In its prime, Yahoo! was one of the most visible and recognizable names associated with the internet. Without Google and other indexed search engines, Yahoo! was an unstoppable force that once paid 5.7 billion dollars or 100 times its annual revenue for broadcoast.com, a company that never made profits.
At its peak in January 2000, the company was trading at $125 per share. Shortly following the dot.com crash, Yahoo!’s shares fell to a mere $4. Looking at the equity story since then, the company’s shares have pared back some of the decline to reach its highest level in 15 years of 50 dollars per share. Had Yahoo!’s bid to acquire Google for $3billion in 2002 succeeded, the company’s current prospects would look very different with Google current valued at over $370 billion. Instead the company has been mired by a long list of disruptive operating, strategic and technical issues ranging from activist hedge funds forcing out Yahoo! senior management, to substantial headcount reductions and ill-conceived buyouts. Perhaps the most critical strategic error was the decision to drop Google-powered results from Yahoo! in 2009 in favour of Microsoft’s Bing search. Yahoo!’s market share subsequently dropped to 10% from 17% while Google increased its share to take 65% of the search market.
It’s hard to think of many web companies that have succeeded in turning themselves around. Indeed changing perceptions of brands is extremely difficult and with the low capital needs of potential entrants as has been witnessed by the meteoric growth of social networks like Instagram and Pinterest, new fresher brands are constantly raising the bar for technology companies to engage internet browsers. In this article we’ll analyse the current state of the search and advertising industry, Yahoo!’s corporate strategy to date and the risks it faces as we address whether Yahoo! can really turn itself around. This article is a story based on BlueBook analyst, Henry Sturges presentation, available at www.bbk.io/henrysturges.
Yahoo! is a technology company focused on making the world’s daily habits more inspiring and entertaining.
- Yahoo! has suffered falling market share, stagnating revenue growth, and declining user engagement for the past 3 years
- Yahoo! has struggled in recent years due to under-indexing in the rapidly growing mobile market, and in the midst of worsening cost conditions
The core business has collapsed in value since 2012, with the company’s share price being supported by large stakes in Alibaba and Yahoo! Japan.
Let’s look at the Online Advertising Industry to start…
Between 2014 and 2016, the online advertising industry is forecasted to grow 29.9%. Yahoo! currently holds 2.5% of online advertising revenues worldwide. Concerning is the fact that traditional desktop revenues have plateaued as the industry moves towards mobile advertising which is forecasted to grow at 193% between 2014-2017. All advertisers globally are repositioning to ensure their platforms adjust to this new medium.
Yahoo! has a number of high-profile global competitors around its operating segments in search engines and advertising/networking including the likes of Google, Microsoft and AoL in the US and Baidu in China.
There are fundamental risks in the online advertising industry. Revenues are heavily dependant on the spending patterns of consumers. These are directly impacted by:
- The seasonal nature of e-commerce
- Macroeconomic conditions
- A considerable need for high advertising budgets by Business to Business companies.
Online advertisers contain some of the world’s most valuable and recognisable brands. Revenue streams highly geared towards advertising spending:
- Approximately 80% of Yahoo!’s revenues are driven by search and display revenues
Strategic Considerations Snapshot
The future of Yahoo! is in rapid transition to mobile advertising and technologies
- Yahoo! is expecting to have 50% of its employees working on mobile technologies
- Gemini Native, Yahoo! Ad Manager Plus
Yahoo! operates in a highly competitive industry
- In Asian, Middle Eastern and Latin American markets, local monopolies, such as local ISPs, are preventing international revenue growth
Yahoo!’s performance has been weak outside the Americas
- EMEA revenues fell 25% and 18% in 2011-2012 and 2012-2013 respectively
- Asia Pacific revenues fell 23% in 2012-2013
Yahoo! requires constant innovation to remain competitive
- 50% of new hires had design, engineering, or product background
Yahoo! online properties are amongst the most popular in the world
- Second most viewed behind Google
- Tumblr’s user base has grown 40% since being acquired by Yahoo!
- Flickr hosts over 10 billion photos
How is Yahoo!’s Financial Health?
Yahoo!’s core business has collapsed in value since 2012
- SOTP valuation shows a fall in core business value from $7.3bn to -$5bn 2012-2014
Yahoo! has grown almost entirely inorganically since Marissa Mayer became CEO in 2012
- In 2013 Yahoo! was the most acquisitive company globally
- Yahoo! is planning to continue investing into acquisitions in the near-term
Yahoo! owns a 16.3% share in Alibaba, and a 35% share in Yahoo! Japan
- Alibaba share buybacks generated Yahoo! $4.3bn in 2012
Yahoo! is coming out of a period of aggressive cost-cutting, having shut down eight offshore offices since 2012
- 2,000 performance-related departures
- Exited 65 tertiary product lines
- Worked to consolidate teams and offices
However operating costs for Yahoo! are expected to increase:
Other costs drivers include the fact that Yahoo! has significantly increased headcount and investment in high quality human capital:
- Reduction in outsourcing
- Investing heavily in new product development talent
- Investing in tax professionals
Yahoo! has increased marketing spend and has invested in new marketing initiatives such as:
- Yahoo! on the road campaign
- Fantasy football TV ads
Yahoo!’s profitability has fallen over the last three years as can be seen from the sharp fall in its operating margins over 2012-13 and declines in Europe. The slide below highlights the key trends visually:
Relative to its closest peers, Yahoo! has experienced substantial sales declines vs Google and Microsoft.
Despite falling profitability, Yahoo!’s share price as fared much better with a 20% increase over September 2014 in the run up to Alibaba’s IPO which gained enormous interest from global investors.
Alongside Alibaba, Yahoo! has been extremely acquisitive as it looks to inorganically support its core competencies. With 36 acquisitions since 2012, Yahoo! management has stated their intent on penetrating the mobile markets (Flurry and Sparq) and growing its user base with its purchase of Tumblr in May 2013 for $1.1 billion.
Given the company’s riskier strategy of acquiring for growth and all attached risk (integrations costs, management distraction, overvaluing synergies etc.), the company has had mixed success so far. Tumblr has grown 40% since acquisition with its minutes per unique user on the rise. Yahoo! has accessed technologies which it has previously underinvested in relative to competitors such as programmatic buying and mobile. However selected acquisitions did not return shareholder value with the closure of Xobni to “focus on the core business”. Crucially, the success of these initiatives in growing users and engagement has failed to impact revenues – for example even if Tumblr’s revenue had grown twice as fast as traffic, it would have only added single digit millions to Yahoo!’s revenue.
Is Yahoo! a Takeout Target?
Alibaba and SoftBank are set to become global internet companies in the long-term. Acquiring Yahoo! Would mean developing a close partnership with these firms. This could be attractive for a firm looking to push into China/Japan. Alibaba is looking to push into the U.S. An “Enemy of my enemy” scenario could enable an acquirer to expand into e-commerce and compete with Amazon. Based on current valuations, an acquirer could effectively get Yahoo!’s core business for “free” if Yahoo! sold back stakes in Alibaba and Yahoo! Japan.
The risk of this is if dilutive M&A is acting as a “poison pill”? Yahoo’s brand has become splintered with 76 different mobile apps at last count. Difficulties in bringing together and consolidating all existing firms will be challenging for any acquirer. Furthermore, unprofitable acquisitions may turn off potential buyers away. Currently Yahoo! is continuing to buyback shares and management has announced its plans to allocate cash from its $3bn sale of Alibaba shares to buyback its own shares. Yahoo may be defending itself from a possible takeover.
Will Yahoo! turn itself around?
If Yahoo! is to succeed in regaining some of its former glory, its M&A activity will likely form the basis for the necessary revival in the core business. Tumblr’s user base has grown 40% since acquisition with minutes of usage per user increasing. Acquisitions such as BrightRoll and Flurry will allow Yahoo to capitalize on the mobile market.
Yahoo! will need to strengthen its core products to reduce loss, focus on operations and marketing (cost reductions and smart hires). The company will likely need to improve its operating margins by assimilating new infrastructure and technologies faster. The hiring of Marissa Meyer as CEO from Google in 2012 has marked a new strategy for Yahoo – hire impressive talent, change brand perception and strengthen the balance sheet mostly due to its Alibaba acquisition and recently announced spin-off.
In the words of Marc Andreesen of Andreesen-Horowitz Venture Capitalist:
Apple demonstrates that it’s possible to turn a tech company around. Apple also proves how hard it is because it is one of a very small number of examples. Tech Companies can in fact be turned around but the problem is, there aren’t a lot of Steve Jobs characters running around.”
The thing about turnarounds is that they take time. It’s three to five years to do the job. So one of the things she (Marissa Mayer) needs for the board to support her for that period of time. Secondly for shareholders to support her and finally for the generally public to once again welcome Yahoo! back into their online experience.