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In it, there are several interesting details buried amid the footnotes and legalese that makes your eyes glaze over after a couple of pages of reading.
Yet, as a software executive once said to me: "There's margin in the mystery."
It's always a great idea in any investment to slog through the boring annual and quarterly filings for more info on a company you're interested in. You always develop a better sense of the company for the time and effort to review these, and the 10-K is one of the most important documents of the year.
In Yahoo!'s case, there were several interesting findings I want to point out.
First off, with respect to its 35% stake in
Yahoo! Japan, Yahoo! said:
We currently hedge our net investment in Yahoo! Japan with forward contracts to reduce the risk that our investment in Yahoo! Japan will be adversely affected by foreign currency exchange rate fluctuations. The forward contracts are required to be settled in cash and the amount of cash payment we receive or could be required to pay upon settlement could be material.
And later on [emphasis mine]:
Net Investment Exposure. In December 2012, we began hedging, on an after-tax basis, our net investment in Yahoo! Japan with forward contracts to reduce the risk that our investment in Yahoo! Japan will be adversely affected by foreign currency exchange rate fluctuations. The forward contracts have maturities ranging from nine to 15 months. If the Japanese yen appreciates at maturity from the forward contract execution rates, the forward contracts will require us to pay a cash settlement, which may be material. If the Japanese yen depreciates at maturity from the forward contract execution rates, we will receive a cash settlement, which may be material. We have elected to apply net investment hedge accounting and expect the hedges to be effective, allowing changes in fair value of the derivative instrument to be recorded in accumulated other comprehensive income on our consolidated balance sheet. The notional amounts of the foreign currency forward contracts related to our net investment hedge were $3 billion as of Dec. 31, 2012.The fair value of the foreign currency contracts was $3 million as of Dec. 31, 2012 and is included in prepaid expenses and other current assets on the consolidated balance sheet. A gain of $3 million was recorded for the year ended Dec. 31, 2012 and is included in accumulated other comprehensive income on our consolidated balance sheet.
At the end of December, one U.S. dollar bought you 84 yen. Earlier last September, it bought 77 yen. At the moment, it buys 95 yen as the yen has weakened considerably over this period with the support of the Japanese central bank. This is a 13% weakening since mid-December.
We don't know when Yahoo! hedged its Yahoo! Japan (YJ) investment. However, a 13% gain on $3 billion in notional value is $390 million. To give some perspective to that amount, in 2012, Yahoo! gained $83 million in YJ dividends. Also, net income attributable to YJ in 2012 was $1.3 billion. So, such a gain on a forward currency contract in the first quarter could be highly material.
The other big thing that jumps out in the Yahoo! 10-K is the
Microsoft(MSFT) revenue guarantee is set to end at the end of this month. This was already renewed a year ago.
Some are worried that, if Marissa Mayer terminated the agreement at the end of the month, it could be a big negative for the stock -- unless it already had a deal with
Google(GOOG), which has its own issues of course from a regulatory risk perspective.
I think it's highly unlikely the agreement with Microsoft will end. It's not really in the interest of either party to terminate it. There were also some recent executive shuffles on both sides relating to working on the alliance, which would be strange if either side was planning to simply end the relationship in a few weeks.