yhoo downgrade 1 26-11 final

WILLIAMS CAPITAL RESEARCH

B r i a n B o l a n B o l a n @ w i l l c a p . c o m T r a d i n g N Y 8 0 0 - 9 2 4 - 1 5 1 1 , C T 8 0 0 - 6 8 8 - 6 3 4 9

PLEASE SEE PAGES 5‐8 FOR IMPORTANT DISCLOSURES, REG AC ANALYST CERTIFICATION AND DISCLAIMERS

Summary Yahoo! reported revenues of $1.205B and earnings per share of $0.26, well below our revenue estimate and substantially higher than our earnings estimate. At first glance that would be a good thing and indicative of cost cutting, but an aggressive accounting change has given us pause. TAC, or traffic acquisition costs, used to be subtracted from revenue before coming to a gross profit number. Yahoo! has shifted its policy to include TAC in its reported revenues despite that the “C” is TAC stands for cost. The shell game that companies often employ during difficult times is a change in reporting, and Yahoo! also enacted this policy to further cloud what is really happening. Eliminating the “Affiliate” line from the revenue break out allows the company to report Search, Display and Other. No longer will we delineate from the Owned and Operated segments, but look at the industry as a whole. Revenues were down 30% from the prior year and lower 25% from last quarter. Costs were lower too, but only by 11% from the year ago period and sequentially higher by 2%. This is not what we expected from Yahoo and the weak guidance gives us further pause. Execution of the Search Alliance is coming in below expectations as RPS (revenue per search) did not live up to expectations. Bartz blamed ad matching technology and its partner (Microsoft) for the short coming. Yields were also a source of disappointment and they are not likely to show positive results until 2H11. We note the combined marketplace has only been active for 60 days, so while disappointing, these results still have time to turn things around. Layoffs were announced yesterday for Yahoo!, but Bartz noted that total headcount will grow above current levels and that costs will remain flat with prior year. We translate that into cutting several high priced engineers and adding dozens of low cost content producing bloggers, but this is especially stinging to the Yahoos that see Googlers getting a 10% raise.

YHOO Underperform Curr. Q. 1 yr ago

Price: $16.02 Dec-10 Dec-09 Mar-11 Jun-11 Sep-11 Dec-11

Price Target: NA F4Q10E F4Q09 F1Q11E F2Q11E F3Q11E F4Q11E

52 Week High: $19.12 Rev prev: $6.46 $6.42 $6.80 6.460 $6.42 $6.80 xxx xxx 1.619 1.659 1.673 1.849

52 Week Low: $13.14 Rev new:

6.460 NA NA 6.460 NA NA 1.718 1.732 NA NA NA NA

NTM P/E: NAEPS prev:

xxx xxx xxx xxx $0.67 $0.84 xxx xxx $0.19 $0.20 $0.20 $0.25

Market Cap (B): 20.80 EPS new:

$0.61 $0.67 $0.84 $0.61 NA NA $0.18 $0.15 NA NA NA NA

Ent Value (B): 19.00 EV/S: 2.94x 2.94x

Shares Outstanding (B):

1.30 P/E 26.26x 23.91x 19.07x 26.26x

Avg Daily Volume (M): 3.30

Cash/Share: 2.16

BV/Share: 9.28

Key Data (Rev in $bns)

Fiscal Year Calendar Year Next 4 Quarters

CY09 CY10E CY11EFY09 FY10E FY11E

Equity Research Yahoo Inc. (NASDAQ:YHOO)

Company Earnings Current Rating: Underperform

January 26, 2011 Downgrading and suspending price target and estimates

Internet Analyst: Brian Bolan 773-413-0285; [email protected]

Trading Desk: NY 800-924-1511 CT 800-688-6349

WILLIAMS CAPITAL RESEARCH January 26, 2011


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Accounting changes, revenue decreases, and execution issues all add up to nervous investors and we believe Wall Street will sell first and ask questions later. We are downgrading Yahoo! to Market Underperform and suspending our price target until our model gets more clarity in light of the accounting change. Not throwing the baby out with the bath water Display was among the bright spots in a dimly lit quarter, showing strong growth of 27% from the prior quarter and 16% from the year ago period. Management noted that several large brands and their agencies utilized Yahoo for its “science art and scale”. It was noted on the call that these are the clients that drive the shift from offline to online advertising. It was also noted that Facebook is set to be a formidable competitor in the coming quarters. The other bright spot comes from Bartz comments on Yahoo Japan, which could see a divestiture in the near future. CEO Carol Bartz noted that the company would be looking to unlock the value in a tax efficient way, suggesting a stock swap that may hinge on the participation of private equity. A creative solution could allow a brief rally for shares, but it is doubtful that it would last. Shares (Not) Repurchased Surprisingly, the company was not in the market this quarter, suggesting that management expects the stock to trend lower in the coming months. It was quickly noted that the company purchased $100M worth of shares at around $14.68 in an attempt to set a floor for the stock. We believe that notion could be challenged over the next few months. Suspending our price target We are suspending our price target due to the aggressive change in accounting and how this affects our estimates going forward. For that reason, our estimates and model are suspended as well until we can fully digest the accounting change, revenue decreases and search alliance ramifications. We initiated the company with a perform rating based on lower future revenues and concurrently significantly lower costs. We now do not anticipate this affect to kick in until the 2H11 and full apples to apples comparisons to not be meaningful until 2012.



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Yahoo 4Q10 Earnings Review Exhibit 1

Source: Company reports and WCR estimates



PAGE 4

Investment Risks

If the company experiences any or all of the following risk factors, as well as others, the company’s stock price may be affected.

Advertisers reduce internet budgets. Advertising is the source of the majority of Yahoo!’s revenue. Should advertisers lose faith in the internet as a medium for advertisements Yahoo! would suffer a significant revenue slowdown.

A better advertising platform is developed for internet advertising. Search has been the dominant application on the internet for the last ten years. Should another application become more acceptable than search, advertisers could move budgets from search to that platform.

Competition is intense and moves quickly. Yahoo! faces intense competition from Google and AOL among others. Should a competitor develop a more efficient and relevant search engine, a better email platform, or a more compelling display platform, Yahoo! would be severely impacted.

Future growth is predicated on success of mobile. Many of our assumptions of growth are based on the future success of all things mobile. Should Yahoo! fail to adapt to a changing environment that focuses on mobile delivery of search and display ads, the company would face significant challenges.

Loss of key management. Turnover at Yahoo! has been significant concern for some time and continues to remain a challenge to top management. Should this trend continue the talent drain will result in an inability to properly serve clients which would put future revenues at risk.



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APPENDIX Exhibit 2 Yahoo! One Year Price Chart

Source: BigCharts.com

Prices as of January 25, 2011.

ANALYST CERTIFICATION

I, Brian Bolan, hereby certify that the views expressed in the foregoing research report accurately reflect my personal views about the subject companies and their securities mentioned in this report. I further certify that no part of my compensation was, is, or will be directly, or indirectly, related to the specific recommendations or views contained in this research report.

Financial Interests: Neither I, nor a member of my household owns securities in any of the subject companies mentioned in this research report. Neither I, nor a member of my household is an officer, director, or advisory board member of the subject company or has another significant affiliation with the subject company. I do not know or have reason to know at the time of this publication of any other material conflict of interest.

By: Brian Bolan



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___________________________________________________________________________

IMPORTANT DISCLOSURE INFORMATION

Analyst Compensation: The author's compensation is based upon the value directly or indirectly attributed to the research services by Williams Capital institutional brokerage clients. The author of this report is compensated based on the performance of the firm, and has not received any compensation in the past 12 months from any of the subject companies mentioned in this report. The performance of the firm is driven by its secondary trading revenues, investment banking revenues, and asset management revenues.

WILLIAMS CAPITAL RESEARCH STOCK RATING KEY:

Outperform: (BUY) In the analyst's opinion, the stock will outperform the sector by 5% over the next 12 months.

Perform: (HOLD) In the analyst's opinion, the stock will perform in line with the sector over the next 12 months.

Underperform: (SELL) In the analyst's opinion, the stock will underperform the sector by 5% over the next 12 months.

Company Ratings History as of January 26, 2011 Company Name

Ticker

Date

Action

Prior Rating

Current Rating

Price

Target Price

Yahoo inc. YHOO 1-15-10 Initiate coverage none Perform $16.51 $18

Yahoo inc. YHOO 1-26-11 Ratings change Perform Underperform $16.02 NA

Valuation Methodology: We are suspending our price target due to the aggressive change in accounting and how this affects our estimates going forward. Risks

If the company experiences any or all of the following risk factors, as well as others, the company’s stock price may be affected.

- Advertisers reduce internet budgets. Advertising is the source of the majority of Yahoo!’s revenue.



PAGE 7

Should advertisers lose faith in the internet as a medium for advertisements Yahoo! would suffer a significant revenue slowdown.

- A better advertising platform is developed for internet advertising. Search has been the dominant application on the internet for the last ten years. Should another application become more acceptable than search, advertisers could move budgets from search to that platform.

- Competition is intense and moves quickly. Yahoo! faces intense competition from Google and AOL among others. Should a competitor develop a more efficient and relevant search engine, a better email platform, or a more compelling display platform, Yahoo! would be severely impacted.

- Future growth is predicated on success of mobile. Many of our assumptions of growth are based on the future success of all things mobile. Should Yahoo! fail to adapt to a changing environment that focuses on mobile delivery of search and display ads, the company would face significant challenges.

- Loss of key management. Turnover at Yahoo! has been significant concern for some time and continues to remain a challenge to top management. Should this trend continue the talent drain will result in an inability to properly serve clients which would put future revenues at risk.

ADDITIONAL DISCLOSURE INFORMATION:

The Williams Capital Group, L.P. or its Affiliates do and seek to do business with companies mentioned in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Additional information is available upon request.

“Investment Banking Clients” is defined as companies in respect of which The Williams Capital Group, L.P. (the “firm”) or its affiliates have received or are entitled to receive compensation for investment banking services in connection with transactions that were publicly announced in the past 12 months.

Distribution of Equity Research Ratings as of: January 25, 2011 (Prior to today’s rating change)

Outperform Perform Underperform

All Research Coverage: 66.7% 33.3% 0% Universe of IBC: 0% 0% 0% Internet: 40.0% 60.0% 0% Internet - IBC: 0% 0% 0%



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Investment Banking Disclosures: Within the past 12 months, the research analyst authoring this report has not participated in a solicitation of any subject company mentioned within this report, with or at the request of investment bankers, for investment banking business. Within the past 12 months, the firm and its affiliates have managed or co-managed a public offering of the securities of a subject company mentioned within this report, and the firm received compensation for investment banking products or services from the company. The firm does not expect to receive or intend to seek compensation for investment banking services from this subject company during the next three months.

Firm Compensation: Within the past 12 months, the firm and its affiliates have not received compensation for any non-investment banking products or services from subject companies mentioned in this report, and the subject company has been a client of the firm during the past 12 months.

Stock Ownership: The firm and its affiliates do not own 1% or more of any class of equity security discussed in this report, and do not make a market in any such securities.

DISCLAIMER

The information and opinions contained in this report were prepared by the firm and have been derived from sources believed to be reliable, but no representation or warranty, expressed or implied, can be made as to their accuracy. All opinions expressed herein are subject to change without notice. This report is for information purposes only and should not be construed as an offer to buy or sell any securities. The firm makes every effort to use valuation methodologies that it believes to be reasonable in the derivation of price targets, but we do not guarantee that such methodologies are accurate.

To receive any additional information upon which this report is based, please contact the following individuals or write to: Williams Capital Research, Research Department 650 Fifth Ave. 11th Floor New York, NY 10019 [email protected] Suling Lew, Head of Institutional Sales or Jack Murphy, Director of Research

212-373-4243 203-659-6007

yhoo downgrade 1 26-11 final

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