Yahoo
I took advantage of this long weekend to catch up on my tech news… it’s been a tough few weeks. There’s been a tremendous amount of chatter about Yahoo/MSFT. While I don’t feel particularly strongly about either one of these companies, I decided to scan into the financials of Yahoo. In my opinion, in the last several years, the only company that has done less with as much resources than MSFT is Yahoo.
One look into the income statement of Yahoo reveals why shareholders should be critical by Yahoo’s current management team. From a technology point of view, you can’t ignore management’s inability to create any new innovative products and services. While Yahoo owns a tremendous amount of real estate, it’s inability to monetize it effectively has been downright disturbing.
Now, for the financials… while Gross Profit has grown about 10% from FY06 to FY07, and 18% from FY05 to FY06 (Primarily through top line growth), the resulting Operating Income and Net Income are just downright shocking. Just looking at Operating Income, it’s dropped 27% from FY06 to FY07… and 15% from FY05 to FY06. You don’t have to be a financial guru to be appalled by these numbers. Taking this into context, Google has been growing their bottom line around 36% in FY07 and the whole tech industry has seen substantial growth over this same period.
One of the most shocking fact that I noticed is that Yahoo’s R&D costs have grown from 30% and 45% in the last two years. You would generally like to see a correlation between R&D spending and top line revenue, but we see very little evidence of this.
While being acquired by MSFT may not be the perfect option, the management team’s inability to grow the company and provide a long-term coherent strategic vision is concerning. This is a play that will help MSFT gain the scale economics it requires, improve it’s operational performance, expand it’s R&D capabilities, and help MSFT reposition itself. Whether you believe MSFT will be able to accomplish this, I admire that they are actively seeking ways to grow.
Yahoo shareholders deserve better than what their management team has done for them and I firmly believe MSFT’s offer presents a fair exit. And judging from Yahoo shareholder reactions, it looks like they agree.
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