Yahoo!'s Alibiba spin-off can't cover up the spin needed to excuse a 52% profit collapse
- Summary:
- Yahoo!'s spinning-off its remaining Alibaba stake which makes shareholders happy. They're likely to be less amused by a 52% drop in profits.
There’s always a lot of spin around earnings announcements, but Yahoo! yesterday took it one stage further with its very own SpinCo, a way to avoid a hefty tax bill for its 15% holding in China’s Alibaba.
It was an expedient slight of hand that almost - but not quite - distracted from a horrific 52% year-on-year profit collapse and actually caused the share price to rise on the back of the latest set of excuses for Yahoo!’s continuing lack of recovery.
Yahoo! bought a 40% stake in Alibaba in 2005, as part of a $1 billion deal that included handing over control of Yahoo China to the ecommerce group. It still held a 24% stake ahead of last September’s IPO of Alibaba. (See: Alibaba IPO – winners, winners and maybe a loser.)
Now Yahoo!’s remaining 384 million shares of Alibaba, worth about $40 billion, will transfer to a standalone tax-free publicly-traded company called SpinCo towards the end of this year. SpinCo shares will then be given to existing Yahoo shareholders.
The announcement is the latest example of Alibaba keeping Yahoo! alive, if not exactly kicking. Yahoo's current market value is $45 billion, of which $40 billion is in Alibaba shares.
It’s little wonder then that Yahoo! CEO Marissa Mayer sang the praises of:
our founder Jerry Yang’s prescient investment in Alibaba in 2005. We would like to thank both Jerry as well as the team at Alibaba.
Harsh realities
So that’s nice. Now for the nasty.
Wall Street was looking for $1.19 billion revenues. It got $1.18 billion. In the grand scale of things, perhaps not too bad. But then compare that to last year’s number of $1.2 billion and it becomes obvious that Yahoo!’s downwards trajectory continues.
And now it’s set to become a company with a $7 billion market cap , which has got to increase its vulnerability to a hostile takeover.
Of course, Mayer’s spin remains inevitably upbeat. She declares:
We had a very good year in mobile and we grew at an accelerating rate and one that appears to be faster than the industry. In Q4 our mobile monthly active users were up to 575 million, making us one of the largest mobile audiences globally.
Certainly there is a good mobile story to be told at Yahoo! But does it offset the more negative numbers, such as:
- a 5% decline in display advertising
- a 20% fall in price per ad
- flat search revenue
- traffic acquisition costs up 12% year-on -year
- overall operating costs up 6% year-on-year.
Mayer concedes that there needs to be a more targeted approach to advertising:
The more personalized these ads are, they are priced on a CPC (Cost Per Click) basis, the more clicks we get on those ads the better they perform for both with our advertisers and for us in terms of revenue.
We also need to explore additional formats. When we started out with Gemini [Yahoo!’s native advertising initiative] we were doing text-only ads. We have since have been adding various image ads, now some product ads as well as some video ads and I think that these new forms are something that really help us take the Gemini ads and adapt them to something that’s really truly native as we move across different products and platforms.
Native ads are a trend that are here to stay. They’re now big part of our product portfolio and there has been some adjustment as our sales force has really gotten familiar with the product and understood which advertisers to bring that product to, how to optimize them and ultimately provide better performance on the campaigns. But we really need a lot of process there.
Mayer also admitted that Yahoo! needed to rationalize its ever-inceasing - and seemingly confusing to buyers - portfolio of ad technologies:
When you look across the different ad technology stacks, what we’ve actually been working to do is basically consolidate. We’re shutting down our Right Media platform in favor of the Yahoo! Ad exchange and the Yahoo! Ad Manager Plus.
We’ve really been trying to get to rather than having many different platforms, none of which work together, all of which have different brand names, really getting to a few consolidated entities.
We feel good about what we have in our ad technology stack. I think that there’s certainly some rationalization that we need to do to make sure that buying ads on Yahoo! is really easy for our advertiser. That’s really where the focus would be.
My take
Yahoo! just turned in a 52% collapse in profits and Mayer proceeded to praise Yahoo!’s “stability”.
Really?
Overall Mayer’s rallying cry remains the same:
We are all here to turn an iconic company to greatness.
How many more quarters do investors have to keep hearing this without tangible evidence that it’s actually happening?
The Alibaba spin-off is a good move and a nice gift to shareholders that buys a bit more time.
But without its Chinese ‘sugar daddy’, Yahoo! now stands nakedly exposed.
The big question now is how many shareholders in Yahoo! will care that much once SpinCo is set up?