The unusual move on Tuesday by Yahoo!
(YHOO)
of reiterating guidance for the 2008 first quarter in a mid-quarter-like press release -- as well as offering forward guidance for the next three years -- was greeted enthusiastically by investors (who promptly took the shares up 7%). However, there was relative suspicion by some of the cheerleaders who thought Yahoo's projections for 2009 and 2010 were too optimistic, given the company's recent problems.
Estimates Come in on the High Side
YHOO said that they were comfortable with first-quarter estimates of earnings of $0.11/share on revenue of $1.32 billion. The company said that it plans to double operating cash flow from $1.9 billion expected this year to $3.7 billion by 2010, and also said net revenues in 2010 of $8.8 billion, which would give a compound annual growth rate (CAGR) of 20%, something YHOO has not been able to do of late. The company is guiding revenue growth to 11% year-over-year in 2008, 25% in 2009 and 25% in 2010 vs. consensus Street estimates of 11%, 13% and 11%, respectively.
In the advertising area, YHOO is guiding global online advertising growth of 22% CAGR for the next three years to 2010, and said Search would grow at a 24% CAGR annually over the next three years.
Finally, the company is forecasting Display to grow at a 19% CAGR for the next three years ending Dec. 31, 2010. Industry-wide, YHOO is forecasting 10%-14% industry volume growth, and 8%-10% industry monetization growth in the next three years in Search, and 10%-12% volume and monetization growth in Display for the industry.
The company also said in its filing that it can expand operating cash-flow margins from 33% in 2008 to 38% in 2009 and 42% in 2010 by lowering its SG&A as a percentage of revenue from 35% to 37% at present to 31% by 2010.
YHOO stated was that their investments in YHOO Japan, Alibaba, et. al., are worth at least $12.6 billion at present and growing in value every year.
The company said that they will continue to invest more in capex from a $700 million level last year to at least $1 billion/year by 2010.
Interestingly, YHOO stated that the search monetization gap between them and Google
(GOOG)
at the end of 2007 was 60%-70%, despite YHOO having reduced the gap by 30% in the year. A telling testament in favor of GOOG, especially given the fierce rivalry between the two firms.
After all was said and done, most of the cheerleaders were of the opinion that the projections were too lofty and that his was just an attempt by YHOO to squeeze more money out of Microsoft
(MSFT)
.
Looking at It Another Way
My take on the issue is to take the glass-is-half-full approach to the announcement from YHOO based on the following reasons:
Panama has increased Yahoo's search monetization, and display advertising growth has also improved.
YHOO was able to reduce the search monetization gap between GOOG and themselves by 30% last year. There's no reason they cannot continue closing that gap going forward, although probably not at that pace.
Over the next year or so, we are going to witness a boom in Internet users in India and China, two countries where YHOO has a well-entrenched position and mind-share. India especially still has dismally low penetration rates in amount of Internet users given the massive population.
Despite a macro slowdown here, Yahoo's projection (which could be considered lofty now) indicate that faster growth in international could offset the weakness here, especially as we move through the year.
Finally, there are Yahoo's myriad other non-public investments, so valuing them at present is almost impossible. The value of these assets could turn out to be significantly higher if those companies were to go public or spun off.
I think if MSFT wants YHOO, they will have to raise their bid and more than likely make it an all-cash offer at higher levels as well. YHOO is a fantastic acquisition for MSFT, but I am afraid Softee could more than likely botch things up if the deal goes through like it has done so many times in the past.
Until the next time, happy investing.
At the time of publication, Somaney was long Yahoo! calls, Google and Google calls, although positions may change at any time without notice. Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com, a subscription site that focuses on technology and Indian stocks (including ADRs), providing information, news and chatter. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback; click here to send him an email.
