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Research for the Prudent Investor

Date 4/18/07 Yahoo! (YHOO):Earnings

Current Price $32.09
review, maintain HOLD.
52WK HI $34.09 • Industry: Internet Services
52WK LO $22.65 • YHOO: NASDAQ; $32.09
EPS (TTM) $0.52 • 12-month price target: $26.00
Shares Outstanding 1.4B Buy initiated 7/14/06: $32.23 Downgrade to Hold 7/19/06: Hold 12/14/06: $26.60 Target:
Target: $37.00 $32.24 Target: $33.00 $26.00
Market Cap. $43.5B
Dividend Yield NA
Price/Earnings (TTM) 62X
Price/Sales (TTM) 6.7X
EV/Revenue (TTM) 6.3X

Company Description
Brian Bolan Yahoo! is an internet search and technology platform for all media that has
established itself as the leader in its growing market. Yahoo! has transition to
Director of Research more than just a search engine to become a destination site and platform for new
Technology media delivery.
Jackson Securities, LLC Valuation and Recommendation:
300 S. Wacker Dr., Suite 2450 Earnings released last night will likely not excite investors and could cause many
Chicago, IL 60606 to realign their technology portfolios. Yahoo!’s earnings call seemed to have a
Ph: (312) 253-0578 slight hint of desperation to it, as deals with eBay, United Online and Viacom
Fax: (312) 986-0560 were presented as the potential saviors to what is more like a cost control
bbolan@jacksonsecurities.com problem at Yahoo!. After seeing a sell off in after hours, we remind investors that
our target price of $26 implies significant de-valuation may still be on the horizon.

Jackson Securities, LLC seeks to do business with companies

covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect
the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decisions. Please
also refer to the important disclosures found on page number 6.
Analyst Certification is found on page number 6.
Yahoo! (YHOO)

Earnings review

Yahoo! reported revenue of $1.183B in the first quarter of 2007,

below that of both the Wall Street consensus and our estimate. A
quick look at our estimates shows that we were far too aggressive
as the company posted a topline number that was 3.9% below that
of our estimate.

Paid relationships were up 200,000 in the quarter, bringing the

total to 16.5M individuals who are paying Yahoo! for a premium
service. Last quarter the increase was better than 800,000 and the
drop off can be explained by the lack of fantasy football. Going
forward, we expect this number to increase in 2Q07 due to fantasy
baseball, and would hope to see the revenue per user per month
begin to stabilize.

Project Panama launched, heads out to the rest of the world

The wait is over for Project Panama, released on February 5, the

new system for ad placement is expected to reverse the current
downward trend of revenue per query in search. The company
again noted that it would likely take a full quarter before we would
see positive financial affects of Panama, but that the second half of
the year should show building results.

As of the end of March, all US advertisers had been transitioned to

the new platform and the roll out now moves to the international
community. As of the release of earnings, 5 select partners in
Japan were introduced to the new platform and several others are
expected to come on line in the coming days. The international
roll out will proceed much the same way as the domestic roll out

New inventory coming and a shift seen by management

Several times throughout the prepared remarks of the conference

call, management noted that there was new inventory coming
online and transition or shift about to occur. We believe that they
may have been referring to video on the web and the coming

JACKSON Brian Bolan 2

SECURITIES, Director of Research
Yahoo! (YHOO)

content war that Google seems to be fighting with Viacom. Little

clarity was really given on this idea, but it is one that we will pay
close attention to in the coming weeks.

The Silent Semel

This conference call was dominated by Sue Decker, as she handled

nearly every question. CEO Terry Semel was barely audible and
his reply to a question on the Google purchase of DoubleClick was
almost a non-answer. If anything, this shows the writing is on the
wall and that another quarter with a bottom line miss will be the
last one for Semel. It is apparent that Decker is more than capable
of stepping in at any moment.

We note that stock based compensation was significantly higher

than we expected in the quarter, coming in at $140M vs. our
$125M estimate. We continue to believe that stock based
compensation is a highly effective way to attract and retain the
highest quality of employee, but we have to begin to question
management as to where this is all headed.

Some may think that the underwhelming performance of Yahoo in

the quarter, accompanied by higher costs, higher stock based comp
and a virtually invisible CEO on the conf call could be a sign of a
change at the top in the near term. We tend to agree with this idea.

Higher costs across the board

Yahoo posted some disappointing expense numbers for the first

quarter of 2007. There was also no mention of a potential cost
control ahead, but rather that cash flow margins were likely to
continue to fall throughout the second quarter. Management also
implied that there should be a rebound, as margins for the full year
should recover to the 40% levels that were present last year.

The expense front, we were surprised by the higher number in all

three main line items. We are particularly worried about the
growth in the General and Administration line which was fully
13% ahead of our estimate. Going forward, we will likely be
increasing our Operating expense estimates to reflect this.

JACKSON Brian Bolan 3

SECURITIES, Director of Research
Yahoo! (YHOO)


Guidance was less than impressive, seeing $1.2B -$1.3B on the

topline for the next quarter. For the full year, Yahoo expects
revenue of between $4.95B - $5.54B, up 14% from year ago levels
at the midpoint. We believe our estimates are probably too
aggressive going forward and we will be adjusting our numbers
downward in the coming weeks.


We continue to believe that holding Yahoo! shares is the

appropriate action given the circumstances. After seeing the stock
increase dramatically over the past few months, a healthy
readjustment has taken place. With the stock trading in the high
20’s again, we feel investors have realized that the super high (and
somewhat unfair) expectations of Yahoo! are not realistic. We
continue to rate Yahoo! shares HOLD.

We will be looking deeper into the valuation of Yahoo later in the


JACKSON Brian Bolan 4

SECURITIES, Director of Research
Yahoo! (YHOO)

Yahoo! 1Q07 Earnings Performance against Jackson Securities Estimates.

Source: Company reports and Jackson Securities estimates.

JACKSON Brian Bolan 5

SECURITIES, Director of Research
Yahoo! (YHOO)


Analyst Certification
I, Brian Bolan, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities
and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or
views expressed in this research report. I may be compensated in part based on the overall profitability of Jackson Securities, LLC, which
includes earnings from investment banking and all other aspects of the firm’s business.

Conflicts of interest:
Neither Jackson Securities nor any of its publishing analysts or their immediate family members has a position in the securities described

• The research analyst has not received compensation based upon investment banking revenues or from the subject company in the last
12 months.
• Jackson Securities has not in the last 12 months managed or co-managed a public offering of securities, received compensation for
investment banking services from the subject company or any compensation for products or services other than investment banking
• Jackson Securities will seek investment banking compensation from the subject company in the next 3 months.

Position as Officer or Director:

Neither the research analysts nor members of their immediate households occupy positions as an officer or director with the
company/companies mentioned in this report.

Market Making:
Jackson Securities does not make a market in this stock

Explanation of Ratings:
Buy - Expected 12-month absolute performance of +10% or higher than the market price at which time the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from the price at the time the rating was issued.
Sell - Expected 12-month absolute performance of –10% or lower than the market price at which time the rating was issued.

Distribution of Ratings:
Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:
Buys – 51.4% (18 of 35 active recommendations)
Holds – 45.7% (16 of 35 active recommendations)
Sells – 2.9% (1 of 35 active recommendations)

Jackson Securities has provided investment banking services within the previous 12 months with the following percentage of the companies
they have rated:

Buys – 0.0% (0 of 35 active recommendations)

Holds – 0% (0 of 35 active recommendations)
Sells – 0% (0 of 35 active recommendations)

Risks: General economic conditions, economic slowdown/recession, adverse industry news.

Other Important Disclosures and Disclaimers

Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy any securities mentioned herein. This material should not be construed as an offer to sell or the solicitation of an offer
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JACKSON Brian Bolan 6

SECURITIES, Director of Research
Yahoo! (YHOO)

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JACKSON Brian Bolan 7

SECURITIES, Director of Research