Yahoo Dodged The Elephant In The Room Which Highlighted The Magnitude Of Failure

  • Yahoo reported its Q1 2016 results with higher-than-expected EPS and revenues.
  • Management refused to disclose any details of the sale process and focused on core business progress.
  • Earnings' call highlighted the declining profitability and disappointing growth in the mavens' businesses.

Internet giant Yahoo (NASDAQ:YHOO) reported its Q1 2016 results on Tuesday with slightly higher-than-expected revenues and EPS figures compared with analysts’ consensus. The company provided improved results in its core businesses and demonstrated some progress in the restructuring process. Ms. Mayer is trying to transform Yahoo into a lean, more focused internet, media, and content company.

The earnings call was webcast via live video streaming on Yahoo’s IR website, presenting CFO Goldman and CEO Mayer, who started the call with an impressive speech about the company’s commitment to the sale process, a chance to describe how management is devoted to complete the transaction. However, this PR-like introduction was concluded with the CEO noting that the company will not address any aspects of the selling process during the prepared remarks or Q&A.

Ms. Mayer’s announcement at the beginning of the call sounded more like a PR pitch in a roadshow than an introduction of an investor’s conference call, and it was her attempt to dodge the giant elephant in the room – the sale process of Yahoo. She considers that Yahoo has been valued for a long time not based on its fundamental value or potential top-line/bottom-line growth but rather on the potential value that a future sale will unlock. With the most interesting topic put aside, CEO Mayer and CFO Goldman were ready to discuss the company’s core business performance.

Yahoo continues to present decisive progress in decreasing the company’s workforce, and the Q1 2016 headcount is only 9,400, which is 21% below Q1 2015 figure. Total top-line revenues dropped in the 11%, which is a significant decline but smaller than the market expected when most of the decline is driven by search and desktop revenues. On its strategic growth drivers nicknamed "Mavens" (mobile, video, native and social), Yahoo presented a modest growth of 7% YoY, which is not a significant rise that can pull the entire company up. Ms. Mayer is talking about turning the company around through additional investments in its Mavens businesses, but it doesn’t fit the results that the Mavens businesses yield. When the company’s management refuses to discuss the most urging topic in the company’s history, it highlights the poor results that the core business generates after three years of attempts to turn the company around.

On top of the declining revenues and EPS that was expected, the company’s profitability worsened when Yahoo’s gross margin declined from 62% in Q1 2015 to 53%, in Q1 2016 EBITDA margin fell from 18% to 13%, and net profit margin turned negative.

Conclusion

For the rational long-term investor, Yahoo’s earnings call provided little value add and only highlighted the failure of the current management. Investors who looked for some more color in Yahoo’s sale process will have to settle for updates from the conventional news outlets. My bullish thesis on Yahoo backed by a future sale, breakup, or spin-off of the company or its assets remains unchanged following the earnings release.

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