RULE MAKER PORTFOLIO

Rule Maker Portfolio
Yahoo!, Rule Maker

By Matt Richey (TMF Verve)

ALEXANDRIA, VA (October 7, 1999) -- Blow-out numbers. Upbeat management. Astonished analysts. Last night's Yahoo! (Nasdaq: YHOO) Q3 earnings conference call had it all. Over the course of the call, Yahoo!'s management described its business strategy using certain words again and again:

  • Relentless.
  • Aggressive.
  • Focused.
  • Integrated.
  • Self-reinforcing.
  • Worldwide.
Good words, no? You might even say they have a Rule Maker-ish ring to them. And, if Yahoo! didn't live up to every single one of those words, I'd be the first person to slam the company for its hubris. But, Yahoo! does indeed live up to its bold statements.

Here are the highlights of the third quarter (pro forma):
  • Revenues -- $155 million, beating the consensus for $139 million
  • Revenue Growth -- 134% year-over-year
  • Gross Margins -- 85%, up from 81% a year ago
  • Operating Margins -- 35%, up from 9% a year ago
  • Cash & Long-term investments of $847 million, or 80% of total assets
  • Flow Ratio -- ~0.26, versus ~0.33 at 12/31/98
Yahoo!, once just the little search engine that could, is now the Internet's leading media company, offering communication, entertainment, and commerce services to 105 million worldwide users. You'll recall that number was 80 million only three short months ago. During September, Yahoo! users clicked into 385 million page views per day, up from 310 million in June. And, during the quarter, Yahoo! increased its cash balance by $111 million -- without a lick of debt.

Now think about this for a moment: Cash increased by $111 million, while reported net income equaled only $15 million. Yahoo! even generated more cash than the $40 million of net income shown on its pro forma income statement. (Yahoo!, like many young companies, reports both "pro forma" and "as reported" income statements. The pro forma version leaves out the non-cash expenses, so that investors can get a better idea of the company's true economics.)

So, where did all the cash come from? Up-front payments by advertising customers is the key. During the quarter, Yahoo! added 350 new advertisers, bringing the total to 3,150. These customers purchase ad space from Yahoo! at prices ranging anywhere from a few hundred dollars -- for small buttons -- all the way up to tens of millions of dollars -- for prominent placement on Yahoo!'s top commerce pages, such as Yahoo! Shopping.

With advertising rates on the rise -- which was rumored during the quarter, and confirmed true on the conference call -- customers have an incentive to go ahead and pay Yahoo! now in order to lock in the current rates. When customers buy ad space in advance, Yahoo! gets the cash immediately, but recognizes it as revenue over time. Whatever amount that's not booked immediately as revenue sits on the balance sheet as "deferred revenue." At the end of Q3, Yahoo! had $72 million in deferred revenue. Again, this amount represents cash that's already been received, but not yet booked as revenue.

In addition to being paid in advance by customers, Yahoo! has also generated cash through stellar asset management. This quarter marked the 14th consecutive quarter of declining days sales outstanding (DSO). We can measure Yahoo!'s asset management by looking at the flow ratio. Since the beginning of the year, Yahoo!'s flowie has improved from 0.33 to 0.26. Those numbers are only approximate because the press release balance sheet isn't broken into current and long-term components, but the comparison is valid on an apples-to-apples basis. As I explained yesterday in the discussion of Pfizer, a declining flow ratio means that cash is flowing into a company.

Got that? Flowie up, cash flows out. Flowie down, cash flows in.

So for Yahoo!, excellent cash management for the past 14 quarters has meant steadily greater amounts of cash rolling into the company. Why? It's a combination of excellent financial management, and Yahoo!'s strong competitive position. Essentially, Yahoo! has a monopoly of eyeballs. And as CEO Tim Koogle said on the call, "Dollars always follow eyeballs." Websites like Marketwatch and theStreet.com and even The Motley Fool all count on Yahoo! to send users our way. Sites like these happily pay Yahoo! for those eyeballs. Make no mistake about it, Yahoo! has the upper hand versus all of its customers -- and that's a valuable position to be in.

Yahoo! is no longer just a Cash Prince; it has become a Rule Maker.

There's much more to say about Yahoo!'s business progress, but there's not enough time or space, so I'm going to post my conference call notes on the Yahoo! message board:

My Conference Call Notes

For more on Yahoo!'s quarter, check out today's Fool Plate Special. And for even more on Yahoo!, check out these past Rule Maker articles:

- Yahoo! -- Cash Prince
- Good Results at Yahoo!
- Yahoo! Financials

And to get the story from the horse's mouth:

- Yahoo! Q3 Earnings Press Release
- Yahoo! Q3 Conference Call

Fool on!


 




Rule Maker Portfolio

10/7/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AXPAMER EXPRESS-5/8$145.88
CHVCHEVRON CORP-1 13/16$85.81
CSCOCISCO SYSTEMS-1 1/32$70.88
DPHDELPHI AUTOMOTIVE SYSTEMS3/16$16.00
EKEASTMAN KODAK-7/8$75.44
GMGENL MOTORS-1/8$65.63
GPSGAP INC5/16$36.81
INTCINTEL CORP-1 5/16$75.63
KOCOCA-COLA CO1/16$52.00
MSFTMICROSOFT CORP1/16$93.75
PFEPFIZER, INC-3/8$38.63
SGPSCHERING-PLOUGH1/8$47.13
TROWT.ROWE PRICE ASSOC1/16$30.06
XONEXXON CORP-7/8$73.13
YHOOYAHOO INC14 1/2$190.25

  Day Week Month Year
To Date
Since
2/2/98
Annualized
Rule Maker .20% 4.23% 4.91% 13.52% 41.88% 23.17%
S&P 500 -.59% 2.72% 2.72% 7.19% 34.41% 19.27%
S&P 500(DA) -.59% 2.72% 2.72% 7.77% 36.19% 20.20%
S&P 500(DCA) n/a n/a n/a n/a 21.08% 12.07%
NASDAQ .12% 4.53% 4.17% 30.47% 76.66% 40.36%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
6/23/9875CSCO32.865$70.88115.66%
2/3/9859MSFT49.352$93.7589.96%
5/1/9882GPS22.708$36.8162.11%
2/13/9852INTC46.928$75.6361.15%
2/17/9916YHOO126.309$190.2550.62%
2/3/9866PFE27.433$38.6340.80%
5/26/9818AXP104.067$145.8840.17%
3/12/9820EK63.148$75.4419.46%
3/12/9820XON64.335$73.1313.66%
3/12/9817GM60.400$65.638.65%
3/12/9815CHV83.343$85.812.96%
8/21/9844SGP47.993$47.13-1.81%
3/12/9811DPH17.190$16.00-6.92%
2/3/9856TROW33.673$30.06-10.72%
2/27/9827KO69.107$52.00-24.75%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
6/23/9875CSCO$2,464.86$5,315.63$2,850.76
2/3/9859MSFT$2,911.79$5,531.25$2,619.46
2/13/9852INTC$2,440.28$3,932.50$1,492.22
5/1/9882GPS$1,862.06$3,018.63$1,156.57
2/17/9916YHOO$2,020.95$3,044.00$1,023.05
5/26/9818AXP$1,873.20$2,625.75$752.55
2/3/9866PFE$1,810.58$2,549.25$738.68
3/12/9820EK$1,262.95$1,508.75$245.80
3/12/9820XON$1,286.70$1,462.50$175.80
3/12/9817GM$1,026.80$1,115.63$88.82
3/12/9815CHV$1,250.14$1,287.19$37.05
3/12/9811DPH$189.09$176.00($13.09)
8/21/9844SGP$2,111.70$2,073.50($38.20)
2/3/9856TROW$1,885.70$1,683.50($202.20)
2/27/9827KO$1,865.89$1,404.00($461.89)
  Cash: $160.96  
  Total: $36,889.02  


Notes
The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.