According to some pages from the “book” that Yahoo bankers have given out to prospective buyers, the financial situation at the Silicon Valley Internet giant is becoming increasingly dire.
While I cannot show the documents I have obtained, Recode has gotten access to them. The book, for those not familiar, is made up of disclosure documents that sellers give to buyers to allow them to intelligently prepare a bid. In addition, those interested also have access to a protected data room, with more detailed information.
And, along with reviewing the documents, a series of sellers I have interviewed said that while the Yahoo book is unusually confusing and perhaps purposefully so — more on that below — it shows a company in what has been a serious free fall, which has been apparent to many for a while now and from Yahoo’s continuing public downgrading of its prospects.
Still, the collective issues depicted in the book has many nervous about bidding.
I’d be a little wary, too, if the information Yahoo has been doling out continues, which it signaled in its recent results. In one slide showing expected results from 2016, Yahoo is estimating that revenue is dropping close to 15 percent and earnings by over 20 percent. Those revenues, backing out traffic acquisition costs (TAC), are expected to decline from $4.4 billion in 2014 and $4.1 billion in 2015 — already down from previous years — to $3.5 billion in 2016; meanwhile, earnings before depreciation, taxes and amortization are moving from $1.4 billion in 2014 and just below $1 billion in 2015 to $750 million in 2016.
Holy cash flow drought, Batman!
While expenses are also declining, it is not nearly enough to offset what is a troubling landscape that Yahoo is painting for possible acquirers. In addition, while Yahoo expects its number of employees to be about 9,000 at the end of 2016 — down from 12,500 in 2014 and 10,500 in 2015 — stock-based compensation remains steady. At well over $400 million annually now, that’s double what it was only a few years previously and means CEO Marissa Mayer is loading up valued employees with outsize share grants to get them to stay.
The financial figures for 2016 also show several other troubling trends, around huge increases in TAC and also scary declines in fees from its Asian assets.
The fees first: The slides note $200 million of Yahoo has dubbed TIPLA from China’s Alibaba Group; that is now gone in 2015 after its IPO and it’s not coming back.
Worse still and not depicted in the slides: In 2017, Yahoo will finally lose another $120 million in fees from its Yahoo Japan search relationship (Yahoo Japan switched to Google many years ago, and now those chickens are coming home to roost). While Yahoo will still get another $120 million annually for branding and alleged technology from Yahoo Japan, its controlling owner, SoftBank, is not happy about the arrangement in what has become an increasingly tense situation.
As to the TAC, according to the documents, that has risen from close to $220 million in 2014 to about $875 million in 2015 to an estimated $1 billion in 2016. What does that mean? Let me try to illuminate: Mayer has done search deals with companies like Mozilla and Oracle that have essentially bought revenue but at a high cost. Let that sink in: Buying revenue.
While she and CFO Ken Goldman have publicly said these relationships are profitable and continue to do so in meetings, they are not saying how profitable and many buyers think they are not very much so. (Is it $50 million? Is it $1? Who knows!)
In fact, several possible buyers I spoke to — both strategic and financial — think the entire book and answers from Mayer and Goldman (who is not saying much in meetings I am told) is confounding, because Yahoo has shifted around everything so much that it is not easily clear, if at all, what is making money and what is not.
The other slides Yahoo has handed out are equally perplexing. For example, some search staff costs seem to have been shoved into research, while regional units across the globe are not broken out as clearly as before and sometimes — as in the case with the Asia-Pacific region — have been put in the sales unit numbers (Asia head Rose Tsou now reports in there). No one knows where the newly higher food costs for employees have gone, once much touted by Mayer, even if they are in there somewhere.
In addition, Yahoo execs — including Mayer and Goldman — have declined in meetings to give more detailed answers until buyers are approved for the next round. What about display sales declines? Who’s minding the house at Tumblr? What is going to happen with all the media unit cuts?
In any case, initial bids for Yahoo are due Monday. (Talk about flying blind.)
I’ll be writing about more pages in the book soon, but aside from the sad numbers, one thing that has stuck out for buyers is Mayer’s touting of Index, its Don Quixote voice search effort in mobile. Calling it a personal assistant — and ignoring the fact that Apple, Google, Amazon and Microsoft already have robust products like this already on the market — one slide notes that it “accomplishes tasks on your behalf.”
People who have spoken to Mayer said she is animated about this rival to Apple’s Siri and Amazon’s Alexa, despite the potentially high costs of mounting a challenge. As to what those costs are, if you can find them clearly marked in Yahoo’s book, you are a better accountant than I am. In numerous slides, it is hard to find out where those staffers and costs are located.
While some are scared by the numbers, everyone I spoke to plans to make a bid of some sort, largely because even as financially precarious as it has become, Yahoo remains one of the biggest properties on the Web and it is hard to be able to buy that kind scale easily.
“It’s like a dilapidated house in Silicon Valley — you walk in and are overwhelmed by the work that needs to be done and how bad it has gotten,” said one potential buyer. “But then it’s in a good neighborhood, the market is nuts and there’s not many like it anymore, so you have to hope you can fix it.”