Yahoo! Is Financially Poised for a Turn-Around – Our Analysis
Yahoo! might be running out of zip but I would not count it out of the race yet. Yahoo! still has financial resources and the ability to wring more cash flow out of its working capital. This company is still able to change course and become a force to reckon with again … but time is limited.
Yahoo! Real Revenue Growth
The adjusted annual revenue change is now declining rapidly. The decline in 2011 alone was 43%. A new overall strategy – instead of chasing after established incumbents – could restart revenue growth in a big way. They’re positioned well for this change but can they do it?
Yahoo! Sustainable Revenue Growth
The real revenue decline is a serious problem but Yahoo’s resources are, currently, quite strong. The “bright” side of the real revenue decline is that the financial resources of the company are not being depleted much … yet.
Yahoo! Pricing Policy
The company was able to increase pricing dramatically in 2011 – almost 20%. This increase has greatly compensated for the decline in revenues over the last three years. In other words: they needed it. This company knows how to maintain the pricing of its brand, which will serve it well in strategic rejuvenation.
Yahoo! Operating Expense Control
Net operating margin recovered to its highest level in years at almost 16% to revenues in 2011. This is the highest dollar amount of net operating income in the last 5 years. Yahoo! is making more and more money with less and less revenues – a real survivor mentality
Yahoo! EBITDA To Actual Cash Flow
Yes, the infamous EBITDA has risen in the last four years along with increasing net income but the cash flow before financing declined by almost $800,000 coming into 2011 due to another hidden factor, covered below. This would be very serious for most companies but there is a hidden opportunity for Yahoo!
Yahoo! Debt Free Cash Flow
The adjusted debt free cash flow rose in 2009, then flattened out in 2010, then dropped slightly. The adjustment to cash flow takes out the investment into other assets on the balance sheet, which does not have to be made in order to continue operations. These investments affected cash flow in 2009 and 2011, causing serious declines. Yahoo! Needs to stop investments in other unnecessary assets and focus on the business at hand.
Yahoo! Excess Cash
Yahoo! was producing excess cash over and above their required cash for operations from 2008 to 2010 and then declined 70% in 2011. The culprit for all these declines is explained below. The company holds too much cash – over a billion dollars – which drives down their return on assets and drives up the cost of capital. Distribute and reward your loyal shareholders so they stick with you long enough for a new strategy to take hold.
Yahoo!’s Return On Assets (ROA)
Although adjustments to the ROA results in increasing annual returns, the actual ROA is a miserable 4% to 5% annually. The excess cash generation to assets is also very low and declining year after year. The company must immediately fix the working capital structure to resume production of annual excess cash that can be invested back into a new business strategy.
Yahoo! Working Capital Needs
The working capital current assets (not counting cash balances) were funded by accounts payable and other payables for every year from 2007 to 2010. The net income produces excess working capital resources. The big issue here is that the accounts receivable (as a percentage of revenues) is increasing every year, rapidly eating up cash resources. As this percentage increases without a corresponding increase in current liabilities, the cash resources and cash flow of the company will dry up. There is NO reason for this to happen – not even to the extent that it has so far.
Yahoo! Debt Financing
The use of equity to finance total assets is way too high. This keeps the cost of capital higher than it need be while lowering the ROA – not good. Equity is expensive and debt is a cheaper form of financing but the company shows its fear of the future by holding too much cash. Yahoo! needs to distribute it or invest it.
Yahoo! Net Trade Cycle
The net trade cycle is one of the major problems with the declines in cash flow. This, however, affords the company a real valuable benefit. The net trade cycle has increased from 45 days to 63 days driving the cash flow to a negative $137 million in 2011. If the net trade cycle drops back to 45 net trade days then the release to cash would be up to $250 million. Don’t think this can happen? It is exactly what Facebook did in 2011, much to its immediate benefit.
Yahoo! Cost of Capital and EVA
Yahoo!’s cost of capital is arbitrarily low due to the unacceptable low return on equity averaging – less than 7% over the last four years ending 2011. Yet over the same period, the ROA has averaged less than 5% per year. So every year the company is unable to hurdle its own low cost of capital destroying capital every year this situation exists. The result is lower and declining stock value year after year which Yahoo! has experienced over the last five and ten years.