Wednesday, July 19, 2006

Reading Between the Lines, Part II

Also, on the Project Panama, I was wondering if you could talk about specifically what's changed since the analyst day, when it seems like you were pretty confident in the timing, to now.

So asked one of Wall Street’s Finest on last night’s Yahoo! earnings call.

Or, I should say, lack-of-earnings call, because earnings per share for Yahoo! net of stock-based compensation—meaning real, live, actual, after-tax, after-employee-related expenses—increased a whopping penny from last year’s 10 measly pennies of real, live, actual, after-tax, after-employee-related expenses earnings per share.

That’s right: Yahoo!—which trades at a hyper-growth P/E multiple of 67—grew net earnings per share by 10%.

But the point of this is not to rehash the flakey “non-GAAP adjusted net income” measure preferred by the dot-coms, both those still alive and those long dead. It is to follow up on yesterday’s “Reading Between the Lines” by pointing out a more timely opportunity to read-between-the-lines, which was presented to us on last night’s Yahoo call.

It came early in the Q&A, when UBS’s Ben Schachter asked the question posted above, about the announced one-quarter delay in Yahoo's “Project Panama,” the so-called “next-generation user experience” in search that had been expected shortly.

To Schachter’s question, the company's Chief Operating Officer Dan Rosensweig responded with a hilariously “upbeat”—as Wall Street’s Finest love to describe things—assessment. Note how “extremely pleased” everybody at Yahoo! appears to be about the project:

On the question of Project Panama and the timing, Terry did mention today that we are going to move it a quarter away. We are two months further into the process. We're actually extremely pleased with the process. We're extremely pleased with the product, the stability, as you saw from the 175 advertisers who have a chance to see it and comment. We think we have picked the right feature sets; they are extremely pleased with it.

Did he mention that they are all “extremely pleased”?

You can imagine what went on during the pre-call prep among the top Yahoolians:

“Now, how should we spin this delay?”

“I was thinking, ‘We are disappointed but remain upbeat’?”

“‘Upbeat’ is good, but ‘disappointed’ is bad. Very bad.”

"Right. ‘Disappointed’ is extremely bad. How about ‘We are cautiously upbeat’?"

“No—‘cautious’ is bad.’ They hate ‘cautious.’”

“Right. Hate ‘cautious.’ And ‘upbeat’ sounds trite. How about ‘Pleased’?”

“Better yet, ‘Extremely pleased….’”

“‘We are extremely pleased…’”

“And repeat it at least three times, just so they get it.”

After using “extremely pleased” the required three times, Rosensweig then got down to cases, which is that Project Panama isn’t yet ready for prime time:

But as we got further along in the process, we wanted to make sure that we did it right. We don't manage the company for a particular quarter, so we focused on making sure that we did all the necessary testing. We're going through testing now. Things seem to be looking good. But we do, for example, over 20,000 different tests to make sure that these things are right, stable, it's the right advertiser experience, the advertisers get what they expect. We would rather take the extra time to make sure that we do it right, rather than try to rush into a quarter. This, of course, remains our top priority.

Reading between the lines, I'd say the most interesting single qualifier is "things seem to be looking good." Worse, this is followed by the factoid that Yahoo! is performing "20,000 different tests" on it.

If I had to make a bet, I'd bet Project Panama doesn't happen even in the revised time-frame.

Is this life-threatening to Yahoo!? Maybe to the stock's P/E multiple (and there has been at least one downgrade this morning), but not to the business. After all, nothing in life or in business goes as planned—stuff happens.

Stuff happens to Joe Blow and it happens to Wall Street’s Finest; it happens to bad companies I won’t name and it happens to great companies like Yahoo!

But why can’t anybody just ever come right out and say it?

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Its_strange said...

Sounds like a political campaign to me. Perhaps we take the "lead" of "leaders" ?

bgthej said...

I am pretty new to the Yahoo! story and decided to look into it further today after the 20% drop. First of all, I was very surprised that "Wall Street's Finest" as you call them bought into Yahoo!'s story of dramatically improved search results (i.e. project panama). Second, it appears to me that analyst's forecasts and the company's guidance are way too high for H2:06, with the company calling for a reaccleration in revenue and cash flow despite decelerating revenue trends and accelerating cost trends. Third, as you point out, the valuation is still very rich, although I would point out that FCF is significantly higher then EPS due to book taxes being extremely high relative to cash taxes. Also the company has some valuable hidden assets that should help mitigate the fall. But this stock is going to $20 before it goes back to $32, in my opinion.

douglas mcintyre said...

Great analysis on Yahoo!'s earnings release.

tahoe kid said...

Boy, I am "extremely pleased" I don't own YHOO. I actually feel bad for those who do.

smitty said...

But why can’t anybody just ever come right out and say it?

Never forget the time Dr. Bob Shillman of Cognex started a quarterly call with:

Let me give it to you straight: "Business stinks."