Yhoo initiation 12-17-2010_v1 (2)

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Yhoo initiation 12-17-2010_v1 (2)

  1. 1. WILLIAMS CAPITAL RESEARCHEquity Research Yahoo Inc. (NASDAQ:YHOO)Company Update Current Rating: PERFORMDecember 17, 2010 Initiating Coverage with a Perform RatingInternet Analyst: Brian Bolan 773 413 0285; bolan@willcap.comTrading Desk: NY 800-924-1511 CT 800-688-6349YHOO Perform Fiscal Year Calendar Year Curr. Q. 1 yr ago Next 4 Quarters Key DataPrice: $16.51 (Rev in Dec-10 Dec-09 Mar-11 Jun-11 Sep-11 Dec-11 FY09 FY10E FY11E CY09 CY10E CY11EPrice Target: $18.00 $bns) F4Q10E F4Q09 F1Q11E F2Q11E F3Q11E F4Q11E52 Week High: $19.12 Rev prev: NA NA NA NA NA NA NA NA NA NA NA NA52 Week Low: $12.94 Rev 6.460 6.517 6.801 6.460 6.517 6.801 1.718 1.732 1.619 1.659 1.673 1.849NTM P/E: 16x EPS NA NA NA NA NA NA NA NA NA NA NA NA prev: EPSMarket Cap ($B): 21.52 $0.61 $0.67 $0.84 $0.61 $0.67 $0.84 $0.18 $0.15 $0.19 $0.20 $0.20 $0.25Ent Value ($B): 19.00 EV/S: 2.94x 2.92x 2.79x 2.94x 2.92x 2.79xShares Outstdg (M): 1.30 P/E 27.07x 24.64x 19.65x 27.07x 24.64x 19.65xAvg Daily Volume (M): 18.90Cash/Share: 2.16BV/Share: 9.28 Yet Another Hierarchical Officious Oracle is the acronym for Yahoo!. Yahoo! was first made available in 1994 and has grown to serve more than 2.3 billion visits per month. Through its search engine, users can navigate the web and find useful information along with tools to communicate with others. The economic downturn and attempted acquisition by Microsoft (Nasdaq: MSFT - $27.99, not rated) has provided large distractions to a company that quite literally cannot afford another distraction. Having reached a deal with Microsoft to handle the search, the company is focusing on display and improving technology to better serve large clients. We believe that the fundamentals will improve slightly throughout the remainder of the year but that this is already in the stock. Upside surprises to US market share are expected by management although we are somewhat sceptical. We expect display to lead most of the upside for Yahoo! in the second half of 2010 as search looks to us to be a margin enhancer instead of its previous role as revenue growth supplier. At 31x trailing twelve months earnings, we believe that Yahoo! is fairly valued despite the difficulty in assigning value to the Asian assets the firm has. We initiate coverage on Yahoo! with a Market Perform rating and a 12- month price target of $18.00 based on a 21x multiple of our 2011 earnings estimate. Industry Discussion The internet search market is dominated by Google but still has several major competitors. While some smaller players are still around, the majority of the attention in the space is focused on Google, Yahoo! and Microsoft(Bing). Other companies like AOL Inc. (NYSE: AOL - $24.84, not rated) and Ask.com are still PLEASE SEE THE APPENDIX TO THIS REPORT ON PAGES 14‐17 FOR IMPORTANT DISCLOSURES, REG AC  ANALYST CERTIFICATION AND DISCLAIMERS  Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  2. 2. WILLIAMS CAPITAL RESEARCH PAGE 2 December 17, 2010relevant in terms of market share, but few others have been able to make or sustain an impact in the industry.Search sites, unlike popular portals, have maintained their position as starting points for users. Yahoo! madebeing the starting point for users a key strategic initiative, demonstrating the importance of being first. Whetherusers prefer content on the starting page or a search box, it is clear that search will continue to be a dominateplatform for the internet.Taking the search engine beyond the search home page has been the goal of the major search companies over thelast several years. They have utilized the ability to quickly index a page, scan it for keywords or phrases anddeliver highly targeted ads that match the content of the specific page. The best example of this was in the socialnetworking space as Google outbid competitors to deliver ads to one of the most trafficked sites, the News Corp-owned MySpace. The deal focused on better monetizing the massive traffic on the site and led its majorcompetitor to enlist the help of Microsoft to serve its ads. The difference in the two deals was a $15 billionvaluation that was given to Facebook by Microsoft via a minority stake investment. With the investment,Microsoft became the ad serving agent for Facebook, the popular social networking site.A watershed moment came during the 4Q07 Google earnings conference call. The company noted that it wasfacing challenges in monetizing the traffic that MySpace was generating. Microsoft sensed weakness and movedto attempt to level the playing field in the search space by making a $46B bid for Yahoo!. An arduous fightensued as Yahoo! was determined to remain independent and struck an accord with Google in an effort to escapeMicrosoft’s bear hug. Yahoo! successfully thwarted the takeover attempt; however, it continues to see its marketshare decrease. Microsoft has abandoned its quest for a complete purchase of Yahoo! and has instead moved tojoin forces with Yahoo! and combine the search efforts of Bing with Yahoo! to better compete with Google.Yahoo! stayed out of the competition for server ads to the major social networks, with Microsoft investing in andserving ads for Facebook, while Google still delivers ads for MySpace. Display rates came down significantly inthe economic downturn as ad buying mainstays of Auto’s and Finance verticals both suffered more than most.Rates have returned as ad budgets for online brand buys have increased in 2010.Where the growth will come from Much has already been said about the shift of ad budgets to online from offline. We believe this trend willcontinue; but just as that trend continues to accelerate, another segment is at its nascent stage. Mobile phoneshave become more sophisticated in the last few years, with BlackBerry maker Research in Motion still leading theway in terms of market share. What was a battle between BlackBerry and Palm has turned into a race withseveral competitors, the most notable of which is Apple’s (Nasdaq: AAPL - $321.25, not rated) iPhone. The richcontent of the web has moved from the PC to the smartphone. The potential to target consumers via trackingmovement and purchases subsidized via advertising could significantly change how commerce is enacted. As new technology comes to market, we believe that consumers will embrace smartphones and their features. Itmay be some time before consumers are willing to allow for web-based payments to take share from credit cards,but it is something that makes sense over the long term. This bodes well for the platform that is the most robustwhich, by definition, will allow for the most applications.We believe that Yahoo! will take an agnostic approach to the two key platforms of Android and Apple anddevelop applications for both. We would note that the Yahoo Search app for iPhone with its drawing features is astrong competitor in the market.Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  3. 3. WILLIAMS CAPITAL RESEARCH PAGE 3 December 17, 2010Market ShareOver the last several years, market share has been measured by several companies that purchase the “clickstream”of users from internet service providers (ISP). This raw data is analyzed to determine how many searches weremade in a specific time frame (generally one month) and where they were made. This data is not fully endorsedby the search companies, but the trends are usually in agreement with the search companies’ internal logs.Google is the dominant search company with almost 70% of the worldwide market as tabulated by comScore.We believe that Google’s market share of search will continue to grow and will approach the 75% level in thesummer of 2011. Yahoo!, on the other hand, has seen its share of the US and worldwide markets continue to fall.We believe that this trend will continue despite the search partnership the company entered into with Bing. Withonly a year under Bing’s belt it is hard to compare it to Yahoo! and Google, but it is a significant change from theMSN search stats Microsoft used to deliver. Early results for March indicate that Yahoo! gained share from bothGoogle and Bing, and showed some signs of stabilization in what had been a year-long pattern of market sharelosses for Yahoo!.Going forward, we believe that search market share numbers will focus mostly on worldwide measurements asopposed to domestic vs. international. That being said, Google dominance is unquestioned worldwide, althoughthere are smaller segments of the world where Google is not the leader. Yandex is the leader in Russia, but thismarket is small compared to the US.Exhibit 1Source: Company reports and Williams Capital ResearchSeasonalityThere is an issue of seasonality that affects internet usage and internet companies. The general consensus is thatusage slows during the summer months as the weather draws more people to outdoor activities. The later part ofthe third quarter is buoyed by back to school when traffic increases from academic sources. The fourth quarter istraditionally the strongest quarter as the combination of the educational segment and the searches that arise fromthe holiday shopping and travel season increase traffic.Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  4. 4. WILLIAMS CAPITAL RESEARCH PAGE 4 December 17, 2010Comparable CompaniesYahoo! faces competition from numerous sources, and while it produces its own content, it partners withnewspapers and other media partners in attempts to drive traffic. The company relies on both the search engineand its owned media properties for a majority of its revenue. The search deal with Microsoft makes thatcomparable a moot point in terms of search, as the two search engines will likely begin producing the exact sameresults. In essence the same search will produce the same results at Bing as well as the Yahoo! search. Webelieve this will, over time, shift market share from Yahoo! search to Bing.Google (NASDAQ: GOOG - $591.71, rated Outperform) - Google dominates the search market withapproximately 65% of US market share and has a sizeable digital footprint. Through its acquisition ofDoubleClick, it also participates in the display business placing ads on properties the company owns as well asfor Network partners. Google has a substantial balance sheet and the ability to make large acquisitions ordevelop costly operations from scratch.Aol. (NYSE: AOL - $321.25, not rated) - After a spin out from Time Warner, Aol. is now a primary competitorwith Yahoo! in the highly competitive fields of display advertising, email and instant messaging. Aol. search isenhanced by Google and maintains roughly 3-4% of the domestic search market. Lately, the company hasfocused more on producing localized content on which it runs display advertisements.Microsoft (NASDAQ: MSFT- $27.99, not rated) - Despite being a key partner in search, Microsoft also offersan ad network to publishers to reach mobile, content (display) and search platforms. Although the online divisionof Microsoft is not a significant portion of total revenue contribution, we believe that the company will continueto compete in the space.Baidu (NASDAQ: BIDU - $98.31, not rated) - The Chinese search engine is a competitor in the internationalspace. Based in China, Baidu has seen its stock soar since its IPO and has dominated the Chinese languagesearch market. Though most of its appeal has been its MP3 search and downloads, Biadu competes withYahoo!’s Asian propertiesYandex (Private Company) – Yandex is a Russian search engine that has 19 million daily users and is growingfast in Eastern Europe. The company’s market share in Russia increased from 56% in January 2009 to 62% byFebruary of 2010 with page-views of 10 billion in December 2009. Google had 21.8% market share in Russia inFebruary 2010.Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  5. 5. WILLIAMS CAPITAL RESEARCH PAGE 5 December 17, 2010Exhibit 2Source: Google Finance, recent pricesCompany BackgroundYahoo!, which recently turned 15 years old, has seen a dramatic series of events that most parents ofteenagers understand. From birth to bubble to bust to buyout, this company has gone through a lot andcontinues to be a leader in the internet. To get a better understanding of the company we are looking ateach unit and how it has performed over the last few years.Exhibit 3Source: Company reports & Williams Capital ResearchSearchOwned and Operated (O&O) Search has been a source of disappointment since its revenue peaked back in 3Q08,as the broader economy began to turn. The company struggled the rest of the year but entered 2010 with moredisappointments in search.Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  6. 6. WILLIAMS CAPITAL RESEARCH PAGE 6 December 17, 2010Exhibit 4Source: Company reports & Williams Capital ResearchWe believe that the search deal with Microsoft will ultimately improve margins as the company continues tofocus of driving more display share.DisplayThe Display business is best characterized by brand-building advertisements. These command lower rates thansearch-based ad rates as search is more a “point of purchase” style advertisement. With the economy recovering,display rates are likely to move higher off of what are likely artificially low rates over the past few quarters.With more devices coming to market (iPad, Slate, and smartphones) we believe that total impressions will growin the remainder of the year despite the fact that Yahoo! saw 0% pageview growth in 1Q10.Exhibit 5Source: Company reports & Williams Capital ResearchAffiliateYahoo! noted on its 1Q10 conference call that it is working to deepen its relationship with significant partners,and we believe that its continued focus on better ad serving technology will pay off in the form of higher revenueBrian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  7. 7. WILLIAMS CAPITAL RESEARCH PAGE 7 December 17, 2010from affiliates. With Yahoo!’s reach of 600 million audience members, it remains a high priority for mostadvertisers.Exhibit 6Source: Company reports & Williams Capital ResearchListings and ServicesThe decrease in revenues in Listings and Services is likely to continue as Yahoo! sold HotJobs to Monster.com inFebruary 2010. This change could have affected the listings at HotJobs in the quarter outside of the pre-existingcontracts.Exhibit 7Source: Company reports & Williams Capital ResearchFees Fees revenue declined 11.7% sequentially in 1Q10 as broadband partnership shifted to advertising from a fee-based structure. At the end of CY08, Yahoo! had 19 million fee-paying customers and by the end of thefollowing year that number stood at 9.7 million. We expect to see further decreases in the fee revenue line itemover the course of the year.Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  8. 8. WILLIAMS CAPITAL RESEARCH PAGE 8 December 17, 2010Exhibit 8Source: Company reports & Williams Capital ResearchAcquisitions Yahoo! has a history of acquiring companies, but lately the track record has been less than stellar. The Companyproved that it wasn’t afraid of large scale acquisitions when it purchased Overture or the $5 billion price tag itpaid for the Mark Cuban Broadcast.com company. Since that time the company continued eating up smallercompanies, some of which eventually dissolved and some that failed to reach their pre-acquisition hype.Yahoo! bought a couple of ad exchanges over the last two years including RightMedia and Blue Lithium. Themove brought a new model (exchange) to Yahoo! but we have seen little evidence that the marketplace is about toshift the way it purchases ads.We believe the takeaway from the last two acquisitions (Maktoob.com in August 2009 and citizensports.com inMarch 2010) shows the company will continue to add to its platform despite its currency (stock) being weakerthan it has been over the last few years. That said, we do not believe that any significant acquisitions are in theworks for Yahoo!.ManagementVenture Capitalists have a saying about management, ‘the jockey is just as important as the horse.’ This meansthat management can make or break even the best of ideas. That seemed to be the case over the last several yearswith Yahoo!. Terry Semel, a former CEO of Yahoo! wanted to position the company as close as he could toHollywood in order to develop media relations and advertising partnerships. One too many misses of earningsled him to leave the position and he was replaced by co-founder Jerry Yang.Jerry Yang’s tenure as CEO was far shorter, as Microsoft attempted to acquire Yahoo! but Yang did not want tosee the company he founded be sold to what many in the technology industry consider to be the new age “BigBrother”.The hiring of Carol Bartz was a surprise move going with more veteran leadership that featured more crass outtakes. At the start of her tenure her energy and shakeup were welcome changes, but a brain drain of talent leavingfor start-ups and competitors has made us question the decision. A few months ago, Bartz was on a media blitzBrian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  9. 9. WILLIAMS CAPITAL RESEARCH PAGE 9 December 17, 2010after completing a year as CEO but still had troubles in describing what Yahoo! does and what the plan for thefuture was. Our concerns with top management are that Yahoo! may be trying to be too much to too manyinstead of focusing on core competencies.Carol Bartz Ms. Bartz has served as Chief Executive Officer and as a member of the Board of Directors sinceJanuary 2009. Ms. Bartz served as the Executive Chairman of the Board of Autodesk, Inc., a computer-aideddesign software provider, from May 2006 to February 2009, as Chairman, President and Chief Executive Officerof Autodesk from April 1992 to April 2006 and as a director of Autodesk from April 1992 to February 2009.Tim Morse, Prior to joining Yahoo!, Morse was the CFO of Altera Corporation, a semiconductor companyspecializing in programmable logic devices for communications, industrial, and consumer applications, where heestablished scalable, cost-effective processes and controls. He previously served as the CFO and general managerof business development for General Electric Plastics.The recent loss of Hilary Schneider speaks to the continuous turmoil at the top as Yahoo! has struggled withgiving its vision clarity. We expect Yahoo! to begin to look at poaching talent from companies like AOL andGoogle as it continues to tweak its value proposition to the market. Much as being a one stop shop in thefinancial sector did not work, we do not believe that advertisers or consumers are looking for one place, one siteto handle all of their digital needs. The recent layoffs of 600-700 employees will also work against the generalmorale of the people that remain at Yahoo!Financial Statement AnalysisYahoo!’s Income Statement showed year over year top line growth for consecutive quarters the first time inseveral quarters with Display increasing 20% year over year in 1Q10 and 19% year over year in 2Q10. Affiliatesalso contributed to the growth but it was the only other line item to show year over year growth. We anticipateyear over year growth of 4% in the remaining quarter of 2010.Yahoo! will have a complex year financially with the Microsoft search deal providing some cost savings for thecompany and potentially lowering expected R&D costs towards the end of the year. With less of a focus onsearch, the company will likely be looking to display and affiliates to pick up any revenue shortfall. We expectmargins, on a whole to begin to improve over the next several quarters.Balance SheetAt the end of 2Q10, Yahoo! had more than $3.8 billion in cash and equivalents and marketable securities, downfrom $4.14 billion following the first quarter of 2010. During the most recent quarter, the company repurchased32 million shares for $496 million. On June 24 a new buyback of $3 billion was authorized, and we expect thecompany to continue to repurchase shares.Yahoo! does not have any long term debt at this time. We do not expect Yahoo! to take on any long term debt inthe foreseeable future.Asian AssetsThe company holds a significant interest in two Asian internet properties, Yahoo! Japan and Alibaba Group.These investments have caused a great deal of consternation among investors and the press as calls formonetization have not been answered. Given the tax implications, lack of liquidity, and general lack of premiumBrian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  10. 10. WILLIAMS CAPITAL RESEARCH PAGE 10 December 17, 2010buyers, we expect Yahoo! to continue to hold these assets for the foreseeable future. Yahoo! holds approximately35% ownership of Yahoo! Japan and a 44% ownership of the Alibaba Group.Over the last few years there has been a call to monetize these assets and or call attention so that the market willreflect the value of these assets in the Yahoo! share price. We believe that assets hold value, but investors shouldbe more concerned with the day-to-day operations of the company instead of looking for a monetization event.Should the company move to monetize any of the Asian assets, it may be interpreted as sign of weakness and thenear term financial gain may be undermined by longer term pressure on the stock.Financial OutlookThe company has noted that its current goals are to increase margins, and the Microsoft Search deal will go a longway to helping that happen. We expect that better rates for the display business combined with better audiencetargeting will result in better performance for Yahoo! in 2010.We are not overly aggressive in terms of our estimates for Yahoo! as we are skeptical that the company willsubstantially improve its search share. At the same time, we believe that margins should expand as costs movelower and revenue improves slightly.Recommendation and ValuationWe are initiating coverage of Yahoo! with a Market Perform rating and a one-year price target of $18. Over thelast year, we have seen severe multiple contraction as revenue deceleration has taken its toll on the valuation. Wesee potential for improvements for the display business and increases in operating margin due to the Microsoftdeal to help the financial outlook for 2011. Our price target is derived off of a 21x multiple of our 2011 earningsestimate.Having been a member of the “Nifty-Fifty” (50x forward earnings) in the past, Yahoo! has seen its valuationreadjusted after the Microsoft offer and subsequent search deal. We believe that Wall Street discounts the Asianassets slightly more than the approximate $8.3 billion value they have as a sale or greater monetization isunlikely. The weak cash position compared to two of its main rivals is also an aspect that we believe has to factorinto overall valuation.Our price target of $18 per share is derived by a multiple of 21x our 2011 earnings estimate of $0.84.Investment RisksIf the company experiences any or all of the following risk factors, as well as others, the company’s stock pricemay be affected. Advertisers reduce internet budgets. Advertising is the source of the majority of Yahoo!’s revenue. Should advertisers lose faith in the internet as a medium for advertisements Yahoo! would suffer a significant revenue slowdown. A better advertising platform is developed for internet advertising. Search has been the dominantBrian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  11. 11. WILLIAMS CAPITAL RESEARCH PAGE 11 December 17, 2010 application on the internet for the last ten years. Should another application become more acceptable than search, advertisers could move budgets from search to that platform. Competition is intense and moves quickly. Yahoo! faces intense competition from Google and AOL among others. Should a competitor develop a more efficient and relevant search engine, a better email platform, or a more compelling display platform, Yahoo! would be severely impacted. Future growth is predicated on success of mobile. Many of our assumptions of growth are based on the future success of all things mobile. Should Yahoo! fail to adapt to a changing environment that focuses on mobile delivery of search and display ads, the company would face significant challenges. Loss of key management. Turnover at Yahoo! has been significant concern for some time and continues to remain a challenge to top management. Should this trend continue the talent drain will result in an inability to properly serve clients which would put future revenues at risk.Exhibit 9Source: Company reports & Williams Capital ResearchBrian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  12. 12. WILLIAMS CAPITAL RESEARCH PAGE 12 December 17, 2010 Yahoo! 3Q10 Income Statement AnalysisExhibit 10Source: Company reports & Williams Capital ResearchBrian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  13. 13. WILLIAMS CAPITAL RESEARCH PAGE 13 December 17, 2010 Yahoo! Income StatementExhibit 11Source: Company reports & Williams Capital ResearchBrian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  14. 14. WILLIAMS CAPITAL RESEARCH PAGE 14 December 17, 2010Appendix -Exhibit 12 Two Year Price Chart Yahoo Inc. (YHOO) Price Perform ance Chart (Rating and Target) 14-Dec-2007 to 15-Dec-2010 (Daily) Ratings: O=Outperform; P=Perform; U=Underperform 35 30 P $18.00 25 20 15 10 51/08 4/08 7/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10 7/10 10/10 Yahoo! Inc. Source: FactSet PricesPrices as of December 16th, 2010. ANALYST CERTIFICATIONI hereby certify that the views expressed in the foregoing research report accurately reflect mypersonal any of the subject companies mentioned in this report. I further certify that no part ofmy compensation was, is, or will be directly, or indirectly, related to the specificrecommendations or views contained in this research report.Financial Interests: Neither I, Brian Bolan, nor a member of my household owns securitiesin any of the subject companies mentioned in this research report. Neither I, nor a member ofmy household is an officer, director, or advisory board member of the issuer or has anothersignificant affiliation with the subject company. I do not know or have reason to know at thetime of this publication of any other material conflict of interest.By: Brian Bolan Williams Capital Research DISCLOSURE INFORMATION ADDITIONAL INFORMATION IS AVAILABLE UPON REQUESTAnalyst Compensation: The authors compensation is based upon the value directly orindirectly attributed to the research services by Williams Capital institutional brokerageclients. The author of this report is compensated based on the performance of the firm, andhas not received any compensation in the past 12 months from any of the subject companiesmentioned in this report. The performance of the firm is driven by its secondary tradingrevenues, investment banking revenues, and asset management revenues.Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  15. 15. WILLIAMS CAPITAL RESEARCH PAGE 15 December 17, 2010Williams Capital Group does not act as a market-maker.Williams Capital Group does act as a block positioner. WILLIAMS CAPITAL RESEARCH STOCK RATING KEY:Outperform: (BUY) In the analysts opinion, the stock will outperform the sector by 5%over the next 12 months.Perform: (HOLD) In the analysts opinion, the stock or sector will be in line with the sectorover the next 12 months.Underperform: (SELL) In the analysts opinion, the stock or sector will underperform thesector by 5% over the next 12 months. DISCLAIMER The opinions, forecasts, and recommendations contained in this report are those of the analystpreparing the report and are based upon the information available to them as of the date of thereport. The analysts are basing their opinions upon information they have received fromsources they believe to be accurate and reliable and the completeness and/or accuracy isneither implied nor guaranteed. The opinions and recommendations are subject to changewithout notice.Williams Capital Research has no obligation to continue to provide this institutionalresearch product and no such obligation is implied or guaranteed. The report is provided tothe Institutional clients of Williams Capital Research for informational purposes only andis not an offer or a solicitation for the purchase or sale of any financial instrument. The firmdoes not make a market in the security of the subject company(ies) or affiliated securities. Thefirm or its employees may buy or sell the subject company’s(ies’) securities or derivatives thatis/are the subject(s) of this report. And the firm from time to time may buy or sell the subjectcompany’s fixed income securities from customers on a principal basis. Past performance isnot an indication of future results. Calculations of price targets are based on a combination ofone or more methodologies generally accepted among financial analysts, including but notlimited to, analysis of multiples and/or discounted cash flows (whether whole or in part), orany other method which may be applied.Although the statements of fact in this report have been obtained from and are based uponoutside sources that the firm believes to be reliable, the firm does not guarantee the accuracy orcompleteness of material contained in this report. Any such estimates or forecasts contained inthis report may not be met. Past performance is not an indication of future results. CalculationsBrian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  16. 16. WILLIAMS CAPITAL RESEARCH PAGE 16 December 17, 2010of price targets are based on a combination of one or more methodologies generally acceptedamong financial analysts, including but not limited to, analysis of multiples and/or discountedcash flows (whether whole or in part), or any other method which may be applied. Rating,target price and price history information on the company in this report is available uponrequest. ADDITIONAL DISCLOSURE INFORMATION: The Williams Capital Group, L.P. or its Affiliates do and seek compensation forinvestment banking services from the subject company(ies) within the next 3 months. As aresult, investors should be aware that the firm may have a conflict of interest thatcould affect the objectivity of this report. Investors should consider this report asonly a single factor in making their investment decision. Additional informationis available upon request. “Investment Banking Clients” is defined as companies in respect of which The WilliamsCapital Group, L.P. (the “firm”) or its affiliates have received or are entitled to receivecompensation for investment banking services in connection with transactions that werepublicly announced in the past 12 months.Distribution of Equity Research Ratings as of: December 16, 2010 Outperform Perform SellAll Research Coverage: 75% 25% 0%Universe of IBC: 0% 0% 0%Consumer Staples: 50% 50% 0%Consumer Staples - IBC: 0% 0% 0%Company Ratings History Prior Current TargetCompany Name Ticker Date Action Rating Rating Price PriceYahoo! YHOO 16-Dec-10 Initiation of Coverage None Perform $16.51 $18.00Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349
  17. 17. WILLIAMS CAPITAL RESEARCH PAGE 17 December 17, 2010ValuationWe are initiating coverage of Yahoo! with a Market Perform rating and a one-year price target of $18.Over the last year, we have seen severe multiple contraction as revenue deceleration has taken its toll onthe valuation. We see potential for improvements for the display business and increases in operatingmargin due to the Microsoft deal to help the financial outlook for 2011. Our price target is derived off ofa 21x multiple of our 2011 earnings estimate.Having been a member of the “Nifty-Fifty”(50x forward earnings) in the past, Yahoo! has seen itsvaluation readjusted after the Microsoft offer and subsequent search deal. We believe that Wall Streetdiscounts the Asian assets slightly more than the approximate $8.3 billion value they have as a sale orgreater monetization is unlikely. The weak cash position compared to two of its main rivals is also anaspect that we believe has to factor into overall valuation.Our price target of $18 per share is derived by a multiple of 21x our 2011 earnings estimate of $0.84.RisksIf the company experiences any or all of the following risk factors, as well as others, the company’sstock price may be affected. 1. Advertisers reduce internet budgets. Advertising is the source of the majority of Yahoo!’s revenue. Should advertisers lose faith in the internet as a medium for advertisements Yahoo! would suffer a significant revenue slowdown. 2. A better advertising platform is developed for internet advertising. Search has been the dominant application on the internet for the last ten years. Should another application become more acceptable than search, advertisers could move budgets from search to that platform. 3. Competition is intense and moves quickly. Yahoo! faces intense competition from Google and AOL among others. Should a competitor develop a more efficient and relevant search engine, a better email platform, or a more compelling display platform, Yahoo! would be severely impacted. 4. Future growth is predicated on success of mobile. Many of our assumptions of growth are based on the future success of all things mobile. Should Yahoo! fail to adapt to a changing environment that focuses on mobile delivery of search and display ads, the company would face significant challenges. 5. Loss of key management. Turnover at Yahoo! has been significant concern for some time and continues to remain a challenge to top management. Should this trend continue the talent drain will result in an inability to properly serve clients which would put future revenues at risk.To receive any additional information upon which this report is based, please contact the followingindividuals or write to Research Production Department, Williams Capital Research, 650 Fifth Ave.,New York, NY 10019 - Suling Lew, Head of Institutional Sales or Jack Murphy, Director of Research 212-373-4243 203-659-6007Brian Bolan Bolan@willcap.com Trading NY 800-924-1511, CT 800-688-6349

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