Tuesday, April 22, 2008

Psychology of the Yahoo! Inc. (YHOO) Q1 2008 Call

Most recent notable analyst changes
March 25th, Citigroup upgraded from hold to buy.
March 8th, ICAP initiated coverage with a buy.
Feb. 5th, Canaccord Adams upgraded from hold to buy.
Feb. 5th, Banc of America downgraded from buy to neutral.
Feb. 4th, Soleil downgraded from buy to hold.
Feb. 1st, Susquehanna Financial downgraded from positive to neutral.
Jan. 30th, Citigroup downgraded from buy to hold. Our team will listen and analyze the Psychology of the Call (POTC) of all these analysts closely, but especially Citigroup's analyst as he changed his rating on Yahoo! Inc. (YHOO) from a January 30th downgrade to a March 25th upgrade; perhaps his psychology during the question and answer (Q/A) session will reveal the freshest facts. Here are some of our team’s insights into the recent developments surrounding YHOO:

YHOO's CC will be dissected and analyzed more from a psychological perspective and less on a quantitative/number basis since there is a buy out offer of 44.6B or $31/share from Microsoft Corp. (MSFT) being debated. Microsoft's Steve Balmer is politicking of late and we don’t see him backing out, especially in light of GOOG's monster move on Friday.


Obviously, there are many opposing views on the deal judging by the incredible media coverage. We believe YHOO will continue to under perform GOOG and eventually go the way many well meaning companies went, that being extinct. The Google juggernaut might be challenged only by a collaboration between MSFT & YHOO, although our readers should realize that MSFT believes that GOOG is so far ahead their offer for Yahoo shows more desperation than promise.

The CC started at 4:00 PM ET with Marta from IR read the safe harbor

At the seventh minute (7m) Jerry, Co-Founder outlined strategy; the MSFT unsolicited take over proposal was mentioned and three components were addressed 1) MSFT 2) Q1 performance 3) growth drivers.
9m MSFT proposal substantially undervalues Yahoo franchise, read the reasons why board rejected MSFT proposal.
10m Board and management is open to all and any alternatives, including MSFT's proposal.
11m One thing is Yahoo will not enter into any transaction that will not maximize shareholder value; 25% growth q/q in display advertising, successful Maven Networks buy out mentioned:


12m Key elements recapped 1) increasing volume of properties, front page search, and mobile. 13m Advertisers will be served so well that they will insist on working with us; key to strategy is closing the gap in search monetization against rivals.
13m Largest opportunity lies in display advertising, estimated to be $40B by 2010.
14m Although not immune to macro economics, we are well positioned even in a slowing macro environment; brisk progress and strong momentum against the circumstances in the last 3 months (Marco issues), results have been extraordinary; 15% growth and executing well and maximizing shareholder value.
15m Sue, President mentioned healthy speed and efficiency in rolling out higher quality products.
16m Q1 Three key changes in strategy outlined; growth, simplification, innovation.. facilitating social connections across networks; Yahoo content like Answers and Flicker.
18m 10% compound search growth has been exceeded in U.S; #2 position in search; game changing features will continue to drive volume: search assist, video and volume, customer satisfaction is growing.
19m Search results will become more of a dynamic monetizing key, search 2.0 voice activated search has been initiated, search assist, one search, and mobile search mentioned.
20m We've closed the gap in the last 18 months, material gains in algorithmic search.
21m Non-search search 12% growth experienced; social connections, Buzz launched in Feb. proprietary algorithm.
22m comScore reported 4M new visitors in last month; enormous scale; here's an explanation of who and what comScore is: (http://www.comscore.com/)
Repeat visits are strong.
22m Video on Flicker over 40M world wide users, leveraging social connections as no other company.
23m More objectives outlined; broaden advertising skills and networks.
24m Continually innovating to make it easier for others to do business with YHOO.
24m Search and display yield: Panama continues to make good gains: POTC gives credit to Ross from RBC Capital for calling out Yahoo executives in the 50m mark below; and questions regarding Panama did come up back in 2007: (http://blog.searchenginewatch.com/blog/070904-123519)
25m Coverage by click-through-rates explained, and price per click upside (PPC) developments. 26m 3 year goal is for 15% RPS gains.
27m GOOG deal mentioned; goal is to optimize near term monetization.
27m 3 year plan for 15% annual growth should benefit from display ad platform.
28m Right Media and Blue Lithium acquisitions mentioned, inventory is still highly fragmented, so YHOO will take advantage to fuse that element in the display market.
29m AMP announced recently, selected newspapers, inventory is undervalued today.
30m "We sell you sell" campaign, upside can even be greater.
31m Extraordinary time for YHOO; innovating and executing more effectively, we are on the verge of fundamentally changing the game in display.
31m Blake, CFO read the publicly disseminated results.
33m Reaffirmed 2008 guidance; $2.8B cash balance at year end.
35m Maven and Foxy Networks mentioned; Ali Baba and GMarket; YHOO owns 40% of Ali Baba; significant additional value is in other investments mentioned in a convincing/believable tone.
36 m Ali Baba IPO mentioned; $167M of $750M convertible were converted into common stock; conversion of notes explained in more detail.
39m Auto and pharma doing well, softening in finance, retail and travel seen (weak).
40m Advertising budgets may fall, but return on investment (ROI) may actually go up; AT&T and Rogers renewed, expect negative impact, higher payments.
41M Received $35M payment from AT&T,.
41m Headwinds mentioned in relation to AT&T and Rogers.
42m 39% Q1; other taxes mentioned, higher in next few quarters.
44m Jerry emphasized strategy very confidently, but POTC wants readers to read between the lines here… Jerry must be confident as there is a $31/share buy out offer on the table, so we accepted his remarks with a grain of salt.

Q/A started at 45m

46 m Youssef from Jeffries Q: Questioning the optimism on long-term guidance. A: Guidance is reflected in the economic view we have today (POTC sees the guidance being overly optimistic, again, with the MSFT offer on the table, YHOO's best interest is to over promise, NOT guide lower) Credit to Youssef from Jeffries, who we crucified for downgrading Google days before their monster move and earnings; Youssef is redeeming himself of late, but here's a review of his GOOG call: http://psychologyofthecall.blogspot.com/2008/04/psychology-of-google-q1-2008-call.html

We all make mistakes, but his downgrade looks completely wrong after this CC and a $75 up move in Google! (Be cautious if the MSFT deal doesn't go through, as now YHOO has over promised on Q2 in POTC's and Youssef's opinion).
Jeffrey from Sanford Bernstein Q: Certain metrics are coming down, is there a slow down A: Overall TAC rates declined slightly, there is pressure on TAC rates, competitive dynamics have become more difficult; discipline mentioned, weak response in POTC's opinion.
48m Brian from Banc of America Q: More color on inventory and on weakness A: Sue didn't answer question in our opinion.
50m Ross from RBC Q: Why slowdown in Panama? A: Panama was roughly 20%, now 10%, so tougher comparison; we are pleased on click yield though.
51m Looking forward we will drive price per click (PPC).
52m Global basis RPS gains were 15%.
52m Mark of Citigroup Q: On Asian assets, hypothetical on Ali Baba and Yahoo Japan A: We can't talk about all the alternatives for competitive reason, but we our strategies are unique.
Psychological note to readers: POTC feels since Mark has most recently upgraded YHOO, as seen in our opening paragraph, we feel his question reflected that positive rating, neither good nor bad, but we want our readers to understand the rationale behind different analysts’ questions; obviously Mark is hoping the Asian markets see viral growth, and this must be followed, as we like analysts who make rating changes, rather resting on their laurels and simple hope.
54m Krista from Thomas Weisel Q: On ad networks and AMP A: AMP is built upon the open exchange.
55m AMP is a display platform today; over time the world will converge, so AMP is only first launch on that platform, you will see more from AMP; POTC's link for AMP: (http://advertising.yahoo.com/amp/)
56m Emron Kahn from JP Morgan Q: Revenue growth rate and MSFT distraction effect A: No one time event in International, continued pressure of affiliates experienced.
57m Continue to see strong display growth Internationally.
58m No impact from MSFT proposal, no distraction.
58m James from Goldman Q: U.S. current economic weakness on search business, Panama. A: Financial, travel, and retail weakness, but other growth rates in double digits.
59m Development in a main stream advertising vehicle.
60m Panama global and advantage seen in pricing, especially International.
61m Justin from Merrill Q: Search: where did you get the 60%-70% improvement figure given last quarter A: Sue was confused by the question, perhaps you are referring to comScore statistics?
62m U.S. sponsored search we have closed the gap.
63m Cost savings seen, below originally forecast.
63m Keith from Credit Suisse Q: In terms of display, what kind of ad inventory growth are you seeing, particularly in finance? A: Still very early in display market (POTC feels the question was dodged, as YHOO didn't want to pepper the CC with negatives since a MSFT offer is pending).
64m we continue to invest in inventory, we have seen robust growth in display this quarter.
65m long term goal in 3 year plan is to grow 12%

CC ended at 6:05 PM ET

We feel YHOO is strictly an arbitrage play. Although we do feel MSFT's offer will have to be raised if they are serious about taking on one of our favorite stocks, Google (GOOG). Google’s CC was 10X more upbeat and 10X more transparent. We feel YHOO's management is definitely distracted with the MSFT offer. YHOO would be wise to continue their "power play" attitude; and ironically, they must thank Google for that company’s incredible Q1 results and stupendous CC, because now MSFT is hungrier.
We hope you learned something new and thank you for giving us the pleasure to offer you our little Psychology of the Call blogspot.

No comments: