Yahoo!: Yet Another Hierarchical Officious (re)Organization -- Brian Wieser, Pivotal Research

Alongside Yahoo's 4Q15 earnings results, the company provided a key announcement around its newfound willingness to consider strategic alternatives (read: a sale of the core business). Of no less importance in our view, Yahoo's board also announced the departure of one of its independent members, Charles Schwab. At the same time, the company provided color around its newest strategic plan. If it goes ahead as planned, this will only be the most recent of many reorganizations in the company's recent history. For point of reference, we can point to five years over the past eight where Yahoo has incurred more than $100mm in annual restructuring costs.

The company's latest strategic plan focuses on products including search, mail and Tumblr with news, sports, finance and lifestyle as core content verticals and the US, Canada, UK, Germany, Hong Kong and Taiwan as priority territories. Ad products are intended to be branded under Gemini and BrightRoll. Some legacy products will also be retained, such as Flickr, Answers and Groups.

In essence, this effort means Yahoo will have a reduced presence in certain countries (such as Latin America and many key European territories) along with less revenue in those markets following from a streamlined portfolio of consumer and ad products. Presumably the restructuring will also lead to a greater emphasis on programmatic media sales – which may or may not indicate a more significant focus on self-service ad products rather than the insertion order / relationship-driven ad sales efforts that Yahoo has historically been known for (and, we note, for which it is still reasonably well-regarded despite all that has occurred with the company in recent years). In tangible terms, the company expects to drive $400mm of costs out of the business from its efforts, while cutting headcount by 15%. Margins will be more challenged during the first part of the year – especially as revenues are more heavily impacted – but should improve in the second half of the year. Revenue growth is expected to eventually follow.

While we don't doubt that an improved Yahoo could follow from this plan, we are generally doubtful that it will be seen through by the current management team (or the current board), as a proxy fight seems inevitable if a sale of the business doesn't occur first. Because of the uncertainty of timing around when such changes may occur, we think that guidance serves as a baseline for estimates, even if guidance for 4Q15 was overly conservative. There are meaningful threats which continue to face the company, and so conservatism is not unreasonable; nonetheless, our forecasts for revenue growth and EBITDA are slightly above the top end of management's 2016 guidance.

Overall, our valuation on Yahoo is changed only slightly post these results. We place a value on Yahoo's core business of $3.5bn, not counting the $5.7bn in cash we expect Yahoo to have on its balance sheet at year-end 2016. This includes an assumption of longer-term low to mid-single digit top-line growth, mid-20s rising towards low-30s adjusted EBITDA margins and $800mm in annual capex and M&A post 2016. We further assume only 2% long-term growth (the lowest among companies we cover) and a 13% long-term discount rate (the highest among companies we cover). Of course, there are a range of other scenarios that might be as plausible, such as lower margins and lower growth (or decline) but less M&A that produces the same valuation.

VALUATION: We value Yahoo with its core business worth $3/share and cash less debt worth nearly $5. We value the Alibaba and Yahoo Japan assets at $27/share presently.

RISKS: 1) Ongoing erosion in the core business 2) Unfavorable outcome from monetizing stakes in Alibaba and Yahoo Japan and 3) Uncertainty about management.

FULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE: YHOO 2-3-16.pdf

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