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Olympia Capital Markets Group Equity Research 28 Ap ril 2010 Company Overview and Key Data Initiating

Olympia Capital Markets Group

Equity Research

28 April 2010

Company Overview and Key Data

Initiating Coverage

Yahoo! Inc. is a global Internet media company that offers an online guide to Web navigation,
Yahoo! Inc. is a global Internet media company that offers
an online guide to Web navigation, aggregated information
content, communication services, and commerce. The
Company's site includes a hierarchical, subject-based
directory of Web sites, which enables users to locate and
access information and services through hypertext links
included in the directory.
EPS
Mar
Jun
Sept
Dec
FY
2009A
$0.15
$0.16
$0.15
$0.15
$0.61
2010
$0.15A
$0.14E
$0.17E
$0.19E
$0.66E
Source: Yahoo!. SEC filings and Olympia Capital Markets Group Estimates
Yahoo!
(Nasdaq Global Markets: YHOO)
bbolan@olympiany.com
Market Capitalization:
Shares Outstanding:
28 April 2010
Brian Bolan
1 773 413 0285
52-Week Range:
$13.60 - $19.12
1.4 billion
$23.7 billion
NA
Dividend Yield:
Source: Bloomberg
Price Target:
Share Price:
Neutral
$18.00
$16.92

Yahoo! Inc.

(Nasdaq GM: YHOO)

Investment Conc ept

Yet Another Hierarchical Officious Oracle is the acronym

for Yahoo!. Yahoo! was

first made available in 1994 and has grown to serve more than 600 million users per

month. Through its search engine, users can naviga te the web and find useful

information along with tools to communicate with others.

The economic downturn and attempted acquisition by M icrosoft has provided large

distractions to a company that quite literally cannot

afford another distraction.

Having reached a deal with Microsoft to handle the search, the company is looking

to focus on display and improving technology to better ser ve large clients.

We believe that the fundamentals will improve slightly t hroughout the remainder of the year but this is already in the stock. Upside surprises to US market share are expected by management although we are somewhat sceptical. We expect display to lead most of the upside for Yahoo! in 2010 as search looks to us to be a margin enhancer instead of its previous role as revenue growth supplier.

At 28x trailing twelve months earnings, we believe that Yahoo! is fairly valued despite the difficulty in assigning value to the Asian assets the firm has. We initiate

coverage on Yahoo! with a Neutral rating and a 12-month price target of $18.00

based on a 27x multiple of our 2010 earnings estimate.

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets YHOO)

Inside

Industry Discussion

3

Company Background

5

Conclusion and Valuation

11

Appendices

12

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Industry Discussion

The internet search market is dominated by Google but still has s everal major competitors.

While some smaller players are still around, the majority of the

attention in the space is

focused on Google, Yahoo! and Microsoft. Other companies like AOL and Ask.com are still relevant in terms of market share, but few others have been ab le to make or sustain an impact in the industry. Search sites, unlike popular portals, have maintained their position as starting points for users. Yahoo! made being the starting point for users a key strategic initiative, demonstrating the importance of being first. Whether u sers prefer content on the starting page or a search box, it is clear that search will continue to be a dominate platform for the internet.

Taking the search engine beyond the search home page has b een the goal of the major search companies over the last several years. They have utilized the ability to quickly index a page, scan it for keywords or phrases and deliver highly targ eted ads that match the content of the specific page. The b est example of this was in the social networking space as Google outbid competitors to deliver ads to one of the most trafficked sites, the News Corp- owned MySpace. The deal focused on better monetizing the mas sive traffic on the site and led its major competitor to enlist the help of Microsoft to serve its ads. The difference in the two deals was a $15 billion valuation that was given to Facebook by Micro soft via a minority stake investment. With the investment, Microsoft became th e ad serving agent for Facebook, the popular social networking site.

A watershed moment came during the 4Q07 Goog le earnings conference call. The

company noted that it was facing challenges in monetizing the generating. Microsoft sensed weakness and moved to attempt to

traffic that MySpace was level the playing field in

the search space by making a $46B bid for Yahoo!. An arduous fig ht ensued as Yahoo! was

determined to remain independent and struck an accord with Goo gle in an effort to escape Microsoft’s bear hug. Yahoo! successfully th warted the takeover attempt; however it continues to see its ma rket share decrease. Microsoft has abandoned its quest for a complete purchase of Yahoo! and has instead moved to join forces with Yahoo! and combine the search efforts of Bing with Yahoo! to better compete with Goo gle.

Yahoo! stayed out of the competition for server ads to the ma jor social networks, with Microsoft investing in and serving ads for Facebook, while Go ogle still delivers ads for MySpace. Display rates came down significantly in the econom ic downturn as ad buying

mainstays of Auto’s and Finance verticals both suffered more

than most. Rates have

returned as ad budgets for online brand buys have increased in 20 10.

Where the growth will come from

Much has already been said about the shift of ad budgets to onlin e from offline. We believe this trend wil l continue; but just as that trend continues to accelerate, another segment is at its nascent stage. Mobile phones have become more sophisticated in the last few years, with BlackBerry maker Research in Motion still leading the way in terms of market share. What was a battle between BlackBerry and Palm has turned into a race with several competitors, the most notable of which is Apple’s iPhone. The rich content of the web has moved from the PC to the smartphone. The potential to target consumers via tracking movement and purchases subsidized via advertising could significantly change how commerce is enacted.

As new technology comes to market, we believe that consumers will embrace smartphones and their features. It may be some time before consumers are willing to allow for web-based payments to take share from credit cards, but it is something that makes sense over the long term. This bodes well for the platform that is the most robust which, by definition, will allow for the most applications.

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

We believe that Yahoo! will take an agnostic approach to the two key platforms of Android and Apple and develop applications for both. We would note that the Yahoo Search app for iPhone with its drawing features is a strong competitor in the market.

Market Share

Over the last several years, market share has been measured b y several companies that purchase the “clickstream” of users from internet service provider s (ISP). This raw data is analyzed to determine how many searches were made in a specific time frame (generally

one month) and where they were made. This data is not fully

endorsed by the search

companies, but the trends are usually in agreement with the se arch companies’ internal

logs.

Google is the dominant search company with almost 70% of

the worldwide market as

tabulated by comScore. We believe that Google’s market share of search will continue to grow and will approach the 75% level in summer of 2011. Yahoo !, on the other hand, has seen its share of the US and worldwide markets continue to fall. We believe that this trend will continue despite the search partnership the company entered into with Bing . With only a

year under Bing’s belt it is hard to compare it to Yahoo! and Google, but it is a significant

change from the MSN search stats Microsoft used to deliver.

Early results for March

indicate t hat Yahoo! gained share from both Google and Bing, and showed some signs of

stabi lization in what had been a year long pattern of market share losses for Yahoo!.

Going forward, we believe that search market share numbers will f ocus mostly on worldwide

measurements as opposed to domestic vs. international. That being

said, Google

dominance is unquestioned worldwide, although there are small er segments of the world where Google is not the leader. Yandex is the leader in Russia , but this market is small compared to the US.

Seasonality

There is an issue of seasonality that affects internet usage and

internet companies. The

general consensus is that usage slows during the summer mon ths as the weather draws more people to outdoor activities. The later part of the third quart er is buoyed by back to school when traffic increases from academic sources. The fourth quarter is traditionally the strongest quarter as the combination of the educational segme nt and the searches that arise from the holiday shopping and travel season increase traffic.

Comparable Companies

Yahoo! faces competition from numerous sources, and while it produces its own content, it partners with newspapers and other media partners in attem pts to drive traffic. The company relies on both the search engine and its owned media p roperties for a majority of its revenue. The search deal with Microsoft makes that comparab le a moot point in terms of search, as the two search engines will likely begin producing th e exact same results. In essences the same search will produce the same results at Bing as well as the Yahoo! search. We believe this will, over time, shift market share from Yahoo! search to Bing.

Google (NASDAQ: GOOG) -

Google dominates the search market with approximately

65% of US market share and has a sizeable digital footprint. Through its acquisition of DoubleClick, it also participates in the display business placing ads on properties the

company owns as well as for Network partners. Google has a substantial balance sheet and the ability to make large acquisitions or develop costly operations from scratch.

Aol. (NYSE: AOL) - After a spin out from Time Warner, Aol. Is now a primary competitor with Yahoo! in the highly competitive fields of display advertising, email and instant messaging. Aol. search is enhanced by Google and maintains roughly 3-4% of the domestic search market. Lately, the company has focused more on producing localized content on which it runs display advertisements.

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Microsoft (NASDAQ: MSFT) - Despite being a key partner in se arch, Microsoft also offers an ad network to publishers to reach mobile, content (displa y) and search platforms.

Although the online division of Microsoft is not a significant portion

of total revenue

contribution, we believe that the company will continue to compete in the space.

Baidu (NASDAQ:

BIDU) - The Chinese search engine is a competitor in the international

space. Based in China, Baidu has seen its stock soar since its IP O and has dominated the Chinese language search market. Though most of its appeal has been its MP3 search and

downloads, Biadu competes with Yahoo!’s Asian properties

Yandex (Private Company) – Yandex is a Russian search engine that has 19 million daily users and is growing fast in Eastern Europe. The company’s market share in Russia increased from 56% in January 2009 to 62% by February of 2010 with pageviews of 10 billion in December 2009. Google had 21.8% market share in Russia in February 2010.

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) Microsoft (NASDAQ: MSFT) - Despite

Company Background

Yahoo!, which recently turned 15 years old, has seen a dramatic series of events that most parents of teenagers understand. From birth to bu bble to bust to buyout, this company has gone through a lot and continues to be a leader in the internet. To get a better understanding of the company we are looking at each unit and how it has performed over the last few years.

Search

Owned and Operated (O&O) Search has been a source of disappointment since its revenue peaked back in 3Q08, as the broader economy began to turn. The company struggled the rest of the year but entered 2010 with more disappointments in search. We believe that the search deal with Microsoft will ultimately improve margins as the company continues to focus of driving more share. On the 1Q10 earnings conference call, management noted that they believed their search share losses had stabilized.

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO)  in millions of dollars

in millions of dollars (O&O: Owned and Operated)

Source: Company filings and Olympia Capital Markets Group estimates

Display

The Display business is best characterized by brand-building advertisements. These command lower rates than search-based ad rates as search is more a “point of purchase” style ad. With the economy recovering, display rates are likely to move higher off of what are likely artificially low rates over the past few quarters. With more devices coming to market (iPad, Slate, and smartphones) we believe that total impressions will grow in the remainder of the year despite the fact that Yahoo! saw 0% pageview growth in 1Q10.

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO)  in millions of dollars

in millions of dollars

Source: Company filings and Olympia Capital Markets Group estimates

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Affiliate

Yahoo! noted on its 1Q10 conference call that it is working to de epen its relationship with significant partners, and we believe that its continued focus on better ad serving technology will pay off in the form of higher revenue from affiliates. With Yahoo!’s reach of 600 million audience members, it remains a high priority for most advertisers.

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) Affiliate Yahoo! noted on its

in millions of dollars

Source: Company filings and Olympia Capital Markets Group estimates

Listings and Services

The decrease in revenues in Listings and Services is likely to continue as Yahoo! sold HotJobs to Monster.com in February 2010. This change could have affected the listings at HotJobs in the quarter outside of the pre-existing contracts.

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) Affiliate Yahoo! noted on its

in millions of dollars

Source: Company filings and Olympia Capital Markets Group estimates

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Fees

Fees revenue declined 11.7% sequentially in 1Q10 as

broadband partnership

shifted to advertising from a fee-based structure. At the e nd of CY08, Yahoo! had 19 million fee- paying cust omers and by the end of the following year that number

stood at 9.7 million. We expect to see further decreases in the fee revenue line item over the course of the year.

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) Fees Fees revenue declined 11.7%

in millions of dollars

Source: Company filings and Olympia Capital Markets Group estimates

Yahoo! Revenue Analysis 100% 90% 80% 70% Affiliate Sites expand as percent of total revenues 60%
Yahoo! Revenue Analysis
100%
90%
80%
70%
Affiliate Sites expand as
percent of total revenues
60%
50%
40%
Display grows
30%
20%
10%
Search trends lower
0%
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q210E Q3 10E Q4 10E
O&O Search
O&O Display Site
Affiliate Sites
Listing Services and Other
Fees

Source: Company filings and Olympia Capital Markets Group estimates

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Acquisitions

Yahoo! has a history of acquiring companies, but lately the track record has been less than stellar. The Company proved that it wasn’t afraid of large s cale acquisitions when it purchased Overture or the $5 billion price tag it paid for the Mark Cuban Broadcast.com company. Since that time the company continued eating up sm aller companies, some of which eventually dissolved and some that failed to reach their pre- acquisition hype.

Yahoo! bought a couple of ad exchanges over the last two years including RightMedia and Blue Lithium. The move brought a new model (exchange) to Yaho o! but we have seen little evidence that the marketplace is about to shift the way it purchase s ads.

We be lieve the takeaway from the last two acquisitions (Maktoob.com in August 2009 and citizensports.com in March 2010) shows the company will continue to add to its platform despite its currency (stock) being weaker than it has been over the last few years. That said, we do not believe that any significant acquisitions are in the works for Ya hoo!.

Management

Venture Capitalist have a saying about management, ‘the jockey is just as important as the

horse.’ This means that management can make or break even

the best of ideas. That

seemed to be the case over the last several years with Yahoo!. Terry Semel, a former CEO

of Yahoo! wanted to position the company as close as he could develop media relations and advertising partnerships. One too

to Hollywood in order to many misses of earnings

led him to leave the position and he was replaced by co-founder Je rry Yang.

Jerry Yang’s tenure as CEO was far shorter, as Microsoft attemp ted to acquire Yahoo! but Yang did not want to see t he company he founded be sold to what many in the technology industry consider to be the new age “Big Brother”.

The hiring of Carol Bartz was a surprise move going with mor e veteran leadership that featured more crass out takes. Early on her energy and shakeup were welcome changes,

but a brain drain of talent leaving for start-ups and

competitors has made us question the

decision. A few months ago, Bartz was on a media blitz after com pleting a year as CEO but still had troubles in describing what Yahoo! does and what the pla n for the future was. Our concerns with top management are that Yahoo! may be trying to be too much to too many instead of focusing on core competencies.

Carol Bartz Ms. Bartz has served as Chief Executive Officer and a s a member of the Board of Directors since January 2009. Ms. Bartz served as the Executi ve Chairman of the Board of Autodesk, Inc., a computer-aided design software provider, fro m May 2006 to February 2009, as Chairman, President and Chief Executive Officer of Aut odesk from April 1992 to April 2006 and as a director of Autodesk from April 1992 to Februa ry 2009.

Tim Morse, Prior to joining Yahoo!, Morse was the CFO of Altera Corporation, a semiconductor company specializing in programmable logic devices for communications, industrial, and consumer applications, where he established scalable, cost-effective processes and controls. He previously served as the CFO and general manager of business development for General Electric Plastics

Aristotle Balogh currently serves as executive vice president of Products and Chief Technology Officer. In this role he leads the company's Products organization, which is responsible for the vision, strategy, design and development of Yahoo!'s global consumer and advertiser product portfolio. Previously, Balogh held the role of Chief Technology Officer at Yahoo! and was responsible for company-wide technology development, including infrastructure, engineering, research and development, and ensuring the quality of Yahoo!'s product and service delivery.

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Financial Statement Analysis

Yahoo!’s Income Statement showed year over year top line gr owth for the first time in several quarters with Display increasing 20% from the same peri od a year ago. Affiliates

also contributed to the growth but it was the only other line item to show year over year growth. We anticipate year over year growth of 2%, 3% and 6% in the remaining quarters of

2010.

Yahoo! will have a com plex year financially with the Microsoft search deal providing some cost sav ings for the company and potentially lowering expected R&D costs towards the end

of the y ear. With less of a focus on search, the company will likely be looking to display and

affiliates to pick up any revenue shortfall. We expect margins, on a improve over the next several quarters.

whole to begin to

Balance Sheet

At the end of 1Q10, Yaho o! had more than $4.14 billion in cash and equivalents and marke table securities on the balance sheet. This is very slight decrease both sequentially and on a year over year basis. We expect Yahoo! to improve its cash position throughout the remainder of the year.

Yahoo! does not have any long term debt at this time. We do not expect Yahoo! to take on any long term debt in the foreseeable future.

Asian As sets

The company holds a significant interest in two Asian internet prop erties, Yahoo! Japan and Alibaba Group. These investments have caused a great dea l of consternation among

investors and the press as calls for monetization have not been

answered. Given the tax

implication s, lack of liquidity, and general lack of premium buyers, we expect Yahoo! to continue to hold these assets for the foreseeable future. Yahoo ! hold approximately 35% ownership of Yahoo! Japan and a 44% ownership of the Alibaba G roup.

Financial Outlook

The company has noted that its current goals are to increase margins, and the Microsoft Search deal will go a long way to helping that happen. We expect that better rates for the display business combined with better audience targeting will result in better performance

for Yahoo! in

2010.

.

We are not overly aggressive in terms of our estimates for Yahoo! as we are sceptical that the company will substantially improve its search share. At the same time, we believe that margins should expand as costs move lower and revenue improves slightly.

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Investment Risks

If the company experiences any or all of the following risk factor s, as well as others, the company’s stock price may be affected.

  • Advertisers reduce internet budgets.

Advertising is the

source

of

the majority of

Yahoo!’s revenue. Should advertisers lose faith in the i nternet as a medium for

advertisements Yahoo! would suffer a significant revenue slowdown.

  • A better advertising platform is developed for internet adve rtising. Search has been

the dominant application on the internet for the last ten

years. Should another

application become more acceptable than search, advertis ers could move budgets

from search to that platform.

  • Competition is intense and moves quickly.

Yahoo! faces

intense competition from

Google and AOL among others. Should a competitor dev elop a more efficient and relevant search engine, a better em ail platform, or a more compelling display platform, Yahoo! would be severely impacted.

  • Future growth is predicated on success of mobile. Ma ny of our assumptions of growth are b ased on the future success of all things mobile. Should Yahoo! fail to adapt to a changing environment that focuses on mobile delivery of search and display ads, the company w ould face significant challenges.

  • Loss of key management. Turnover at Yahoo! has been sign ificant concern for some time and continues to remain a challenge to top manage ment. Should this trend continue the talent drain will result in an inability to properly serve clients which would put future revenues at risk.

Conclusion and Valuation

We are initiating coverage of Yahoo! with a Neutral rating and a on e-year price target of $18.

Over the last year, we have seen severe multiple contraction as

revenue deceleration has

taken its toll on the valuation. We see potential for improvements for the display business and increases in operating margin due to the Microsoft deal to help the financial outlook for 2010. That said, we believe that Yahoo! is already adequately valued in terms of trailing P/E and operating and net profit margins. Our price target is derived off of a 27x multiple of our 2010 earnings estimate.

Having been a member of the “Nifty-Fifty” (50x forward earnings) in the past, Yahoo! has seen its valuation readjusted after the Microsoft offer and subsequent search deal. We believe that Wall Street discounts the Asian assets slightly more than the approximate $8.3 billion value they have as a sale or greater monetization is unlikely. The weak cash position compared to two of its main rivals is also an aspect that we believe has to factor into overall valuation.

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Appendices

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) Appendices Source: Company filings and

Source: Company filings and Olympia Capital Markets Group estimates

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) 28 April 2010 Olympia Capital

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) 28 April 2010 Olympia Capital

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) Source: comScore qSearch Source: comScore

Source: comScore qSearch

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) Source: comScore qSearch Source: comScore

Source: comScore qSearch

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Yahoo!, Inc (Nasdaq GM: YHOO)

Historical Price Chart

Olympia Capital Markets Group Research Yahoo! Inc (Nasdaq Global Markets: YHOO) Yahoo!, Inc (Nasdaq GM: YHOO)

Source: Bloomberg

Olympia Capital Markets Group Research

Yahoo! Inc (Nasdaq Global Markets: YHOO)

Important disclosures:

Analyst Certification:

The following analysts hereby certify that their views about the companies and sec urities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Brian Bolan.

As of the date of this report, the analyst has no financial interest in any companies mentioned in this report.

Ratings:

Buy: The stock’s total return is expected to exceed 15% over t he next 6-12 months.

Neutral: T he stock is expected to have a positive return of less than 15% over the next 6-12 months.

Sell: Th e stock is expected to have a negative return over the next 6-12 months.

Olympia Capital Markets Group’s distribution of ratings is:

Buy 63%

Neutral 37%

Sell 0%

An investor’s decision to buy or sell a security should be based on investment objectives, current holdings, and other individu al factors.

Disclosures:

Olympia Capital Markets Group does not make a market in the shares of any stock mentioned in this report and has not received compensation from or expect to receive compensation from any company mentioned in this report.

This investment report contains information from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction. Olympia Capital Markets Group, or its affiliates, may own, take a position, make or market or engage in transactions with respect to the securities mentioned herein. This report is for informational use only. Additional information available on request. All rights reserved by Olympia Capital Markets Group.

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