Wednesday, January 24, 2007

Color on results: Yahoo! (NASDAQ:YHOO)

Several firms are commenting on Yahoo (NASDAQ:YHOO) after the co released its Q4 results and 2007 guidance.

- UBS thinks management hit all the right notes in their prepared remarks and during Q&A. The fourth quarter itself was solid, with branded the obvious highlight. Of course, the announcement that the new Panama ranking switch would be turned on February 5 was something that the firm, along with most investors, had been waiting on for some time.

Guidance is the one area where some investors may be a bit concerned as the revenue midpoint implies 14% y/y growth (the low-end of guidance implies just 8.6% y/y), however, the firm believes this guidance will prove to be relatively conservative. They assume that branded can continue to perform at least in line with the overall online ad market at about 25% in '07, and if one takes the company at face value in that Panama can provide double digit increases in search by the back half of the year, then it amounts to top-line growth of at least 16%-18% year over year.

The bottom line is that they think investors want to believe in Panama and that this management team can execute. We think that sentiment will improve on the heels of the Panama launch. While there are sure to be bumps in the road as the new technology is released, the firm continues to believe that investors will be rewarded as Yahoo moves forward in 2007 and Panama begins to show tangible results. Finally, they point out that Panama may continue to surprise investors as its scale and scope become better understood as a platform designed for much more than just text-based ads.

The read through for Google is difficult given the differences in Yahoo and Google's growth trajectories and monetization efforts. Having said that, UBS thinks Yahoo's q/q search growth was about 3-4%. That implies to us that it may be difficult for Google to see the 20% q/q growth they think it needs to move the stock up significantly. They think that Google had about 10-12% q/q volume gains in the quarter. So while Yahoo likely had zero monetization gains, they are not sure that Google's monetization improvements were significant enough to push it over 20% q/q. The profile internationally could be different, and may make firm's projections look conservative. However, given the uncertainty in the quarter,they recommend investors refrain from the short-term trade on Google's quarterly results. Rates Google Neutral.

- Stifel notes Yahoo! experienced a quarter that was at the high-end of its lowered guidance
and issued guidance below published expectations. In firm's view, investors are placing a bet that Panama will improve the growth of the business, not for just twelve months, but on a long-term basis.

On the positive side, Panama is here and management noted that the new ranking module will be active in the U.S. on February 5. This means relevancy will be a component of paid search results, like Google. The company is also planning the beginning the rollout in international markets in 2Q. Management further noted that the new search platform will begin to show revenue impact in 2Q and accelerate throughout 2007 and beyond. The company has issued back-end loaded guidance that incorporates a Panama lift beginning in 2Q06 and improving throughout the remainder of 2007. For Yahoo!, the firm projects 2007 revenue growth with Panama of 16% to $5.3 billion, a growth rate lower than both Amazon (21%) and eBay (19%).

Firm's view is that we are at a point of maturity on the Internet that opportunities are no longer greenfield in nature. In other words, at this juncture, when one company wins another loses. They strongly believe that Google and Yahoo! are direct competitors and that the growth trends favor Google.

They believe the risk to Panama is to the downside as expectations for its launch and a 2H benefit now seemed priced in at 30x 2008 FCF. Also, within the search business, they believe Google's better monetization has created an environment in which Google can always outbid competitors for affiliate deals unless competitors choose to give away all the economics of a deal. Expects Yahoo! to continue to experience affiliate departures throughout 2007 due to the network effect apparent in Google's affiliate business.

- Deutsche Bank is maintaining their HOLD investment rating on shares of Yahoo!, and
believe that the slowing core growth at Yahoo! (particularly pronounced in search) and optionality from the Panama platform have already been priced into the shares. While they contend that not much has changed from yesterday to today, the shares have been bid up on a February 5th Panama launch (all the while the 2007 guidance came in lower than Street expectations). In firm's view, the stock is likely to give back the modest gains overnight as investors dig deeper into the financial and valuation.

While the stock has moved higher on the monetization platform being on time, the quantification of the impact remains a debate. Guidance was lower than expected with a wide range of 8%-20% top line growth. As for the stock, they would be buyers of the stock at $25 and sellers at $30, given the slow 1H growth and uptick in 2H (already in the stock).

Notablecalls: While I love the rationale behind UBS' comments, Deutsche's call is likely to be right in the s-t. YHOO's a short above the $28 level.


notablecalls said...

lousy call.

A said...

Thanks man for your daily updates and comments here.. but I think Yahoo is done going down..