Yahoo Q4 15A & Strategy – Road to nowhere.

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Yahoo’s strategy has McKinsey written all over it.

• Yahoo reported another lacklustre set of results and its strategic update gave every indication of being written by McKinsey rather than Yahoo.
• Q4 15A revenues-ex TAC / ADJ-EPS were $1.0bn / $0.13 a bit better than consensus at $948m / $0.12 but still represented a 15% decline YoY.
• Mobile, Video, Native and Social (Mavens) Q4 15A revenue grew strongly to $472m but this went hand in hand with a 266% increase in traffic acquisition cost (TAC) implying that Yahoo has been buying market share.
• Out of this, revenue from mobile devices was $291m, up 14.6% YoY, underperforming its peers Google and Facebook both in terms of absolute levels of revenue and growth.
• Furthermore, Tumblr which has often been called out as an asset that is performing well, missed its monetisation target and was part of the thumping $4.5bn goodwill write down announced.
• Yahoo also announced its new strategy for 2016 which comprises:
  • First. Focusing on search, mail and messaging, Tumblr and the content channels of news, sports, finance and lifestyle.
  • This will result in the discontinuation of some Digital Life services such as games and (I think) maps.
  • This will reduce Yahoo’s coverage of the RFM Digital Life pie from 75% to 41%.
  • Assets such as Flickr which just about pays its way will be continued but investments for growth will be curtailed.
  • Second. 5 regional offices will be closed and the workforce will be reduced by 15%.
  • This will result in the elimination of around 1,500 positions and with an annual saving of $400m
  • Most of this will be effected before the end of Q1 16, with the full effect in the operating results by Q4 16.
  • Third. The reverse spin (see here) of the core business into a separate vehicle will continue as planned leaving Yahoo’s stake in Alibaba in the current legal entity in order to avoid potential tax liabilities.
• The net result of these changes is revenue guidance well adrift of expectations.
• Q1 16E revenues ex-TAC / Adj-EBITDA are expected to be $820m-$860m / $100m-$120m compared to consensus at $915m / $189m
• FY 16E revenues ex-TAC / Adj-EBITDA are expected to be $3.4bn-$3.6bn / $700m-$800m compared to consensus at $3.9bn / $851m.
• This is very disappointing especially given the speed with which Yahoo intends to implement the cost savings which clearly are not going to flow to the bottom line.
• However, the biggest problem of all is that I think that the conjunction of McKinsey and Yahoo has led to a misunderstanding of the market Yahoo is trying to address.
• Yahoo stated time and again that mobile is its future but the shuttering of games and (I think) maps has massively reduced its long-term growth potential.
• This is particularly the case because games is the one segment of Digital Life that no-one has conquered on mobile.
• Consequently, it is wide open and this is what I think Activision’s acquisition of King Digital is all about (see here).
• I think that Yahoo and McKinsey are looking at each asset or business on its own merits and not considering the bigger picture.
• If Google was to think like this, then it would probably have shut YouTube and Maps which I think would kill a significant piece of its search revenue.
• Google understands that the value of a portfolio of integrated services is orders of magnitude greater than a jumble of stand-alone offerings.
• I have long believed that YouTube and Maps are hugely valuable assets to Google as it monetises them through search using the data that they collect.
• As an ecosystem with a collection of integrated and delightful Digital Life services, Yahoo had the potential to quadruple its revenue base to around $4bn per quarter.
• The strategic realignment reduces that potential to closer to $2bn per quarter and will be even harder to realise.
• The cause of Yahoo’s problems is simple in that it remains unable to execute on integrating its assets to create a consistent and delightful ecosystem.
• To give Marissa credit, I think she had the vision of what Yahoo needed to offer but has been unable to fulfil that dream.
• The end result leaves Yahoo in the hands of McKinsey which will provide some short-term benefit in terms of cost savings but leaves Yahoo going nowhere in the long-term.
• Yahoo’s valuation remains unchallenging as the shares are trading below the value of Yahoo’s holdings in Alibaba and Yahoo Japan.
• Hence the theoretical value of the core business, which is profitable and generates cash, is less than zero.
• Consequently, I see significant upside when it comes to break-up of the company but at the moment this has all the hallmarks of a classic value trap.