerings including paid search, display ads all over the Internet, and mobile advertising.
•Yahoo has several properties, like its Web mail and stock portfolios, with relatively high customer switching costs, keeping users tied to the firm.
•Yahoo has loads of cash for stock buybacks, acquisitions of hot technology, or investment in new content for its Web sites.

Bears Say
•Delays in its new advertising platform and a lack of high-profile acquisitions have led many to perceive
•Yahoo as a lethargic player in a dynamic industry. This could make it difficult to attract and retain users, advertisers, and employees.
•Yahoo faces increased competition for user attention from traditional media companies and trendy sites, including Facebook and YouTube.
•The company faces stiff competition from AOL, Google, and MSN, all of which are building similar advertising platforms.
•A big chunk of Yahoo's revenue comes from search, a business with almost no switching costs. In addition, Yahoo has clearly fallen behind Google in search technology and users.
•With the majority of its revenue tied to online advertising, Yahoo's financial performance will
fluctuate significantly in an economic recession.

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Yahoo! Inc (YHOO) [Citigroup Global Markets]
Who Dat?...Yahoo Dat!...Solid Q4; Turnaround In Effect...
•YHOO Reported A Solid Q4 — $1.73B in Gross Revenue & $457MM in EBITDA beat our/Street estimates of $1.66B/$1.67B & $427MM/$433MM. $0.11 GAAP EPS was in-line with our/Street estimate of $0.11. Q1:10 guidance was mixed vs. the Street – midpoint Gross Revenue of $1.63B is ahead of Street at $1.61B. Midpoint EBITDA of $365MM well below Street at $400MM. Conservatism and opex timing most likely factors.
• Fundamentals Improving — Organic Gross Revenue decline of 5% Y/Y was a slight improvement vs. Q3’s 7% decline (tho 2 points easier comp). Key – Q1 guidance implies first Y/Y Revenue Growth quarter since Q3:08. Adjusted Operating Margin of 9.2% was up 230 bps Q/Q and marked highest level of the year.
•Display AND Search Both Better Than Expected — But BIG story is Display – which increased 26% Q/Q to $503MM (vs. CIRA at $467MM). Fastest Q/Q growth since 2005. Most (tho not all) ad verticals are recovering, pricing is firming up & Yahoo! has key inventory...
•Estimates & PT Largely Unchanged – ’10 Operating Income trims from $607MM to $602MM, but GAAP EPS remains at $0.47. $22 PT = 8X ’11 EBITDA.
•Reiterate Buy On Internet Turnaround Value Play – This was a solid Top & Bottom Line Beat Quarter for a company with deminimus Street expectations and a stock with deminimus valuation expectations. YHOO’s stock needs 1) Clear evidence of Display Ad recovery (Q4 seemed to provide); 2) Clear evidence of Margin Expansion (should be doable, but not yet certain); and 3) Catalytic evidence of Asian Investment Portfolio value (not on near-term horizon).

Yahoo Inc. (YHOO) [credit suisse]
Mixed Results; 4Q09 Review
■Action/Event: Yahoo! reported mixed 4Q09 results. Total revenue of $1.73
billion (-4% y/y) was 1.6% ahead of our estimate due mostly to upside in
affiliate revenue, which offset weaker than expected O&O display and
search results. However, excluding $72m in 1x expenses, GAAP EBIT
amounted to $191 million, flat y/y and 20% better than our $159m projection.
■Investment Case: Yahoo!’s 4Q09 results are consistent with our positive near term bias. Our view is based on attainable margin expansion targets, a cyclical rebound in the ad market, and undemanding valuation. However, on a longer term basis, we remain concerned about YHOO’s
eroding share of search queries and the overall relevancy of portals, both of which may limit sustainable growth beyond the economic rebound.
■Catalysts: Yahoo! guided to 1Q10 revenue of $1.575-$1.675b, +3% y/y at the midpoint, in line with our original expectations. GAAP EBIT is expected to range from $90-$110 million, slightly lower than our original $118.7 million est., although we think this reflects some conservatism. Our FY10 estimates are essentially unchanged with lower O&O search revenues muted by higher estimates for affiliate and fee revenue. The end result is a 0.2% reduction to our gross revenue estimate of $6.7 billion (up 4% y/y). We continue to expect GAAP operating margin to improve to the 8%+ range in 2010 vs. 6.0% in 2009. As a result, our GAAP EPS estimate of $0.47 VS. $0.30 remains unchanged.
■Valuation: YHOO is selling at 4.8x 2010 EV/EBITDA. We maintain our Neutral rating and our $20 target price, which implies that Yahoo! can trade at 8x EV/EBITDA on our 2010 estimates.

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