Yahoo Underwhelms; Ready to Deal?


Pouring over the Yahoo second quarter earnings release, I'm wondering how in the world the company could dismiss the original Microsoft takeover out of hand, on the basis that the company and its management had a "better way" to make money, and that the deal didn't value Yahoo fairly.

Looking at these numbers today, and I think there will be lots of questions from investors as to why this company cannot turn things around.

Analysts following the company knew it would miss expectations this time around, and in that respect, Yahoo didn't disappoint: a dime a share in EPS instead of the 11 or 12 cents Wall Street was anticipating. But that dime a share could actually be 9 cents, making the miss that much more egregious, thanks to three extraordinary items, including two charges connected to the legal battle with Microsoft, and a one-time tax adjustment in Yahoo's favor. Taken together, the actual apples to apple's EPS comparison drops to 9.46 cents.

Yahoo's revenue was also disappointing: $1.35 billion in revenue, excluding those Traffic Acquisition Costs, instead of the $1.38 billion analysts expected.

The company's operating income before depreciation, amortization, and stock-based compensation expense, "EBITDA" for everyone else, came in at a disappointing $427 million versus the $465 million expected.

Looking out to Yahoo's third quarter, the company narrowed its guidance to EBITDA of $405 million to $465 million, well below the $480 million expected, and also well below Yahoo's original guidance of $425 million to $475 million. Revenue in the third quarter seems to be climbing, with Yahoo now expecting $1.78 billion to $1.98 billion versus Street expectations of $1.88 billion and Yahoo's original guidance of $1.73 billion to $1.93 billion.

But for the full year, Yahoo is narrowing its EBITDA range to $1.825 billion to $1.975 billion. It had been $1.78 billion to $2.03 billion, and the Street expected $1.91 billion. For full year revenue, Yahoo now anticipates $7.3 billion to $7.85 billion, versus Yahoo's original guidance of $7.2 billion to $8 billion, and Street estimates of $7.6 billion.

Despite those dampened expectations, there are some fundamental questions that Yahoo has to answer, and some structural challenges the company faces. The company says that consumer goods were weak for display advertising this past quarter, and automotive advertising, as I wrote in an earlier post, also came in weaker than usual. And given those comments, Ryan Jacob at Jacob Internet Fund is skeptical that Yahoo can meet its latest guidance numbers. That doesn't bode well for the company or its investors. And with today's earnings report, we might finally have the real reason for Yahoo's too-late-in-the-game about-face about whether it wanted to be acquired by Microsoft, and why it doesn't simply want to sell off its Search business alone.

Yahoo's numbers don't do much to re-assure investors that this executive team is executing on the strategies CEO Jerry Yang has talked about to improve Yahoo's fundamentals. Add today's earnings to the shareholder agenda at the meeting next week. Investors simply cannot be happy with today's performance.

Questions? Comments?