It's hard to land a roundhouse kick when your back is up against the wall, but you can't blame Yahoo! (Nasdaq: YHOO) for trying.
The search engine titan is speaking out, standing by its near-term guidance and painting a picture of ambitious growth beyond that.
Reiterating its guidance for 2008 is important, at a time when some are speculating that Microsoft (Nasdaq: MSFT) will come back with a lower offer -- or none at all -- if Yahoo! stumbles in next month's first-quarter report.
This doesn't mean that shareholders should start doing the wave. The company's original outlook for 2008 -- calling for revenue to grow by 5% to 16% this year with free cash flow falling (and operating cash flow likely to follow suit) -- isn't exactly a leisurely drive out to Inspiration Point.
However, the fact that Yahoo! is sticking to those targets instead of hosing them down is a welcome sight. I'll give Yahoo! that much. It's an opportunity for investors to exhale.
It is the company's three-year plan that leaves me wondering if the company is making promises that its fundamentals can't keep.
Party like its 2010
Yahoo! is bold about its longer-term outlook. It expects its operating cash flow to double to $3.7 billion by 2010. It expects to generate $8.8 billion in revenue before traffic acquisition costs (TAC) come 2010, too.
This is brazen on many different levels. Let's start at the top. Here is how revenue before traffic acquisition costs has shaped up in recent years:
|
Rev. ex-TAC | |
|---|---|
|
2006 |
$4.56 billion |
|
2007 |
$5.11 billion |
|
2008 |
$5.35 billion-$5.95 billion (est.) |
So let's get this straight. Revenue ex-TAC inched 12% higher last year. It will climb between 5% and 16% higher this year, which implies a midpoint of roughly 11% growth on top. And somehow we're supposed to believe that growth will miraculously accelerate by 48% to 65% over the course of the next two years combined?
That is certainly aggressive, especially since Yahoo! is claiming that it will get there by growing its share of display and video advertising while maintaining its share in search revenue.
Yahoo! has made several timely acquisitions in 2007, though it's clearly not making much of a dent in its 2008 guidance. One can only fathom how poorly Yahoo! is doing organically. Why should it expect to grow its share of display advertising? Didn't Google just close on its $3.1 billion deal for display advertising giant DoubleClick? Isn't Google's YouTube by far the top dog in video-sharing websites, positioning it perfectly to grow in video-based advertising?
I don't know where Yahoo! is getting its helium tanks, but it needs to learn not to inhale when the nozzle goes around the boardroom.
The paid search stance is even more puzzling. Yahoo! is a company that has been losing market share, according to comScore, not just to Google but to smaller upstarts like IAC's (Nasdaq: IACI) Ask.com, as well. Plus competition from Microsoft and Time Warner's (NYSE: TWX) AOL haven't made it a walk in the park. Yahoo! was all aglow a year ago about an upgrade to its Yahoo! paid search product -- a move to make it more like Google -- but the eventual fiscal results provide a more sobering reality.
Then we get to the doubling of operating cash flow, a move that will also have to take place over a two-year span, since 2008 will ape 2007. Yahoo! argues that this is a scalable model, but what if the scale is broken? Operating margins actually fell last year and are expected to fall yet again in 2008.
A river runs through it
It's easy to make big promises about 2010, because Yahoo! knows it's unlikely to see you there to pay up after losing the bet. If it's able to cash out with a sweetened Microsoft buyout bid by waxing upbeat today, we'll never know how Yahoo! would have fared in three years as a stand-alone company. The alternative to Microsoft not buying Yahoo! is a free-falling share price in the near term, no doubt forcing a shareholder revolt that would rid the company of those making the lofty 2010 promises.
Is there really any other scenario? Yahoo! can dream big about 2010 because it knows that it won't be around to tap the snooze button out to 2011 or 2012 when it gets there. I may as well declare myself a pole vault contender in the 2012 Olympic Games.
I'm sure I can get that high. Just pass the helium, Yahoo!.
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