Yahoo! is scheduled to host an analyst day on Tuesday, October 27th, the first since 2006, when Panama took center stage. Since then Yahoo has gone through several growing pains and has reached a point where it's future as an independent company rest on a turnaround in the display business and the stated benefits from the Microsoft deal. If both fail to be fruitful, the firm will likely be folded into the hands of Microsoft.
Investors will give Yahoo about two years to emerge from its desperate state so Bartz has a decent runway ahead and several tools at her disposal that if used wisely, will enhance shareholder value.
As for the analyst day, the following are the 18 questions I would want management to answer:
1. Management believes that Yahoo! is a mature business. Internet advertising is only 6-10% penetrated depending on what estimates you use. eCommerce only represents a single digit percentage of retail sales. Given those numbers, the Internet as a medium is far from mature. How can Yahoo! return to growth?
2. The display business rebounded sequentially in both 2Q09 and 3Q09 and a fundamental shift occurred in 3Q09, whereby guaranteed inventory outpaced non-guaranteed inventory. How sustainable is that shift? Is it industry wide or specific to Yahoo!? How can you provide confidence that the display business, despite its secular issues, is headed for a turnaround that is not cyclical?
3. The search partnership with Microsoft failed to initially delight investors but some are slowing coming to terms with the longer-term margin and free cash flow benefits of the deal. When do you anticipate that the deal will receive regulatory approval? What arguments have you heard against the deal? When exactly do you believe the paid search component will be implemented and which markets will roll out first? How many search engineers will remain at Yahoo!?
4. How do you plan to differentiate yourself from AOL, whose focus is display advertising and whose search business is outsourced to Google?
5. Facebook and Twitter have grown usage exponentially and have taken mindshare from Yahoo! over the past two years. How does Yahoo plan to be relevant in the newest forms of online media? How can Yahoo! compete with these two companies? Does it need to compete with them or is a partnership sufficient?
6. Yahoo! has shuttered or sold multiple business units over the past two years. What other business units can you part ways with that would not sacrifice longer-term growth? Is Hotjobs a business worth including in the Yahoo! portfolio?
7. How does Yahoo! plan to remain competitive through innovation? In what areas are you focusing your engineering talent?
8. Would you consider selling all of Yahoo! to Microsoft?
9. What is Jerry Yang's role in the organization today?
10. How do you plan to motivate and incentivize your employees?
11. Yahoo has sizable monetizable Asian assets. What are the long-term plans with these assets? How does Yahoo! benefit from holding on to those assets?
12. Google, Amazon, and eBay generate 50% and more of their revenues from international markets, whereas, Yahoo only generates 30% of gross revenues outside the U.S. What are Yahoo!'s plans to grow its international operations?
13. Yahoo's has many relationships with mobile carriers but Google has stolen Yahoo's thunder in the mobile space with the advent of Android. How can Yahoo regain its momentum in the mobile space?
14. You have $4.5 billion in cash on the balance sheet and no debt. What are the best uses of your cash? Investments in the core business? If so, how much, and at what scale? Share repurchases? Acquisitions, and if so, what is attractive to Yahoo? What holes need to be filled? Would you consider a one-time dividend as the cash balance builds?
15. What is your relationship like with Google? Do you communicate with Google's upper management?
16. Outside of the benefits of the Microsoft deal, how will margins, cashflow, and earnings improve? How can you squeeze more efficiencies out of the non-search businesses?
17. Should you lever the balance sheet, and if so, what is the optimal ratio?
18. What are your longer-term margin goals?
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Tuesday, October 27, 2009
Sunday, October 25, 2009
Flying High With Expedia
Expedia is scheduled to report 3Q09 results on Thursday October 29 prior to the market open. Consensus calls for revenues of $828 million and EPS of $0.43. My model is projecting revenues of $840 million and EPS of $0.47, four cents ahead of the Street. The shares are likely to rally after the print.
Traffic to the site in 3Q09 was robust, up in the double digits, and results should benefit from FX. In addition, search CPCs for travel terms have remained subdued, and that should help margins.
Expedia currently trades at 9.2x 2010 EBITDA vs. Priceline, which trades at 11.7x 2010 EBITDA. There is no clear reason why Expedia should trade at a lower multiple, and I would argue that Expedia, due to its market leading position, should trade at a higher multiple. If we assume that Expedia trades at Priceline’s multiple, then we would instantly argue for a 20% upside to the share price.
The shares should benefit from both higher estimates and multiple expansion, which should lead to a share price in the $40s from $26 today. The Internet peer group, the most appropriate group to compare Expedia to, is trading at a mean multiple of 15x 2010 EBITDA. Historically, the travel websites have traded at a discount to their Internet brethren due to cyclical concerns, pricing pressures, and other secular issues such as competition from the hotel and airline supplier sites. However, the latter has not materialized in a meaningful way so as to suppress the growth of the online travel sites. Overtime I expect the multiple gap to narrow.
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Traffic to the site in 3Q09 was robust, up in the double digits, and results should benefit from FX. In addition, search CPCs for travel terms have remained subdued, and that should help margins.
Expedia currently trades at 9.2x 2010 EBITDA vs. Priceline, which trades at 11.7x 2010 EBITDA. There is no clear reason why Expedia should trade at a lower multiple, and I would argue that Expedia, due to its market leading position, should trade at a higher multiple. If we assume that Expedia trades at Priceline’s multiple, then we would instantly argue for a 20% upside to the share price.
The shares should benefit from both higher estimates and multiple expansion, which should lead to a share price in the $40s from $26 today. The Internet peer group, the most appropriate group to compare Expedia to, is trading at a mean multiple of 15x 2010 EBITDA. Historically, the travel websites have traded at a discount to their Internet brethren due to cyclical concerns, pricing pressures, and other secular issues such as competition from the hotel and airline supplier sites. However, the latter has not materialized in a meaningful way so as to suppress the growth of the online travel sites. Overtime I expect the multiple gap to narrow.
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Sunday, October 11, 2009
YouTube Could be EBITDA Positive in First Quarter 2011
It is now precisely three years since Google announced the acquisition of YouTube for $1.65 billion in stock and the debate has shifted from potential revenues to lack of profitability of the online video website. Google has publicly stated that YouTube will be become profitable in the near future without quantifying the timeframe. Based on my own projections for YouTube’s revenues and using every piece of reliable information I was able to put together on costs to deliver online videos and display ads, I am estimating that Google will become EBITDA positive in the first quarter of 2011.
The acquisition of On2 Technologies for $107 million in August 2009 is key to reducing Google’s bandwidth costs with its advanced video compression technologies. Note that I have not made assumptions for the fact that YouTube is layered on Google’s infrastructure. That would have the added effect of reducing its costs.
Click on image to expand.
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The acquisition of On2 Technologies for $107 million in August 2009 is key to reducing Google’s bandwidth costs with its advanced video compression technologies. Note that I have not made assumptions for the fact that YouTube is layered on Google’s infrastructure. That would have the added effect of reducing its costs.
Click on image to expand.
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Tuesday, October 6, 2009
Sirius XM Could Avert Bankruptcy
Sirius XM's shares cannot get love from Wall Street. The shares have been stuck at the 60 cents range since August and a recent survey from the Street.com voted SIRI as the company most likely to go bankrupt. I mentioned SIRI as one stock to consider in my write-up Stocks to Buy in a Cyclical Advertising Recovery, although a majority of their revenues are subscription based.
The $4 billion market cap company (including the Liberty preferred shares) has $3.3 billion in debt with three quarters of that coming due between 2011 and 2013. With only $550 million in cash on the books today, 2010 will be a show me year in terms of driving the model to profitability and avoiding bankruptcy.
CEO Mel Karmazin is intent on improving the company's cash flow to avoid that scenario and I think he has a greater than 50% chance of succeeding. Couple that with Liberty Media's interest in avoiding a SIRI bankruptcy, I am inclined to consider the shares at these levels. Liberty can make a cash tender offer for all outstanding shares of SIRI that it does not already own between year two and three of the merger, according to company filings. However, as discussed below, a poison pill may inhibit that action prior to August 2011.
A reverse split is likely in the near future allowing institutional holders who face limits on share prices to buy the stock. Although the flip side is that shorts can come in again with a vengeance.
True is that the retail channel is dead and should remain so for sometime and that the dismal September auto sales figures, following the end of the cash for clunkers program, does not portend an exciting future for the company. However, I think Karmazin can milk the existing 15 million self-pay subs, which are declining only marginally, while continuing to cut costs from the model.
The company has guided for $400 million in EBITDA for 2009 and could likely beat that number. The recent music royalty pass-through fees are high margin revenues and should grow EBITDA along with the increased fee for family plan subscriptions and the add-on fee for Internet streaming. The used car market, where an estimated 15 million pre-owned cars are enabled with a satellite radio, presents an attractive growth opportunity.
In the coming years, more costs can be taken out by renegotiating the unprofitable Howard Stern contract, Nascar, and the MLB. I believe that SIRI has already renegotiated the GM contract, paying GM a lower revenue share and achieving lower subscriber acquisition costs. Further, satellite capex is likely to be reduced significantly beyound 2011 after the last spare satellite is launched into orbit, providing a boost to free cash flow. And don't forget the nearly $7 billion in NOLs that is valuable to an acquirer, although a poison pill put in place in April 2009 limits the value of these NOLs if the company is acquired prior to August 2011.
So alls not gloom and doom for SIRI. There is light and value at the end of the tunnel.
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The $4 billion market cap company (including the Liberty preferred shares) has $3.3 billion in debt with three quarters of that coming due between 2011 and 2013. With only $550 million in cash on the books today, 2010 will be a show me year in terms of driving the model to profitability and avoiding bankruptcy.
CEO Mel Karmazin is intent on improving the company's cash flow to avoid that scenario and I think he has a greater than 50% chance of succeeding. Couple that with Liberty Media's interest in avoiding a SIRI bankruptcy, I am inclined to consider the shares at these levels. Liberty can make a cash tender offer for all outstanding shares of SIRI that it does not already own between year two and three of the merger, according to company filings. However, as discussed below, a poison pill may inhibit that action prior to August 2011.
A reverse split is likely in the near future allowing institutional holders who face limits on share prices to buy the stock. Although the flip side is that shorts can come in again with a vengeance.
True is that the retail channel is dead and should remain so for sometime and that the dismal September auto sales figures, following the end of the cash for clunkers program, does not portend an exciting future for the company. However, I think Karmazin can milk the existing 15 million self-pay subs, which are declining only marginally, while continuing to cut costs from the model.
The company has guided for $400 million in EBITDA for 2009 and could likely beat that number. The recent music royalty pass-through fees are high margin revenues and should grow EBITDA along with the increased fee for family plan subscriptions and the add-on fee for Internet streaming. The used car market, where an estimated 15 million pre-owned cars are enabled with a satellite radio, presents an attractive growth opportunity.
In the coming years, more costs can be taken out by renegotiating the unprofitable Howard Stern contract, Nascar, and the MLB. I believe that SIRI has already renegotiated the GM contract, paying GM a lower revenue share and achieving lower subscriber acquisition costs. Further, satellite capex is likely to be reduced significantly beyound 2011 after the last spare satellite is launched into orbit, providing a boost to free cash flow. And don't forget the nearly $7 billion in NOLs that is valuable to an acquirer, although a poison pill put in place in April 2009 limits the value of these NOLs if the company is acquired prior to August 2011.
So alls not gloom and doom for SIRI. There is light and value at the end of the tunnel.
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Monday, October 5, 2009
IACI: Malone Selling His Shares. Should You?
In a filing late Friday, John Malone’s Liberty Media indicted that it sold 2.3 million shares of Barry Diller’s IAC/InterActiveCorp between September 25 and October 1, bringing its ownership stake to approximately 19%. Is that a bearish signal?
Fundamentally, I do not think so. Management of Liberty Media have stated their willingness to part ways with IAC’s shares either because there is no strategic reason to own the shares or due to the nasty spat with Diller over the spin-offs. Could be that Liberty needs to sell equity holdings to avoid being regulated as an investment company, which would increase their cost structure and reduce their ability to conduct tax efficient asset sales and swaps – investors in Liberty Media’s tracking stocks should keep an eye on that. Whatever the reason, the presence of an active seller is likely to keep a lid on the shares for sometime.
In a previous write-up, Stocks to Buy in a Cyclical Advertising Recovery, I listed IACI as one of my picks. The company has $1.8 billion in cash or $13 per share, about 70% of the stock’s value, and is an active share repurchaser, having repurchased 16 million shares in the first half of 2009, and has a new authorization for 20 million shares (cost of ~$400 million today). It appears that share buybacks are the primary use of cash at the moment and the 20 million shares represent about 15% of the outstanding shares. Thus, Diller can more than partially offset the selling pressure from Malone’s 19% stake with buybacks and thus keep the shares stable.
IAC has a nice mix of assets that are growing nicely. Plus it is a derivative play on Google given Ask.com’s search relationship with the search giant. My work and checks have shown a rebound in Google’s CPCs in the past month, which should have a positive effect on Ask.com’s financials. Match.com should improve both its top-line growth and margins in 3Q, excluding the U.K. operations, which was sold to Meetic.
The shares are trading at 5x 2010 EBITDA, below Yahoo at 6x 2010 EBITDA, but largely free of Yahoo’s secular issues. My sum-of-the-parts valuation, values the company at $25, about 30% upside from current trading levels.
3Q09 consensus revenues, EBITDA, and GAAP EPS are $336 million, $43 million (13% margin), and $0.13, respectively. I am calling for an in-line quarter so nothing spectacular. However, I would continue to nibble at the shares as Malone exits his position.
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Fundamentally, I do not think so. Management of Liberty Media have stated their willingness to part ways with IAC’s shares either because there is no strategic reason to own the shares or due to the nasty spat with Diller over the spin-offs. Could be that Liberty needs to sell equity holdings to avoid being regulated as an investment company, which would increase their cost structure and reduce their ability to conduct tax efficient asset sales and swaps – investors in Liberty Media’s tracking stocks should keep an eye on that. Whatever the reason, the presence of an active seller is likely to keep a lid on the shares for sometime.
In a previous write-up, Stocks to Buy in a Cyclical Advertising Recovery, I listed IACI as one of my picks. The company has $1.8 billion in cash or $13 per share, about 70% of the stock’s value, and is an active share repurchaser, having repurchased 16 million shares in the first half of 2009, and has a new authorization for 20 million shares (cost of ~$400 million today). It appears that share buybacks are the primary use of cash at the moment and the 20 million shares represent about 15% of the outstanding shares. Thus, Diller can more than partially offset the selling pressure from Malone’s 19% stake with buybacks and thus keep the shares stable.
IAC has a nice mix of assets that are growing nicely. Plus it is a derivative play on Google given Ask.com’s search relationship with the search giant. My work and checks have shown a rebound in Google’s CPCs in the past month, which should have a positive effect on Ask.com’s financials. Match.com should improve both its top-line growth and margins in 3Q, excluding the U.K. operations, which was sold to Meetic.
The shares are trading at 5x 2010 EBITDA, below Yahoo at 6x 2010 EBITDA, but largely free of Yahoo’s secular issues. My sum-of-the-parts valuation, values the company at $25, about 30% upside from current trading levels.
3Q09 consensus revenues, EBITDA, and GAAP EPS are $336 million, $43 million (13% margin), and $0.13, respectively. I am calling for an in-line quarter so nothing spectacular. However, I would continue to nibble at the shares as Malone exits his position.
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Sunday, September 13, 2009
Stocks to Buy in a Cyclical Advertising Recovery
In 2Q09, advertising spend in the U.S. declined in the high teens according to most estimates, with all advertising media, except theater advertising, declining year-over-year. Yes, even Internet advertising declined y/y due to weak branded advertising and less than robust search growth. According to my calculations, Google’s domestic search business actually declined y/y by approximately 1-2%. Therefore, even overall search advertising declined y/y given that Google has a lion share of the domestic search market and exhibits the strongest search fundamentals.
At a series of conferences this past week, several companies reported that advertising is still challenging but is however firming, with month-over-month improvement in national and local advertising and improvements in auto advertising.
U.S. advertising has historically tracked GDP growth but has lagged behind other categories in a recovery. On that basis, I would look to less advertising dependent sectors within the TMT universe for stocks worth owning early-on in an economic recovery, particularly technology stocks. However, there are advertising related stocks that are trading at attractive multiples that are not secularly challenged and with relatively balanced risk/reward scenarios – indeed, the best stocks to own in a recovery are the ones operating in advertising sectors free of secular challenges. Further, 4Q09 and 1Q2010 offer easy compares given the harsh experiences in the prior year with the Winter Olympics in February, World Cup Soccer in June, China World Expo in the summer, and political advertising in the fall setting the stage for mild improvements in advertising growth rates.
I’ll go through the sub-sectors to uncover those gems.
Internet
I’ll start with the Internet advertising stocks first, which along with cable programming network advertising has performed better than any of the other advertising categories in the first half of 2009, with Internet advertising edging out cable networks by a slim margin.
Google (GOOG) is my long-term favorite and is the best stock to own in this sector due to its huge exposure to search advertising, which is not facing secular challenges. Search queries have held up well in the recession but pricing (CPCs) has not, which is partially why Google’s y/y growth rates have plummeted from close to 60% in 3Q07 to 3% in 2Q09. However, pricing is cyclically based, in my view, and when/if the economy recovers pricing is likely to rebound with it, leading to a reacceleration of growth for Google. Add to that, improving allocation of ad budgets to search, improving monetization of search queries, mobile search growth, and monetization of YouTube videos and an eventual drive to profitability for the online video site, and finally, improving company wide margins and free cash flow growth as the new CEO has reigned in costs, we have what is the most attractive stock in the media sector. The stock trades at 10.5x 2010 EBITDA, way below its five year historical average of 20x and at a PE of 19x 2010 EPS below the 36x historical average.
IAC/InterActiveCorp (IAC) is another attractive play within the sector. The company has $13 per share in cash, about 70% of the stock’s value, and is an active share repurchaser, having repurchased 16 million shares in the first half of 2009 and has a new authorization for 20 million shares. It appears that share buybacks are the primary use of cash at the moment. IAC has a nice mix of assets that are growing nicely. Plus it is a derivative play on Google given Ask.com’s search relationship with the search giant. The shares are trading at 5x 2010 EBITDA, in-line with Yahoo, but largely free of Yahoo’s secular issues. My sum-of-the-parts valuation values the company at $25, about 30% upside from current trading levels.
I would stay on the sidelines with Yahoo! (YHOO) for now because of its dependence of branded advertising as a core function now that it has decided to essentially exit the search business. Unlike search advertising, branded advertising is facing secular pressures such as unlimited inventory which is depressing CPM pricing, an advertiser mix shift from higher price guaranteed inventory to lower priced non-guaranteed inventory, and CPM pricing pressure due to inventory being purchased through lower priced sales channels. I do not foresee those challenges abating anytime soon, even in an economic recovery. Branded advertising declined 12% for Yahoo! in the first half of 2009, in-line with the broadcast networks and slightly better than outdoor advertising. Domestic search was down 5% y/y in the first half 2009 but down 13% in 2Q09, so clearly no offset there. The shares are trading at 5x 2010 EBITDA and could be an attractive stock for value investors given that it is no longer a value trap. The Microsoft search deal should lift margins and free cash flow substantially but that’s an event that is 24 months out. A Taobao IPO could be a positive catalyst for the shares but the timing is uncertain. And I am not buying the analogy to DELL – Yahoo has lost a competitive advantage by giving up search. Street sentiment has improved with several upgrades to buy in the past two months but I am not convinced yet. Yahoo is a turnaround story but there are too many “ifs” and uncertain catalysts layered on top secular challenges in its now core display business for me to buy this stock.
For the same reasons I would stay clear of AOL when the company goes public in 4Q09. Its branded advertising business was down 19% in the first half of 2009 and its third-party network advertising, which it reports separately, was down harder at 27% in the first half of 2009, rivaling newspaper advertising growth rates. Tim Armstrong will have a hard time selling this story to investors.
Newspapers
Next is newspapers, which are facing secular challenges brought about by declining sales and shift of classified advertising dollars to the Internet, coupled with a high fixed cost structure, and highly levered capital structures.
Newspaper advertising has been battered and is down 30% y/y in the first half of 2009, the worst of any advertising category. The key stocks in this sector are Gannett (GCI), and The New York Times (NYT). Classified advertising at these companies were down 40-45% in 2Q09 due to declining real estate, employment (down 60%+), and auto advertising. NYT stated on their 2Q09 conference call that they expect the newspaper advertising environment to remain challenged but believe the rate of decline will moderate in the third quarter from the second quarter. That has provided some relief to investors that things won’t worsen. Nonetheless, those revenue growth rates are horrible.
In my opinion, newspapers stocks aren’t worth holding for the longer-term because there is a strong likelihood that these companies head towards bankruptcy even if the economy recovers. However, due to the high short interest in these stocks (12% of NYT’s float was sold short at last reported date) investors can make money by trading around the earnings reports because of the likelihood of earnings beat due to the cost cutting. A few of the newspaper companies own broadcasting stations, which are not faring any better. Longer-term, I would avoid stocks in this sector because the equities in this media category could eventually disappear due to the secular challenges.
Radio
Moving on to radio, whose stock prices have been decimated due to massive audience erosion and secular challenges from the iPod in the car, satellite radio, WiMax development that could put Internet radio like Pandora in the car. The latter is years away from having a negative impact on radio, in my view. Radio did suffer from massive audience erosion over the past decade but that has largely abated with the remaining radio listeners likely to stay with the medium. Radio advertising is down 22% in the first half of 2009, faring better than newspapers, magazines, and local cable advertising, but is still bad.
Stocks in this sector include Clear Channel (CCMO) which last traded for $1.20 on the OTC, Entercom (ETM) last traded at $4.79, Emmis (EMMS) lasted traded at $0.68, Cumulus (CMLS) last traded for $1.41, Beasley (BBGI) last traded at $3.29, Radio One (ROIA) last traded for $0.85, and Sirius XM (SIRI) which last changed hands at $0.66. Unlike my view of the newspaper equities, I believe the radio stocks could survive but I am not recommending anyone of them, except Sirius XM purely for the reason that John Malone is behind that company. His company Liberty Media owns 40% of the shares but will not buy in the full company in the next two years due to their inability to use the NOLs. Over 50% of Liberty Capital’s (LCAPA) value is tied to its stake in Sirius XM and for that reason I believe that Malone will ensure that the company does not go into bankruptcy.
Overall, if you want exposure to radio, then CBS (CBS) is the best bet. The company noted on their 2Q09 conference call that they are seeing improving sales trends in the quarter.
Outdoor
Outdoor advertising is down about 16% in the first half led by companies such as CBS Outdoor (CBS), Clear Channel Outdoor (CCO), and Lamar Advertising (LAMR). That sector is likely to remain challenging due to over capacity of billboards, pricing pressures, declining utilization rates, and intensifying competition. Those are not secular issues in my opinion, thus outdoor advertising is likely to be an attractive sector in an ad recovery. The companies are taking down billboards to address the overcapacity issue and pulling back on capital expenditures, which should have the effect of improving free cash flow and improving ROIs. Pricing and utilization rates should come back in a recovery so no concern there. In addition, outdoor advertising is relatively insulated from secular threats from the Internet.
CBS is the best pick overall for a play on this ad category given its more attractive relative valuation. I personally think CBS is one of the most attractive stocks in the media sector and is the one media stock worth owning for the longer-term. Lamar is the most expensive of the group haven already gapped up almost 300% in the past six months due to short covering. It is trading at 11x 2010 EBITDA compared to 9x for Clear Channel, and 7x for CBS.
Magazines
Magazine advertising is down about 25% in the first half of 2009 and is facing the same secular issues that newspapers are facing. There are some signs of stabilization in this medium but I think the spate of magazines going out of business will likely continue even in a recovery. The survivors will need to live in a world with less ad pages, less readership, but with costs that remain the same, hence profits will continue to erode.
Time Warner (TWX) is the behemoth in this sector but others like Martha Stewart (MSO) and Meredith (MDP) are interesting. Meredith is the one interesting play here that is worth taking a harder look at.
Cable Networks
Advertising on cable network advertising was down in the low single digits in the first half of 2009 slightly outperformed by Internet, however, a recent report by Sanford Bernstein has cable networking advertising edging out Internet advertising in 2Q09. The media is free of secular challenges and is taking viewership share from broadcast TV. The pure play stocks to own here are Scripts Networks (SCNI) and Discovery (DISCA) and are attractive long-terms buys.
My favorite of the two is Discovery, which has shown impressive numbers in 1H09 with flat revenues and 11% EBITDA growth. While the stock is not cheap, trading at 10x 2010 EBITDA and 18x 2010 earnings, the long-term trajectory looks compelling given solid ratings, expansion internationally, and driving the Oprah Network and others like Animal Planet to profitability. Plus, DISCA has ample liquidity, with $300 million-plus in cash on the balance sheet, consensus at $650 million in free cash flow in 2010, and is underlevered at just 2.5x. Management can use cash to repurchase shares and to fund internal expansion of cable channels. Further, the company looks attractive as a take-out by one of the conglomerates like Time Warner (TWX), who has stated their interest in cable programming assets.
Time Warner (TWX) and Viacom (VIA) provide good exposure to this sub sector.
TV Stations / Broadcast Networks / Local Cable
TV station and local cable advertising are both down in the 20% range in the first half of 2009 and broadcast networks was down in the mid-teens.
Time Warner Cable (TWC), Cablevision (CVC) and Comcast (CMCSA) are the stocks most exposed to the declining advertising trends on local cable. However, the dynamics of the cable sector overall are extremely attractive leading me to be positive on the cable stocks. I will report on the cable sector on a later post but I would be buyers of these stocks.
The plays in broadcasting networks are CBS (CBS), which again I am a buyer of the shares and Newscorp (NWSA), which I am not. NewsCorp’s shares have doubled since the March lows but the company is facing issues on many fronts including challenges at MySpace, the film business, newspapers, and Sky Italia. If you must invest in a media conglomerate then Disney (DIS), Viacom (VIA), and Time Warner (TWX) offer a more attractive asset mix at their respective valuations.
I am staying on the sidelines on the pure play TV stations but if you are inclined to venture, the stocks to look at are Belo Corp (BLC, $4.25) and Sinclair Broadcasting (SBGI, $3.12). Both stocks have rebounded quite nicely from penny stock status in March but I am not convinced that there is much upside left.
Advertising Agencies
Ad agencies lag in a recovery so there is no reason to chase the stocks – Omnicom (OMC), Interpublic (IPG), WPP Group (traded in the U.K.), Publicis (traded in France).
Emerging New Media
I am considering FaceBook, Hulu, YouTube and MySpace in this category. FaceBook could likely go public in 2010 but even with its massive growth I think the company is burning through cash. See a previous post. When YouTube turns a profit, Google could consider spinning it off into a separate publicly traded company. NewsCorp should do the same for MySpace. Hulu, which is owned by the media conglomerates, could head down that path as well. All of these companies are dependent on the secularly challenged branded advertising to generate revenues, but online search, paid subscriptions, and other paid content/transactions offer means to support revenue growth in the future.
To recap, the most attractive ad mediums in a recovery are Internet, Cable Networks, and Outdoor, and the most attractive stocks in the media space are Google, IAC, Discovery, CBS, Scripts Network, Disney and Time Warner.
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At a series of conferences this past week, several companies reported that advertising is still challenging but is however firming, with month-over-month improvement in national and local advertising and improvements in auto advertising.
U.S. advertising has historically tracked GDP growth but has lagged behind other categories in a recovery. On that basis, I would look to less advertising dependent sectors within the TMT universe for stocks worth owning early-on in an economic recovery, particularly technology stocks. However, there are advertising related stocks that are trading at attractive multiples that are not secularly challenged and with relatively balanced risk/reward scenarios – indeed, the best stocks to own in a recovery are the ones operating in advertising sectors free of secular challenges. Further, 4Q09 and 1Q2010 offer easy compares given the harsh experiences in the prior year with the Winter Olympics in February, World Cup Soccer in June, China World Expo in the summer, and political advertising in the fall setting the stage for mild improvements in advertising growth rates.
I’ll go through the sub-sectors to uncover those gems.
Internet
I’ll start with the Internet advertising stocks first, which along with cable programming network advertising has performed better than any of the other advertising categories in the first half of 2009, with Internet advertising edging out cable networks by a slim margin.
Google (GOOG) is my long-term favorite and is the best stock to own in this sector due to its huge exposure to search advertising, which is not facing secular challenges. Search queries have held up well in the recession but pricing (CPCs) has not, which is partially why Google’s y/y growth rates have plummeted from close to 60% in 3Q07 to 3% in 2Q09. However, pricing is cyclically based, in my view, and when/if the economy recovers pricing is likely to rebound with it, leading to a reacceleration of growth for Google. Add to that, improving allocation of ad budgets to search, improving monetization of search queries, mobile search growth, and monetization of YouTube videos and an eventual drive to profitability for the online video site, and finally, improving company wide margins and free cash flow growth as the new CEO has reigned in costs, we have what is the most attractive stock in the media sector. The stock trades at 10.5x 2010 EBITDA, way below its five year historical average of 20x and at a PE of 19x 2010 EPS below the 36x historical average.
IAC/InterActiveCorp (IAC) is another attractive play within the sector. The company has $13 per share in cash, about 70% of the stock’s value, and is an active share repurchaser, having repurchased 16 million shares in the first half of 2009 and has a new authorization for 20 million shares. It appears that share buybacks are the primary use of cash at the moment. IAC has a nice mix of assets that are growing nicely. Plus it is a derivative play on Google given Ask.com’s search relationship with the search giant. The shares are trading at 5x 2010 EBITDA, in-line with Yahoo, but largely free of Yahoo’s secular issues. My sum-of-the-parts valuation values the company at $25, about 30% upside from current trading levels.
I would stay on the sidelines with Yahoo! (YHOO) for now because of its dependence of branded advertising as a core function now that it has decided to essentially exit the search business. Unlike search advertising, branded advertising is facing secular pressures such as unlimited inventory which is depressing CPM pricing, an advertiser mix shift from higher price guaranteed inventory to lower priced non-guaranteed inventory, and CPM pricing pressure due to inventory being purchased through lower priced sales channels. I do not foresee those challenges abating anytime soon, even in an economic recovery. Branded advertising declined 12% for Yahoo! in the first half of 2009, in-line with the broadcast networks and slightly better than outdoor advertising. Domestic search was down 5% y/y in the first half 2009 but down 13% in 2Q09, so clearly no offset there. The shares are trading at 5x 2010 EBITDA and could be an attractive stock for value investors given that it is no longer a value trap. The Microsoft search deal should lift margins and free cash flow substantially but that’s an event that is 24 months out. A Taobao IPO could be a positive catalyst for the shares but the timing is uncertain. And I am not buying the analogy to DELL – Yahoo has lost a competitive advantage by giving up search. Street sentiment has improved with several upgrades to buy in the past two months but I am not convinced yet. Yahoo is a turnaround story but there are too many “ifs” and uncertain catalysts layered on top secular challenges in its now core display business for me to buy this stock.
For the same reasons I would stay clear of AOL when the company goes public in 4Q09. Its branded advertising business was down 19% in the first half of 2009 and its third-party network advertising, which it reports separately, was down harder at 27% in the first half of 2009, rivaling newspaper advertising growth rates. Tim Armstrong will have a hard time selling this story to investors.
Newspapers
Next is newspapers, which are facing secular challenges brought about by declining sales and shift of classified advertising dollars to the Internet, coupled with a high fixed cost structure, and highly levered capital structures.
Newspaper advertising has been battered and is down 30% y/y in the first half of 2009, the worst of any advertising category. The key stocks in this sector are Gannett (GCI), and The New York Times (NYT). Classified advertising at these companies were down 40-45% in 2Q09 due to declining real estate, employment (down 60%+), and auto advertising. NYT stated on their 2Q09 conference call that they expect the newspaper advertising environment to remain challenged but believe the rate of decline will moderate in the third quarter from the second quarter. That has provided some relief to investors that things won’t worsen. Nonetheless, those revenue growth rates are horrible.
In my opinion, newspapers stocks aren’t worth holding for the longer-term because there is a strong likelihood that these companies head towards bankruptcy even if the economy recovers. However, due to the high short interest in these stocks (12% of NYT’s float was sold short at last reported date) investors can make money by trading around the earnings reports because of the likelihood of earnings beat due to the cost cutting. A few of the newspaper companies own broadcasting stations, which are not faring any better. Longer-term, I would avoid stocks in this sector because the equities in this media category could eventually disappear due to the secular challenges.
Radio
Moving on to radio, whose stock prices have been decimated due to massive audience erosion and secular challenges from the iPod in the car, satellite radio, WiMax development that could put Internet radio like Pandora in the car. The latter is years away from having a negative impact on radio, in my view. Radio did suffer from massive audience erosion over the past decade but that has largely abated with the remaining radio listeners likely to stay with the medium. Radio advertising is down 22% in the first half of 2009, faring better than newspapers, magazines, and local cable advertising, but is still bad.
Stocks in this sector include Clear Channel (CCMO) which last traded for $1.20 on the OTC, Entercom (ETM) last traded at $4.79, Emmis (EMMS) lasted traded at $0.68, Cumulus (CMLS) last traded for $1.41, Beasley (BBGI) last traded at $3.29, Radio One (ROIA) last traded for $0.85, and Sirius XM (SIRI) which last changed hands at $0.66. Unlike my view of the newspaper equities, I believe the radio stocks could survive but I am not recommending anyone of them, except Sirius XM purely for the reason that John Malone is behind that company. His company Liberty Media owns 40% of the shares but will not buy in the full company in the next two years due to their inability to use the NOLs. Over 50% of Liberty Capital’s (LCAPA) value is tied to its stake in Sirius XM and for that reason I believe that Malone will ensure that the company does not go into bankruptcy.
Overall, if you want exposure to radio, then CBS (CBS) is the best bet. The company noted on their 2Q09 conference call that they are seeing improving sales trends in the quarter.
Outdoor
Outdoor advertising is down about 16% in the first half led by companies such as CBS Outdoor (CBS), Clear Channel Outdoor (CCO), and Lamar Advertising (LAMR). That sector is likely to remain challenging due to over capacity of billboards, pricing pressures, declining utilization rates, and intensifying competition. Those are not secular issues in my opinion, thus outdoor advertising is likely to be an attractive sector in an ad recovery. The companies are taking down billboards to address the overcapacity issue and pulling back on capital expenditures, which should have the effect of improving free cash flow and improving ROIs. Pricing and utilization rates should come back in a recovery so no concern there. In addition, outdoor advertising is relatively insulated from secular threats from the Internet.
CBS is the best pick overall for a play on this ad category given its more attractive relative valuation. I personally think CBS is one of the most attractive stocks in the media sector and is the one media stock worth owning for the longer-term. Lamar is the most expensive of the group haven already gapped up almost 300% in the past six months due to short covering. It is trading at 11x 2010 EBITDA compared to 9x for Clear Channel, and 7x for CBS.
Magazines
Magazine advertising is down about 25% in the first half of 2009 and is facing the same secular issues that newspapers are facing. There are some signs of stabilization in this medium but I think the spate of magazines going out of business will likely continue even in a recovery. The survivors will need to live in a world with less ad pages, less readership, but with costs that remain the same, hence profits will continue to erode.
Time Warner (TWX) is the behemoth in this sector but others like Martha Stewart (MSO) and Meredith (MDP) are interesting. Meredith is the one interesting play here that is worth taking a harder look at.
Cable Networks
Advertising on cable network advertising was down in the low single digits in the first half of 2009 slightly outperformed by Internet, however, a recent report by Sanford Bernstein has cable networking advertising edging out Internet advertising in 2Q09. The media is free of secular challenges and is taking viewership share from broadcast TV. The pure play stocks to own here are Scripts Networks (SCNI) and Discovery (DISCA) and are attractive long-terms buys.
My favorite of the two is Discovery, which has shown impressive numbers in 1H09 with flat revenues and 11% EBITDA growth. While the stock is not cheap, trading at 10x 2010 EBITDA and 18x 2010 earnings, the long-term trajectory looks compelling given solid ratings, expansion internationally, and driving the Oprah Network and others like Animal Planet to profitability. Plus, DISCA has ample liquidity, with $300 million-plus in cash on the balance sheet, consensus at $650 million in free cash flow in 2010, and is underlevered at just 2.5x. Management can use cash to repurchase shares and to fund internal expansion of cable channels. Further, the company looks attractive as a take-out by one of the conglomerates like Time Warner (TWX), who has stated their interest in cable programming assets.
Time Warner (TWX) and Viacom (VIA) provide good exposure to this sub sector.
TV Stations / Broadcast Networks / Local Cable
TV station and local cable advertising are both down in the 20% range in the first half of 2009 and broadcast networks was down in the mid-teens.
Time Warner Cable (TWC), Cablevision (CVC) and Comcast (CMCSA) are the stocks most exposed to the declining advertising trends on local cable. However, the dynamics of the cable sector overall are extremely attractive leading me to be positive on the cable stocks. I will report on the cable sector on a later post but I would be buyers of these stocks.
The plays in broadcasting networks are CBS (CBS), which again I am a buyer of the shares and Newscorp (NWSA), which I am not. NewsCorp’s shares have doubled since the March lows but the company is facing issues on many fronts including challenges at MySpace, the film business, newspapers, and Sky Italia. If you must invest in a media conglomerate then Disney (DIS), Viacom (VIA), and Time Warner (TWX) offer a more attractive asset mix at their respective valuations.
I am staying on the sidelines on the pure play TV stations but if you are inclined to venture, the stocks to look at are Belo Corp (BLC, $4.25) and Sinclair Broadcasting (SBGI, $3.12). Both stocks have rebounded quite nicely from penny stock status in March but I am not convinced that there is much upside left.
Advertising Agencies
Ad agencies lag in a recovery so there is no reason to chase the stocks – Omnicom (OMC), Interpublic (IPG), WPP Group (traded in the U.K.), Publicis (traded in France).
Emerging New Media
I am considering FaceBook, Hulu, YouTube and MySpace in this category. FaceBook could likely go public in 2010 but even with its massive growth I think the company is burning through cash. See a previous post. When YouTube turns a profit, Google could consider spinning it off into a separate publicly traded company. NewsCorp should do the same for MySpace. Hulu, which is owned by the media conglomerates, could head down that path as well. All of these companies are dependent on the secularly challenged branded advertising to generate revenues, but online search, paid subscriptions, and other paid content/transactions offer means to support revenue growth in the future.
To recap, the most attractive ad mediums in a recovery are Internet, Cable Networks, and Outdoor, and the most attractive stocks in the media space are Google, IAC, Discovery, CBS, Scripts Network, Disney and Time Warner.
Read More!
Saturday, August 29, 2009
Sina 2Q09 Preview; Focus Media Acquisition by year-end
Sina will report second quarter earnings on Monday, August 31st after the market close. Consensus expectations are for revenues of $88 million (-3% y/y and +20% q/q) and pro forma EPS of $0.30.
Display revenues are expected to decline 12% y/y due in part to tough comparisons to the Olympics ad spend in 2Q08, however, I expect a sequential improvement from 1Q09 as several advertising categories such as autos and real-estate have rebounded in China during the quarter. Mobile revenues is likely to be up in the high teens y/y.
In addition to the fundamentals, attention will be paid to commentary from management pertaining to the Focus Media outdoor acquisition, for which sentiment has been negative. Most expect the deal to collapse, however, my bet is that it goes through. The main hold-up is the Chinese government's extensive review process, which I believe is occurring due to the upcoming 60th anniversary of the communist party on October 1st. When that date passes, I think the government may give the green list to the acquisition.
In addition, both sides continue to want the deal to consummate and Sina has even added Focus Hot Brand Zone to its website, which is an advertising section on the site for Focus Media's outdoor clients. Clearly that would have not occurred if both sides had cooled to the deal or if they believed that the government would strike it down. Plus, no major shareholder have come out against the deal.
Read More!
Display revenues are expected to decline 12% y/y due in part to tough comparisons to the Olympics ad spend in 2Q08, however, I expect a sequential improvement from 1Q09 as several advertising categories such as autos and real-estate have rebounded in China during the quarter. Mobile revenues is likely to be up in the high teens y/y.
In addition to the fundamentals, attention will be paid to commentary from management pertaining to the Focus Media outdoor acquisition, for which sentiment has been negative. Most expect the deal to collapse, however, my bet is that it goes through. The main hold-up is the Chinese government's extensive review process, which I believe is occurring due to the upcoming 60th anniversary of the communist party on October 1st. When that date passes, I think the government may give the green list to the acquisition.
In addition, both sides continue to want the deal to consummate and Sina has even added Focus Hot Brand Zone to its website, which is an advertising section on the site for Focus Media's outdoor clients. Clearly that would have not occurred if both sides had cooled to the deal or if they believed that the government would strike it down. Plus, no major shareholder have come out against the deal.
Read More!
Sunday, August 2, 2009
Telecom Trading and Valution Multiples
Telecommunication Trading and Valuation Multiples
Telecom Trading
Telecom Pricing
Telecom Valuation
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Telecom Trading
Telecom Pricing
Telecom Valuation
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Technology Trading and Valuation Multiples
Technology Equity Valuation Multiples
Technology Trading
Technology Pricing
Technology Multiples
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Technology Trading
Technology Pricing
Technology Multiples
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Saturday, August 1, 2009
Internet Trading and Valuation Multiples
Internet Trading, Pricing, and Valuation Multiples.
Internet Trading
Internet Pricing
Internet Valuation
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Internet Trading
Internet Pricing
Internet Valuation
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Wednesday, July 22, 2009
The Arbs are at Play with Bankrate – Higher Price Likely
First off, let me point out that the acquisition of Bankrate was on my list of 12 2009 Predictions and I previously called for an acquisition in my write-up Final Option for Bankrate: Find a Buyer.
Consensus was estimating $55 million in EBITDA for Bankrate in 2009 but management stated that they would likely miss that estimate. RATE reported $22.5 million in EBITDA in the first half of 2009. I assume they could match that run rate and produce $45 million in EBITDA for the full year 2009. Assuming that EBITDA figure, the acquisition multiple is 12.7x.
I looked back at my notes and saw that Internet acquisitions over the past few years were consummated at a mean 20x EBITDA multiple. However, given the depressed economic environment and RATE’s current challenges, a discount to that mean multiple is warranted.
I think a 14x multiple would properly reflect the current challenges but that branded online advertising could rebound in 2010.
Bottom line, I think the Apax offer is too low. A 14x multiple would value the shares at $31.50.
If Apax doesn’t raise the offer, then another acquirer should step in, particularly as Amazon just paid close to $1 billion, mostly in stock, to acquire Zappos.
Possible acquirers can include IAC, Yahoo, and Microsoft or maybe another private equity firm will see more value in owning RATE.
Read More!
Consensus was estimating $55 million in EBITDA for Bankrate in 2009 but management stated that they would likely miss that estimate. RATE reported $22.5 million in EBITDA in the first half of 2009. I assume they could match that run rate and produce $45 million in EBITDA for the full year 2009. Assuming that EBITDA figure, the acquisition multiple is 12.7x.
I looked back at my notes and saw that Internet acquisitions over the past few years were consummated at a mean 20x EBITDA multiple. However, given the depressed economic environment and RATE’s current challenges, a discount to that mean multiple is warranted.
I think a 14x multiple would properly reflect the current challenges but that branded online advertising could rebound in 2010.
Bottom line, I think the Apax offer is too low. A 14x multiple would value the shares at $31.50.
If Apax doesn’t raise the offer, then another acquirer should step in, particularly as Amazon just paid close to $1 billion, mostly in stock, to acquire Zappos.
Possible acquirers can include IAC, Yahoo, and Microsoft or maybe another private equity firm will see more value in owning RATE.
Read More!
Monday, July 20, 2009
Google Apps Could Cost Microsoft up to $18 Billion in Value
Gauging the Financial Impact of Free Microsoft Office
Responding to Google’s competitive threat on its cash cow, Microsoft decided to offer free web versions of its MS Office, either through an online version similar to Google Apps, or a pc based edition pre-installed in PCs through the OEMs. The free offering is likely to be ad supported. Microsoft has already offered ad supported versions of Microsoft Works in certain countries and is likely to build off that practice with the free online versions.
The ad based version could be supported by display and search ads and should have ready access to Bing throughout the applications.
Microsoft’s CEO contends that any free offering is aimed at steaming the piracy impact rather than defending its turf against Google. I disagree, while acknowledging this effort’s part in monetizing pirated users.
The particular business under threat is Microsoft Business Division (MBD), which accounted for 30% of revenues in fiscal 2008 and has extremely high margins. [See a previous analysis of Microsoft’s revenue breakout.] Even more specifically, Microsoft Office, which is housed in MBD, accounted for 75% of MBD revenues. Drilling down further, the consumer segment of Microsoft Office, which I believe is the most exposed to Google Apps and OpenOffice.org, accounted for 20% of MBD revenues. Therefore, only 6% of Microsoft’s total revenues is under threat from Google Apps. Small, but significant nonetheless, given the high cash flow contribution from those revenues. I believe that there are little costs, if any, associated with the consumer division, so close to 100% of every dollar in this segment drops to the bottom line. I believe that Microsoft will find a way to exclude business users from using the free version or make it prohibitively expensive.
So what’s the financial impact to Microsoft from a free ad supported model? As I noted above, the consumer segment is the unit that’s actually under threat and that unit generated $3.8 billion in revenues in fiscal year 2008, with profits slightly below that figure. Let’s assume revenue growth is flat in fiscal year 2009 that ended in June. So that’s the base level of profits under threat.
But wait. Under 50% of those revenues are derived from retail sales, lets say 45%, with the remainder derived from PC OEMs. Cannibalization is important in my analysis, which I believe will only apply to the retail version, for now, but will likely impact the OEM revenues as time passes. So we are now down to $1.7 billion of revenues that is actually under threat.
Lets assume that 25% of potential retail users (and revenues) initially switch to the free online version. That number will likely prove conservative as time passes and I think should approach 100% in a few years but let’s stay with it now. So we are down to $430 million is revenues that is potentially lost.
I argued that consumer revenues are 100% incremental margins since any costs of development, support, and marketing are likely applied to the business version. But lets assume some costs - 5% of revenues. Applying Microsoft’s 26% tax rate will lead to $300 million in lost profits or $0.03 per share. For reference, the Wall Street consensus estimate is $1.65 per share for fiscal year 2009.
Microsoft can then generate about a $2.50 CPM for display ads on the free version. Let’s ignore potential search revenues for now. Based on page view estimates, I believe that Microsoft can generate approximately $100 million in revenues annually from advertising. This partially offsets the $430 million loss revenue estimate bringing the total lost revenues from the free online version to $330 million.
Assuming a 75% contribution margin on the display business, accounting for ad networks, ad agencies, etc., the loss estimate reduces from $330 million to $245 million or closer to $0.02 per share.
So the initial impact is a loss of 2 cents per share.
If we assume 100% of the retail business converts to the free version, then the impact is a $1.5 billion loss to profits or $0.13 per share, after accounting for the advertising revenues. This equates to an 8% negative EPS impact. That 8% negative impact equates to about $2 per Microsoft share (15x multiple to the 13 cents). The share price didn’t budge on the news, which leads me to believe that investors haven’t walked through the analysis or that the negative implication was already priced into the shares.
Either way, Google has cost Microsoft about $2 per share in value or $18 billion at the most aggressive of assumptions, or $0.30 per share on my initial analysis of a loss of 2 cents a share.
Score one for Google. Now it is Microsoft’s turn to B[r]ing it!
Read More!
Responding to Google’s competitive threat on its cash cow, Microsoft decided to offer free web versions of its MS Office, either through an online version similar to Google Apps, or a pc based edition pre-installed in PCs through the OEMs. The free offering is likely to be ad supported. Microsoft has already offered ad supported versions of Microsoft Works in certain countries and is likely to build off that practice with the free online versions.
The ad based version could be supported by display and search ads and should have ready access to Bing throughout the applications.
Microsoft’s CEO contends that any free offering is aimed at steaming the piracy impact rather than defending its turf against Google. I disagree, while acknowledging this effort’s part in monetizing pirated users.
The particular business under threat is Microsoft Business Division (MBD), which accounted for 30% of revenues in fiscal 2008 and has extremely high margins. [See a previous analysis of Microsoft’s revenue breakout.] Even more specifically, Microsoft Office, which is housed in MBD, accounted for 75% of MBD revenues. Drilling down further, the consumer segment of Microsoft Office, which I believe is the most exposed to Google Apps and OpenOffice.org, accounted for 20% of MBD revenues. Therefore, only 6% of Microsoft’s total revenues is under threat from Google Apps. Small, but significant nonetheless, given the high cash flow contribution from those revenues. I believe that there are little costs, if any, associated with the consumer division, so close to 100% of every dollar in this segment drops to the bottom line. I believe that Microsoft will find a way to exclude business users from using the free version or make it prohibitively expensive.
So what’s the financial impact to Microsoft from a free ad supported model? As I noted above, the consumer segment is the unit that’s actually under threat and that unit generated $3.8 billion in revenues in fiscal year 2008, with profits slightly below that figure. Let’s assume revenue growth is flat in fiscal year 2009 that ended in June. So that’s the base level of profits under threat.
But wait. Under 50% of those revenues are derived from retail sales, lets say 45%, with the remainder derived from PC OEMs. Cannibalization is important in my analysis, which I believe will only apply to the retail version, for now, but will likely impact the OEM revenues as time passes. So we are now down to $1.7 billion of revenues that is actually under threat.
Lets assume that 25% of potential retail users (and revenues) initially switch to the free online version. That number will likely prove conservative as time passes and I think should approach 100% in a few years but let’s stay with it now. So we are down to $430 million is revenues that is potentially lost.
I argued that consumer revenues are 100% incremental margins since any costs of development, support, and marketing are likely applied to the business version. But lets assume some costs - 5% of revenues. Applying Microsoft’s 26% tax rate will lead to $300 million in lost profits or $0.03 per share. For reference, the Wall Street consensus estimate is $1.65 per share for fiscal year 2009.
Microsoft can then generate about a $2.50 CPM for display ads on the free version. Let’s ignore potential search revenues for now. Based on page view estimates, I believe that Microsoft can generate approximately $100 million in revenues annually from advertising. This partially offsets the $430 million loss revenue estimate bringing the total lost revenues from the free online version to $330 million.
Assuming a 75% contribution margin on the display business, accounting for ad networks, ad agencies, etc., the loss estimate reduces from $330 million to $245 million or closer to $0.02 per share.
So the initial impact is a loss of 2 cents per share.
If we assume 100% of the retail business converts to the free version, then the impact is a $1.5 billion loss to profits or $0.13 per share, after accounting for the advertising revenues. This equates to an 8% negative EPS impact. That 8% negative impact equates to about $2 per Microsoft share (15x multiple to the 13 cents). The share price didn’t budge on the news, which leads me to believe that investors haven’t walked through the analysis or that the negative implication was already priced into the shares.
Either way, Google has cost Microsoft about $2 per share in value or $18 billion at the most aggressive of assumptions, or $0.30 per share on my initial analysis of a loss of 2 cents a share.
Score one for Google. Now it is Microsoft’s turn to B[r]ing it!
Read More!
Friday, July 17, 2009
Nouriel Roubini clarifies his views on the end of the recession.
Famed economist and long-term bear Nouriel Roubini is refuting assertions from the media that he is calling for an end to the recession in the next few months. He states that he has always called for a 24 month recession, which takes us to the end of this year, and that his views has not changed.
STATEMENT ON U.S. ECONOMIC OUTLOOK BY DR. NOURIEL ROUBINI
The following is a statement from Dr. Nouriel Roubini, Chairman of RGE Monitor and Professor, New York University, Stern School of Business:
“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.
“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.
“Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out of the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“I have also consistently argued – including in my remarks today - that while the consensus predicts that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.
“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year: on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.
“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.
“Also, as I fleshed out in detail in recent remarks the labor market is still very weak: I predict a peak unemployment rate of close to 11% in 2010. Such large unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.
“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.
“RGE Monitor will soon release our updated U.S. and Global Economic Outlook. A preview of the U.S. Outlook is available on our website: www.rgemonitor.com” Read More!
STATEMENT ON U.S. ECONOMIC OUTLOOK BY DR. NOURIEL ROUBINI
The following is a statement from Dr. Nouriel Roubini, Chairman of RGE Monitor and Professor, New York University, Stern School of Business:
“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.
“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.
“Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out of the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“I have also consistently argued – including in my remarks today - that while the consensus predicts that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.
“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year: on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.
“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.
“Also, as I fleshed out in detail in recent remarks the labor market is still very weak: I predict a peak unemployment rate of close to 11% in 2010. Such large unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.
“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.
“RGE Monitor will soon release our updated U.S. and Global Economic Outlook. A preview of the U.S. Outlook is available on our website: www.rgemonitor.com” Read More!
Google – 2Q09 In-line but not good enough
Google reported a net revenue increase of 3% year-over-year and -.2% quarter-over-quarter to $4.065bn, Adjusted EBITDA of 62.6%, and Non-GAAP EPS of $5.36. Consensus Wall Street estimates expected Google to deliver $4.031 billion in revenues, EBITDA margin of 61.7%, and $5.09 in Adjusted EPS. Google beat those estimates but the results were not good enough. Whisper had expected a quarter-over-quarter increase of 1% or more and the huge EPS beat was due to a lower than expected tax rate of 20%, down from 25% in 1Q09. A normalized tax rate would have resulted in an EPS rate of close to the consensus number. See my previews here.
Highlights from the quarter:
Capex was 3% of sales, the lowest in any quarter since becoming a public company
Headcount declined by 378, the first time headcount has decline sequentially. That was due to the cuts in the marketing department
Paid clicks up 15% y/y, down from 17% in 1Q09 but healthy nonetheless
Cost per click pricing down 13% y/y but up 5% y/y. FX was the main reasons for both movements
Ended the quarter with $19nm in cash. What does management plan to do with the cash?
Free cash flow was $1.47bn; The model could produce $7bn in free cash flow in 2009
Revenue growth ex-FX was 12% YoY and ex-FX and hegding was 10% YoY, down from 14% YoY and 12% YoY in 1Q09, respectively
U.K. revenues declined 7.6% YoY
Google’s CEO on the business stabilizing:
“On the stabilizing question, we a quarter ago, we had no idea where the bottom was. We started off the year and all of a sudden our metrics were off and it became clear that starting roughly Christmas, people were spending more time searching and when they purchased products, they were purchasing products of less value. Furthermore, when they did so, they -- the whole process just took more time. It appears as though, although the RPM's have not fully recovered, the other aspects of behavior have in fact come back. And with the notable exception of the financial vertical, the other verticals in particular, shopping and travel, which had been significantly effected, appear to be recovering. So the sum of those tells us to say the word 'stabilizing. ' We're not at the moment looking at that downward spiral that we thought we might see six months ago.”
Comments on mobile:
“Mobile monetization picked up a good bit of momentum as search traffic grew, again, driven mostly by the smart phones. And we're seeing that users on these high end phones are very active and engaged beyond search, so display advertising on those phones is actually emerging as an interesting mechanism.
On the mobile search side, one of the key things we've done in the last few months, is we've started to show the desktop ads. Turns out that the separate mobile ads have their own formats. Typically it wasn't enough demand, there weren't enough kind of creatives and so forth. So we started showing the desktop ads on the mobile browsers of high quality and these, of course, include the iPhone and the Android phone and anything that's a web kit inspired browser. All of a sudden we started seeing a tremendous number of searches and also very good click-through rates. So they monetize it at a similar level if they are desk-top-based -- it makes sense over time that those ads should perform better than on PCs because on a mobile device we know more about the person and we can have an even more targeted ad, but we don't do that today.”
Comments on display:
“think the way to think about display for us is actually in multi tall strands. One is clearly on the YouTube side, which you just talked about in -- beginning to see some good trajectory in. I think to couple that, the secondary of focus for us is the Google content network, where we Genessee that the revenues are going well and that's performing well. There has been sort of an aversion to more performance-based display advertising in the last quarter because most of the advertisers have started going back to focusing on CPC and clicks. Where we're bringing sort of the metrics to search to display effectively and we're seeing a shift away back to -- on the content network because display inventory continues to rise and people are beginning to want metrics to measure that. On the third, as you have the double click invasion, we've made tremendous progress on the -- double click changed with ad words and AdSense, and we're seeing traction where -- all want to work with an exchange that allows us to expose inventory across the board to various -- both parties in the transaction. So I think Eric's right that that is the next area where the online advertising is going to shift and we're going to see tremendous growth in the display space and we're exited about all three areas individually.”
Comments on CPCs:
“Thank you. My question's on paid clicks and CPCs. First, on CPCs, it looks like if we back out currency at 44 million, they were up 4% quarter over quarter. Is there any kind of sign of stabilization in that number, or is that due to mix and seasonality? And the second thing is paid clicks, 15% growth. Could you talk a little bit about the mix? Are the higher value clicks in, say, the US and UK growing slower than maybe some of the lower value clicks internationally? Could that be a long-term CPC pressure, or are paid clicks growing pretty even across your entire system? Thank you.
This is Jonathan. Just back to the clicks across the system, I think the growth is more seasonality in mix. One of the things that we see is that Brazil and China, for example, are pretty significant and probably have disproportionately more clicks. So I think we're seeing a mix of clicks from the high CPC Western European countries and US, seeing less relative to some of the growing markets. So that overall is having downward pressure on CPC. I think the bids tended to decline more earlier this year and are declining -- are no longer declining now as a general rule across the board.
Thank you. So you have mentioned that -- have been impacted because of the increase in query volumes in Brazil and China. If you were to think about it macro conditions were to improve and higher CPC geographies, do you think the momentum could be big enough for all the declining CPCs of Brazil and China or declining CPCs we should start to expect as a secular trend going on -- market higher and more developed countries? I think it is the puzzle the right way which is international mix has a real effect on our CPC and it has it in two days, which country it comes from whether it be Germany versus India, the growth rates between these different countries, and then obviously there's all the currency issue, FX issues that play into it as well. So I mean the, what we talked about, you know, it was down year-over-year, and up quarter-over-quarter as a good illustration of what the combination of all of these things do and you have seasonality on top of it. So this, these are the pieces at work. Jonathan if you have color. Well, I mean international growth will be a significant component in terms of what the blended average CPC will move toward. You know, we certainly expect growth in those developed markets as the economy rebounds, but the relative difference between the Montyization and the US, Canada, Australia, western European countries is quite significant relative to some of the more markets. So as you add incremental clicks from those developing markets that's going to continue, that brings the blended average, everything else being constant down.
The one thing I think we can say for sure, queries are less sensitive to the economy. There's more comparison shopping when the economy not strong, and potentially a little bit less buying. So you could still have high paid, clicks can be high even when the economy is bad and I think the CPCs would adjust if the users aren't converting if that's consistent with the hypothesis that you are trying to articulate.”
Comments on taxes:
“And one final question, in terms of tax, tax issue reveals in 2009,. I can tell you that at the end of the second quarter, 20% was good because that's where, I can't give you any forward, and again I think that the comment I made on the call was an important one; right. There are really two sets of kind of big dynamics in our tax rates. Obviously it is remember, you know, all of the mix between our international versus US mix of revenues as a big component that will actually swing the tax rate and second there's how the hedging programs rolls out and depending on the types of gains that we may have on hedging and the way that this flows through also has a significant impact on our tax rate. So for if you remember in Q4 for example where we had very large gains on FX, it drew a lot of tax implications. So it is just these are the two big ticket items that you have to consider through modeling.
Finally on the tax rate, my understanding and previously has always been the tax rate in the quarter what you exapproximate peck was your best guess for the year and we should all think about that as your best guess for the year; is that correct?
Thanks for taking the questions. Two questions I think pretty straightforward. First one on cash flow, your net income was higher Q to Q but your free cash flow was lower so can you clarify what's going on working capital and also income taxes, and then secondly, on, came? Somewhat higher than we expected. So I am curious how much you are benefiting at this point from the dell deal coming off? Are you still paying residuals there? And are we likely to see sort of greater benefits from that going forward? Thanks.
So on the cash flow, I will give you the most simple answer which is in Q2 you have two tax payments and they occur for the federal and the California state and they occur April 15th and I think June 15th. So just those, those, you know are not in Q1 and then you get a big hit in Q2. It is a big amount of money like hundreds and hundreds of million. Like 800 million or 900 million in that range. So it is like a ton of money. That will impact free cash, obviously impact by far out weight everything else on the free cash flow calculations. Everything else actually is in pretty good shape. On the tax side, I think, you know, there's again if you look at our tack and how it has been progressing as I said on the call prior on, on the previous call, you just got moving pieces but you wouldn't have kind of, there's no significant event that would have actually moved it in one way or another. You just have they if he can between the Google and the nongoogle and then you have the at the effects between the smaller and larger guys. And then that moves all of the time and that's what you see in the reflection. Obviously, you know, so what we have seen is higher percentage of the smaller partners, and slightly higher on the Google and that's what you end up with.”
Comments on Hedging:
“No. So, it -- again FX is a complicated matter; right for two reasons. One is we started building our FX program last year roughly at this time, and at that time, we had nothing for the GDP for example; right. We actually only started setting up GDP hedges at the end of the second quarter, actually at the end of the third quarter so kind of September-October time frame. So if you think of the ladder of hedges we have started building last year, right, they come at different times and then therefore they impact through this year in different magnitudes. So be careful of using like this quarter and the numbers you see as what should be the steady state for a certain set of exposures. Second is where the currency was last year depending on where we were, you know, Q1, Q2, Q3 on a delta year-over-year basis gets very different sets of numbers. You have so think of the puzzle in terms of those two factors and fortunately right, you don't have all of this information to build. But that's how the mechanics really work from our FX desk. So that's why you end up with this quarter, the delta between -- today for Q2 versus the Q2 of last year give you this kind of sense of magnitudes. So that's the simplest way I can explain it.”
Read More!
Highlights from the quarter:
Capex was 3% of sales, the lowest in any quarter since becoming a public company
Headcount declined by 378, the first time headcount has decline sequentially. That was due to the cuts in the marketing department
Paid clicks up 15% y/y, down from 17% in 1Q09 but healthy nonetheless
Cost per click pricing down 13% y/y but up 5% y/y. FX was the main reasons for both movements
Ended the quarter with $19nm in cash. What does management plan to do with the cash?
Free cash flow was $1.47bn; The model could produce $7bn in free cash flow in 2009
Revenue growth ex-FX was 12% YoY and ex-FX and hegding was 10% YoY, down from 14% YoY and 12% YoY in 1Q09, respectively
U.K. revenues declined 7.6% YoY
Google’s CEO on the business stabilizing:
“On the stabilizing question, we a quarter ago, we had no idea where the bottom was. We started off the year and all of a sudden our metrics were off and it became clear that starting roughly Christmas, people were spending more time searching and when they purchased products, they were purchasing products of less value. Furthermore, when they did so, they -- the whole process just took more time. It appears as though, although the RPM's have not fully recovered, the other aspects of behavior have in fact come back. And with the notable exception of the financial vertical, the other verticals in particular, shopping and travel, which had been significantly effected, appear to be recovering. So the sum of those tells us to say the word 'stabilizing. ' We're not at the moment looking at that downward spiral that we thought we might see six months ago.”
Comments on mobile:
“Mobile monetization picked up a good bit of momentum as search traffic grew, again, driven mostly by the smart phones. And we're seeing that users on these high end phones are very active and engaged beyond search, so display advertising on those phones is actually emerging as an interesting mechanism.
On the mobile search side, one of the key things we've done in the last few months, is we've started to show the desktop ads. Turns out that the separate mobile ads have their own formats. Typically it wasn't enough demand, there weren't enough kind of creatives and so forth. So we started showing the desktop ads on the mobile browsers of high quality and these, of course, include the iPhone and the Android phone and anything that's a web kit inspired browser. All of a sudden we started seeing a tremendous number of searches and also very good click-through rates. So they monetize it at a similar level if they are desk-top-based -- it makes sense over time that those ads should perform better than on PCs because on a mobile device we know more about the person and we can have an even more targeted ad, but we don't do that today.”
Comments on display:
“think the way to think about display for us is actually in multi tall strands. One is clearly on the YouTube side, which you just talked about in -- beginning to see some good trajectory in. I think to couple that, the secondary of focus for us is the Google content network, where we Genessee that the revenues are going well and that's performing well. There has been sort of an aversion to more performance-based display advertising in the last quarter because most of the advertisers have started going back to focusing on CPC and clicks. Where we're bringing sort of the metrics to search to display effectively and we're seeing a shift away back to -- on the content network because display inventory continues to rise and people are beginning to want metrics to measure that. On the third, as you have the double click invasion, we've made tremendous progress on the -- double click changed with ad words and AdSense, and we're seeing traction where -- all want to work with an exchange that allows us to expose inventory across the board to various -- both parties in the transaction. So I think Eric's right that that is the next area where the online advertising is going to shift and we're going to see tremendous growth in the display space and we're exited about all three areas individually.”
Comments on CPCs:
“Thank you. My question's on paid clicks and CPCs. First, on CPCs, it looks like if we back out currency at 44 million, they were up 4% quarter over quarter. Is there any kind of sign of stabilization in that number, or is that due to mix and seasonality? And the second thing is paid clicks, 15% growth. Could you talk a little bit about the mix? Are the higher value clicks in, say, the US and UK growing slower than maybe some of the lower value clicks internationally? Could that be a long-term CPC pressure, or are paid clicks growing pretty even across your entire system? Thank you.
This is Jonathan. Just back to the clicks across the system, I think the growth is more seasonality in mix. One of the things that we see is that Brazil and China, for example, are pretty significant and probably have disproportionately more clicks. So I think we're seeing a mix of clicks from the high CPC Western European countries and US, seeing less relative to some of the growing markets. So that overall is having downward pressure on CPC. I think the bids tended to decline more earlier this year and are declining -- are no longer declining now as a general rule across the board.
Thank you. So you have mentioned that -- have been impacted because of the increase in query volumes in Brazil and China. If you were to think about it macro conditions were to improve and higher CPC geographies, do you think the momentum could be big enough for all the declining CPCs of Brazil and China or declining CPCs we should start to expect as a secular trend going on -- market higher and more developed countries? I think it is the puzzle the right way which is international mix has a real effect on our CPC and it has it in two days, which country it comes from whether it be Germany versus India, the growth rates between these different countries, and then obviously there's all the currency issue, FX issues that play into it as well. So I mean the, what we talked about, you know, it was down year-over-year, and up quarter-over-quarter as a good illustration of what the combination of all of these things do and you have seasonality on top of it. So this, these are the pieces at work. Jonathan if you have color. Well, I mean international growth will be a significant component in terms of what the blended average CPC will move toward. You know, we certainly expect growth in those developed markets as the economy rebounds, but the relative difference between the Montyization and the US, Canada, Australia, western European countries is quite significant relative to some of the more markets. So as you add incremental clicks from those developing markets that's going to continue, that brings the blended average, everything else being constant down.
The one thing I think we can say for sure, queries are less sensitive to the economy. There's more comparison shopping when the economy not strong, and potentially a little bit less buying. So you could still have high paid, clicks can be high even when the economy is bad and I think the CPCs would adjust if the users aren't converting if that's consistent with the hypothesis that you are trying to articulate.”
Comments on taxes:
“And one final question, in terms of tax, tax issue reveals in 2009,. I can tell you that at the end of the second quarter, 20% was good because that's where, I can't give you any forward, and again I think that the comment I made on the call was an important one; right. There are really two sets of kind of big dynamics in our tax rates. Obviously it is remember, you know, all of the mix between our international versus US mix of revenues as a big component that will actually swing the tax rate and second there's how the hedging programs rolls out and depending on the types of gains that we may have on hedging and the way that this flows through also has a significant impact on our tax rate. So for if you remember in Q4 for example where we had very large gains on FX, it drew a lot of tax implications. So it is just these are the two big ticket items that you have to consider through modeling.
Finally on the tax rate, my understanding and previously has always been the tax rate in the quarter what you exapproximate peck was your best guess for the year and we should all think about that as your best guess for the year; is that correct?
Thanks for taking the questions. Two questions I think pretty straightforward. First one on cash flow, your net income was higher Q to Q but your free cash flow was lower so can you clarify what's going on working capital and also income taxes, and then secondly, on, came? Somewhat higher than we expected. So I am curious how much you are benefiting at this point from the dell deal coming off? Are you still paying residuals there? And are we likely to see sort of greater benefits from that going forward? Thanks.
So on the cash flow, I will give you the most simple answer which is in Q2 you have two tax payments and they occur for the federal and the California state and they occur April 15th and I think June 15th. So just those, those, you know are not in Q1 and then you get a big hit in Q2. It is a big amount of money like hundreds and hundreds of million. Like 800 million or 900 million in that range. So it is like a ton of money. That will impact free cash, obviously impact by far out weight everything else on the free cash flow calculations. Everything else actually is in pretty good shape. On the tax side, I think, you know, there's again if you look at our tack and how it has been progressing as I said on the call prior on, on the previous call, you just got moving pieces but you wouldn't have kind of, there's no significant event that would have actually moved it in one way or another. You just have they if he can between the Google and the nongoogle and then you have the at the effects between the smaller and larger guys. And then that moves all of the time and that's what you see in the reflection. Obviously, you know, so what we have seen is higher percentage of the smaller partners, and slightly higher on the Google and that's what you end up with.”
Comments on Hedging:
“No. So, it -- again FX is a complicated matter; right for two reasons. One is we started building our FX program last year roughly at this time, and at that time, we had nothing for the GDP for example; right. We actually only started setting up GDP hedges at the end of the second quarter, actually at the end of the third quarter so kind of September-October time frame. So if you think of the ladder of hedges we have started building last year, right, they come at different times and then therefore they impact through this year in different magnitudes. So be careful of using like this quarter and the numbers you see as what should be the steady state for a certain set of exposures. Second is where the currency was last year depending on where we were, you know, Q1, Q2, Q3 on a delta year-over-year basis gets very different sets of numbers. You have so think of the puzzle in terms of those two factors and fortunately right, you don't have all of this information to build. But that's how the mechanics really work from our FX desk. So that's why you end up with this quarter, the delta between -- today for Q2 versus the Q2 of last year give you this kind of sense of magnitudes. So that's the simplest way I can explain it.”
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Google - YouTube is not profitable today but will be in the not to distant future
Google attempted to put to bed the speculation from a Credit Suisse analyst that YouTube was massively unprofitable. Management essentially admitted that YouTube is unprofitable but stated that the revenue growth and monetization of videos are growing significantly and that those revenues will be profitable soon.
Here are quotes about YouTube from the two conference calls on:
"So on the first one, we don't give the economics of YouTube. What I can tell you is that we're really pleased with the trajectory of YouTube. We're really pleased both in terms of its revenue growth, which is really material to YouTube and, you know, in the not long, too long distance future, we actually see a very profitable and good business for us. So from that perspective, we're really pleased with the trajectory. On the second one, I'll let Eric answer."
"On YouTube, monetized views have more than tripled in the past year. We're now monetizing billions of views of partner videos every month and we're actively promoting featured partner videos on all the home -- on the home, watch and search pages. "
"We do look carefully at the drop-off rate with the preroll and there's very little drop-off, so we're generally pretty optimistic there. The pre-rolls have -- if you look on the web, if you look at premium content, users are accepting that when they are going to watch premium content, they are going to have to see it's supported either by some form of advertising funding or perhaps they are going to have to pay for it at some point in time. It is becoming accepted user behavior that if they are going -- creating it, they are going to watch pre-roll. There seems to be a general acceptance around this area."
"I think, Jonathan, just to add to what you said, yes, we are beginning to see that YouTube has established in the advertiser space now that the YouTube home page is of relevance and is desirable for customers. So we are seeing significant sell-through in most of our major markets where we have YouTube home page for sale. In addition, we are beginning to see lots of interest in -- advertising, which is what customers want on the short clips that we are beginning to acquire from our major partners like Disney and the deal we did recently with -- I think the next phase of YouTube is going to be towards -- long-form video, which are in the process of doing various deals which you have announced in the past. "
"Yeah, YouTube trajectory has effective been about an ability to scale. We've introduced ad formats. We've gotten into the selling process, selling cycle of agencies and advertisers and we've been able to go out and sort of create our sales force to go and make these sell-throughs happen. The reason we're excited about it is we finally got all the pieces in place. The agencies getting into the selling process and the buying process and getting our teams ready. Secondly on YouTube, we're also getting excited about the -- beginning to bring more content. The promoted videos idea, where we can promote partner content up front so we can shift more and more user views towards more premium content allows us to create more inventory, couple that with the fact our teams are now out there selling advertising -- various advertisers that creates the scale and the breadth that we need to drive this forward."
"I think that the, it is true that we are pleased with YouTubes trajectory. And in part the reason why we are communicating to the street is there has been so much press over the last quarter with all of these documentations of massive costs and no business models and all of the negative press that we have read a lot about. And we just wanted to kind of reafirm to the street this was, this is a very credible business model and one that has got trajectory. In that sense it is just to tell everybody we are on progress on the plan we had made for it. I will turn to Jonathan on the monetization pieces. Sure, ben. They watch videos and engage with the community with comment recommendations and that sort of thing. The different types of modes really get different advertising models and that's part of why I think it has taken us time to trian late toward what works and I think some of the thing that is we have now are still in pretty basic stages. If you look at the home page, it is basically big brand display ads. Search can with good for promoting videos. Maybe what app does for google. If you look at where the big inventory is, the massive users are in more the watch pages. So that is where we are sort of trying to figure out is it overlays that are going to work, in-stream stuff, I think we are still asking all of these thing that is the answer is going to be different for the different areas on the site that the user is on. "
Read More!
Here are quotes about YouTube from the two conference calls on:
"So on the first one, we don't give the economics of YouTube. What I can tell you is that we're really pleased with the trajectory of YouTube. We're really pleased both in terms of its revenue growth, which is really material to YouTube and, you know, in the not long, too long distance future, we actually see a very profitable and good business for us. So from that perspective, we're really pleased with the trajectory. On the second one, I'll let Eric answer."
"On YouTube, monetized views have more than tripled in the past year. We're now monetizing billions of views of partner videos every month and we're actively promoting featured partner videos on all the home -- on the home, watch and search pages. "
"We do look carefully at the drop-off rate with the preroll and there's very little drop-off, so we're generally pretty optimistic there. The pre-rolls have -- if you look on the web, if you look at premium content, users are accepting that when they are going to watch premium content, they are going to have to see it's supported either by some form of advertising funding or perhaps they are going to have to pay for it at some point in time. It is becoming accepted user behavior that if they are going -- creating it, they are going to watch pre-roll. There seems to be a general acceptance around this area."
"I think, Jonathan, just to add to what you said, yes, we are beginning to see that YouTube has established in the advertiser space now that the YouTube home page is of relevance and is desirable for customers. So we are seeing significant sell-through in most of our major markets where we have YouTube home page for sale. In addition, we are beginning to see lots of interest in -- advertising, which is what customers want on the short clips that we are beginning to acquire from our major partners like Disney and the deal we did recently with -- I think the next phase of YouTube is going to be towards -- long-form video, which are in the process of doing various deals which you have announced in the past. "
"Yeah, YouTube trajectory has effective been about an ability to scale. We've introduced ad formats. We've gotten into the selling process, selling cycle of agencies and advertisers and we've been able to go out and sort of create our sales force to go and make these sell-throughs happen. The reason we're excited about it is we finally got all the pieces in place. The agencies getting into the selling process and the buying process and getting our teams ready. Secondly on YouTube, we're also getting excited about the -- beginning to bring more content. The promoted videos idea, where we can promote partner content up front so we can shift more and more user views towards more premium content allows us to create more inventory, couple that with the fact our teams are now out there selling advertising -- various advertisers that creates the scale and the breadth that we need to drive this forward."
"I think that the, it is true that we are pleased with YouTubes trajectory. And in part the reason why we are communicating to the street is there has been so much press over the last quarter with all of these documentations of massive costs and no business models and all of the negative press that we have read a lot about. And we just wanted to kind of reafirm to the street this was, this is a very credible business model and one that has got trajectory. In that sense it is just to tell everybody we are on progress on the plan we had made for it. I will turn to Jonathan on the monetization pieces. Sure, ben. They watch videos and engage with the community with comment recommendations and that sort of thing. The different types of modes really get different advertising models and that's part of why I think it has taken us time to trian late toward what works and I think some of the thing that is we have now are still in pretty basic stages. If you look at the home page, it is basically big brand display ads. Search can with good for promoting videos. Maybe what app does for google. If you look at where the big inventory is, the massive users are in more the watch pages. So that is where we are sort of trying to figure out is it overlays that are going to work, in-stream stuff, I think we are still asking all of these thing that is the answer is going to be different for the different areas on the site that the user is on. "
Read More!
Sunday, July 12, 2009
On Deck this Week
Tuesday, June 14 - Goldman Sachs reports results; June retail numbers; Bradley cycle date
Wednesday, June 15 - CPI; Fed June minutes;
Thursday, June 16 - MFR initial unemployment claims of 530K; JPMorgan, Google, Schwab reports results
Friday, June 17 - June housing stats; GE & Citigroup reports results; Read More!
Wednesday, June 15 - CPI; Fed June minutes;
Thursday, June 16 - MFR initial unemployment claims of 530K; JPMorgan, Google, Schwab reports results
Friday, June 17 - June housing stats; GE & Citigroup reports results; Read More!
Google Second Quarter Earnings Preview - "Stabalization is the new up"
Google will report second quarter earnings on Thursday July 16th, 2009 after the market closes. Consensus Wall Street estimates has Google delivering $4.031 billion in revenues in 2Q09, up 3.5% YoY but down 1% QoQ, $2.48 billion in EBITDA (61.7% margin), and $5.03 in Adjusted EPS.
Some new observations since I wrote $30 EPS Possible in 2010.
1. Whisper numbers are for a 1% sequential net revenue increase and a $5.05 Adjusted EPS. In other words, these are the numbers Google has to beat for the stock price to rally.
2. CEO Eric Schmidt said recently on CNBC that the worse of the economic recession is over, so could be that he is seeing greenshoots reflected in Google's numbers this quarter.
3. The dollar continued to fall relative to the Euro and the pound.
4. Search engine marketers have issued less dire scenarios about CPC pricing, ad budget constraints, and search ROIs. I am taking that to mean not that the environment has matertially improved, but that it hasn't gotten worse. "Stabalization is the new up".
My expectations are unchanged from before:
My model has Google reporting $3.993 billion in revenues (+3% YoY, -2% QoQ), $2.485 billion in EBITDA (62.2% margin), and $4.99 in Adjusted EPS. My revenue numbers are based on 15% YoY growth in paid leads and a 13% YoY decline in CPCs, with modest support from YouTube, CPM based revenues, and Licensing/Other revenues. The model assumes a less negative $375 million YoY FX impact and that Google is able to hedge $135 million of that figure for a net $241 million negative FX impact. The wildcard is the actual cost of the hedge, which shows up below operating income, and is difficult to predict. Another is the bonus accrual which is also difficult to predict. Both could lead to variability in the EPS report. Excluding those items, I believe Google’s new found cost disciple under the new CFO Patrick Pichette, should lead to significant margin improvement that is likely to start showing up this quarter. Supporting my thinking is a reduction in the growth rate of employee expenses due to the slowed hiring rate, less depreciation and less operating costs due to lower capex spending, removal of FX headwinds if the dollar goes into a tailspin due to the heavy stimulus spending and tempering of the discretionary costs in the model.
The shares are currently trading at 20x 2009 EPS compared to Yahoo!, which is trading at 40x 09, Amazon at 50x 09, eBay at 12x 09, and IAC at 40x 09. Thus relative to peers, the shares are attractive. I have Google generating $24.13 in Adjusted EPS in 2010 based off 10% growth in paid leads and 1.5% growth in CPC. If the economy recovers in 2010 and the non-FX component of the CPC declines experienced over the past quarters proves cyclical rather than secular, then my CPC estimate will increase and my EPS estimate will likely shoot past $25. If I use Google’s current trading multiple and apply it to the 2010 EPS estimate, then I am looking at a stock worth $500 for another 20% upside. My DCF values the shares at $508 based on a WACC of 9.5% and a 3% terminal growth rate (16x terminal multiple). If the margin benefits discussed above are realized then it is not unrealistic to see a $30 Adj. EPS number in 2010, which would imply a $600 share price. Read More!
Some new observations since I wrote $30 EPS Possible in 2010.
1. Whisper numbers are for a 1% sequential net revenue increase and a $5.05 Adjusted EPS. In other words, these are the numbers Google has to beat for the stock price to rally.
2. CEO Eric Schmidt said recently on CNBC that the worse of the economic recession is over, so could be that he is seeing greenshoots reflected in Google's numbers this quarter.
3. The dollar continued to fall relative to the Euro and the pound.
4. Search engine marketers have issued less dire scenarios about CPC pricing, ad budget constraints, and search ROIs. I am taking that to mean not that the environment has matertially improved, but that it hasn't gotten worse. "Stabalization is the new up".
My expectations are unchanged from before:
My model has Google reporting $3.993 billion in revenues (+3% YoY, -2% QoQ), $2.485 billion in EBITDA (62.2% margin), and $4.99 in Adjusted EPS. My revenue numbers are based on 15% YoY growth in paid leads and a 13% YoY decline in CPCs, with modest support from YouTube, CPM based revenues, and Licensing/Other revenues. The model assumes a less negative $375 million YoY FX impact and that Google is able to hedge $135 million of that figure for a net $241 million negative FX impact. The wildcard is the actual cost of the hedge, which shows up below operating income, and is difficult to predict. Another is the bonus accrual which is also difficult to predict. Both could lead to variability in the EPS report. Excluding those items, I believe Google’s new found cost disciple under the new CFO Patrick Pichette, should lead to significant margin improvement that is likely to start showing up this quarter. Supporting my thinking is a reduction in the growth rate of employee expenses due to the slowed hiring rate, less depreciation and less operating costs due to lower capex spending, removal of FX headwinds if the dollar goes into a tailspin due to the heavy stimulus spending and tempering of the discretionary costs in the model.
The shares are currently trading at 20x 2009 EPS compared to Yahoo!, which is trading at 40x 09, Amazon at 50x 09, eBay at 12x 09, and IAC at 40x 09. Thus relative to peers, the shares are attractive. I have Google generating $24.13 in Adjusted EPS in 2010 based off 10% growth in paid leads and 1.5% growth in CPC. If the economy recovers in 2010 and the non-FX component of the CPC declines experienced over the past quarters proves cyclical rather than secular, then my CPC estimate will increase and my EPS estimate will likely shoot past $25. If I use Google’s current trading multiple and apply it to the 2010 EPS estimate, then I am looking at a stock worth $500 for another 20% upside. My DCF values the shares at $508 based on a WACC of 9.5% and a 3% terminal growth rate (16x terminal multiple). If the margin benefits discussed above are realized then it is not unrealistic to see a $30 Adj. EPS number in 2010, which would imply a $600 share price. Read More!
Experts Give Bing an Ok to Slightly Positive Marks
Susquehanna Financial Group analyst Marianne Wolk had a great report on Bing, in which she summarized the opinions of several industry pundits on Microsoft's Bing search engine.
It looks like most are generally positive on Bing, and that should be of concern to Google's management. I have long thought Microsoft had a fighting chance at search. See my earlier write up, Closing the 3% to 65% Gap.
If anything, the point is that with will, determination, intellect, and access to tons of cash, anything is possible.
Here are a summary of the opinions:
1. Eric Schmidt, Google CEO, said “They [Microsoft] do this about once a year . . . I don’t think Bing’s arrival has changed what we’re doing. We are about search, we’re about making things enormously successful, by virtue of innovation.” The New York Post had a different take, as its sources indicated that the two founders are more worried about Bing than previous Microsoft search updates.
2. Carol Bartz seemed unconcerned about the early data from StatCounter, which pointed to Yahoo! share losses in Bing’s first two weeks: she was quoted as saying “One day does not a trend make.” Yahoo! has been expected to make major upgrades to its homepage (incorporating
personalization, social networking, reducing multiple code bases), and may enhance the search functionality for a more integrated user experience.
3. Danny Sullivan (Search Engine Land) is skeptical that Bing will change search behavior, but explains the most significant change as the organization of search results into categories (visible in a left-hand pane), which he says has not caught on with users historically (in other versions of Microsoft’s and other search engines).
4. Charlene Li (formerly with Forrester) said “Microsoft Bing’s focus on decisions is smart – but not a Google killer.” She applauded Microsoft’s focused strategy on four categories – shopping, travel, local, and health – that garner significant ad dollars.
5. John Battelle said the “Left nav bar is a big change . . . this is an important new approach. I like this – the idea of seeing search as a core dataset upon which a more sophisticated navigation interface is overlaid.”
6. Efficient Frontier (a leading US SEM) commented on new features of Bing that may add to relevancy (drill-down categories on the top left of the results page, etc.), and the company said “If Bing’s click share gains hold, we expect advertisers to allocate additional budget to Microsoft.”
7. Kevin Lee of Did-It comments that “Because Microsoft wants more commercial searches, it’s actually put far more development effort into some of the more important industry segments where results could be improved,” including travel, local search, movies, and popular products in shopping.
8. All Things D’s writers said, “This search engine really did retrieve on-target, useful information on the first try. But what I like best about it is that it does so in a user-friendly manner that looks and feels more inviting than Google.”
9. “It is too early to say what the long-term result will be, but this is a creditable performance by Bing,” commented Aodhan Cullen, CEO StatCounter. “It remains to be seen what happens to Bing after user curiosity and the reported $100 mln advertising budget runs out.”
10. On TechCrunch, writers were mostly positive on Bing, writing that Bing is better than expected, but is unlikely to change user habits significantly; MG Seigler said, “When it comes to search trends, Google is lagging behind Bing,”, while Michael Arrington said, “I like it. And I’d consider using it as my search engine.”
11. On GigaOM, they said “Bing’s ‘decision engine’ does provide better search results than Google when it comes to its ability to help searchers narrow down what they are actually looking for.”
12. Dolores Labs (crowd sourcing site) found that Mechanical Turk users of Google and Bing preferred Google results to Bing’s on 55% of the queries, although the same users preferred Bing results to older Live search results 55% of the time.
13. A small study of 12 users by Catalyst Group (a usability research and design firm) showed that users rate Bing’s design, organization, filtering, and relevance functionality higher than Google’s, although indicating that they would not switch to Bing, mostly because of the familiarity associated with Google. Catalyst Group also did an eye-tracking study on these participants that showed they spent >150% more time looking at Bing ads compared to Google ads during the search process.
Read More!
It looks like most are generally positive on Bing, and that should be of concern to Google's management. I have long thought Microsoft had a fighting chance at search. See my earlier write up, Closing the 3% to 65% Gap.
If anything, the point is that with will, determination, intellect, and access to tons of cash, anything is possible.
Here are a summary of the opinions:
1. Eric Schmidt, Google CEO, said “They [Microsoft] do this about once a year . . . I don’t think Bing’s arrival has changed what we’re doing. We are about search, we’re about making things enormously successful, by virtue of innovation.” The New York Post had a different take, as its sources indicated that the two founders are more worried about Bing than previous Microsoft search updates.
2. Carol Bartz seemed unconcerned about the early data from StatCounter, which pointed to Yahoo! share losses in Bing’s first two weeks: she was quoted as saying “One day does not a trend make.” Yahoo! has been expected to make major upgrades to its homepage (incorporating
personalization, social networking, reducing multiple code bases), and may enhance the search functionality for a more integrated user experience.
3. Danny Sullivan (Search Engine Land) is skeptical that Bing will change search behavior, but explains the most significant change as the organization of search results into categories (visible in a left-hand pane), which he says has not caught on with users historically (in other versions of Microsoft’s and other search engines).
4. Charlene Li (formerly with Forrester) said “Microsoft Bing’s focus on decisions is smart – but not a Google killer.” She applauded Microsoft’s focused strategy on four categories – shopping, travel, local, and health – that garner significant ad dollars.
5. John Battelle said the “Left nav bar is a big change . . . this is an important new approach. I like this – the idea of seeing search as a core dataset upon which a more sophisticated navigation interface is overlaid.”
6. Efficient Frontier (a leading US SEM) commented on new features of Bing that may add to relevancy (drill-down categories on the top left of the results page, etc.), and the company said “If Bing’s click share gains hold, we expect advertisers to allocate additional budget to Microsoft.”
7. Kevin Lee of Did-It comments that “Because Microsoft wants more commercial searches, it’s actually put far more development effort into some of the more important industry segments where results could be improved,” including travel, local search, movies, and popular products in shopping.
8. All Things D’s writers said, “This search engine really did retrieve on-target, useful information on the first try. But what I like best about it is that it does so in a user-friendly manner that looks and feels more inviting than Google.”
9. “It is too early to say what the long-term result will be, but this is a creditable performance by Bing,” commented Aodhan Cullen, CEO StatCounter. “It remains to be seen what happens to Bing after user curiosity and the reported $100 mln advertising budget runs out.”
10. On TechCrunch, writers were mostly positive on Bing, writing that Bing is better than expected, but is unlikely to change user habits significantly; MG Seigler said, “When it comes to search trends, Google is lagging behind Bing,”, while Michael Arrington said, “I like it. And I’d consider using it as my search engine.”
11. On GigaOM, they said “Bing’s ‘decision engine’ does provide better search results than Google when it comes to its ability to help searchers narrow down what they are actually looking for.”
12. Dolores Labs (crowd sourcing site) found that Mechanical Turk users of Google and Bing preferred Google results to Bing’s on 55% of the queries, although the same users preferred Bing results to older Live search results 55% of the time.
13. A small study of 12 users by Catalyst Group (a usability research and design firm) showed that users rate Bing’s design, organization, filtering, and relevance functionality higher than Google’s, although indicating that they would not switch to Bing, mostly because of the familiarity associated with Google. Catalyst Group also did an eye-tracking study on these participants that showed they spent >150% more time looking at Bing ads compared to Google ads during the search process.
Read More!
FaceBook Domestic Ad Growth Rate Decelerating Sharply
eMarketer is reporting that advertising on social networks will taper off this year. This is an additional negative for MySpace, which is currently struggling, but a new negative for the much loved FaceBook, which I opined in a recent write-up CashBurn Book, is hemorrhaging cash. The report states that advertising on social networks will decline 3% to $1.1 billion in the U.S. versus the prior prediction made in December 2008 of a 10% increase to $1.3 billion.
The report further states that MySpace's U.S. advertising business will decline 15% year-over-year in 2009 to $495 million, representing half of the social networking dollars, down from 51% in 2008.
Conversely, FaceBook will see its domestic advertising business increase 9% year-over-year to $230 million, and will shoot past MySpace in total dollars by 2011. Its domestic share of social networking ad dollars will increase to 21% in 2009 from 19% in 2008. However, the 9% growth is a 41 point deceleration from the 50% growth in domestic ad dollars in 2007, where sales grew 50% to $210 million.
So while there is positive conjecture about the health of FaceBook's business since one director stated that they are on track to generate $500 million in total revenues in 2009, market experts are calling for a significant slow down in the growth rate of FaceBook's domestic ad business.
To be fair, any ad growth above 0% in 2009 is a positive for any ad company who can deliver that. But given all the hype about FaceBook, they should be doing much better, particularly if they want to stop bleeding cash and have a decent chance at an IPO next year.
As an aside: I thought the SEC forces companies with more than 500 shareholders to file public documents. I could be wrong but FaceBook does have over 500 employees and I am sure all have shares. Just a thought. Read More!
The report further states that MySpace's U.S. advertising business will decline 15% year-over-year in 2009 to $495 million, representing half of the social networking dollars, down from 51% in 2008.
Conversely, FaceBook will see its domestic advertising business increase 9% year-over-year to $230 million, and will shoot past MySpace in total dollars by 2011. Its domestic share of social networking ad dollars will increase to 21% in 2009 from 19% in 2008. However, the 9% growth is a 41 point deceleration from the 50% growth in domestic ad dollars in 2007, where sales grew 50% to $210 million.
So while there is positive conjecture about the health of FaceBook's business since one director stated that they are on track to generate $500 million in total revenues in 2009, market experts are calling for a significant slow down in the growth rate of FaceBook's domestic ad business.
To be fair, any ad growth above 0% in 2009 is a positive for any ad company who can deliver that. But given all the hype about FaceBook, they should be doing much better, particularly if they want to stop bleeding cash and have a decent chance at an IPO next year.
As an aside: I thought the SEC forces companies with more than 500 shareholders to file public documents. I could be wrong but FaceBook does have over 500 employees and I am sure all have shares. Just a thought. Read More!
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