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Verizon Buys Yahoo for $5 Billion

Posted on Tuesday, Jul 26th 2016

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Yahoo (Nasdaq: YHOO) finally seems to have found a buyer for its core assets. After years of trying to recover lost ground, earlier this year, the company had decided to sell off its core assets. It has finally found a willing buyer in Verizon. Yesterday, Verizon agreed to buy Yahoo for $4.83 billion, making it probably the best news for Yahoo in a while.

Yahoo’s Financials

For the recently reported quarter, Yahoo earned revenues of $842 million against the market’s forecast of $836 million. EPS of $0.09 was shy of the Street’s forecast of $0.10 for the quarter.

By segment, Yahoo’s net search advertising revenues fell 13% to $319 million and net display advertising revenue dropped 3% to $396 million. Other revenues fell 41% to $126 million.

Among other metrics, Yahoo’s MAVEN (mobile, video, native, and social) revenue grew 26% over the year to $504 million, compared with a 7% growth reported last quarter. The number of paid clicks fell 24% compared to a 21% decline in the first quarter. Price-per-click rose 8% over the year.

As part of its cost restructuring initiative, Yahoo had announced its target of cutting 15% of its workforce by the end of this year. The goal has already been achieved and the company now has 8,800 employees, registering a 45% decline since 2012.

For the current quarter, Yahoo forecast revenues at $840 million-$880 million. It expects to end the year with revenues of $3.4 billion-$3.6 billion. The Street was looking for revenues of $853 million for the quarter and $3.51 billion for the year.

Yahoo Devalued Tumblr

Yahoo has failed to impress the markets with its performance across multiple fronts. In May 2013, it had acquired microblogging site Tumblr for an estimated $1.1 billion hoping to gain access to a user base of 300 million monthly visitors who post 50.9 billion microblog posts. Three years later, Yahoo has driven that business to the ground as well and has recorded two devaluations on the asset already. Over the past three years, Yahoo claims that signed-in user base has improved and there is an increased mobile app engagement. Yahoo has also added additional features including GIF maker and the ability to post live video posts. Last quarter, Yahoo introduced support for Live Video on Tumblr with YouNow, YouTube, Kanvas, and Upclose so that Tumblr can become a premier publishing and discovery platform to broadcast, watch, and share live videos. In terms of monetization, the company has added advertising focus.

But despite the efforts, Yahoo recorded a write-off of $85 million on account of Tumblr in the quarter. In 2015, Yahoo had written down Tumblr by $230 million. The write-off was on account of Tumblr’s decreasing operating profits and future cash flow projections. Analysts believe that in 2015, Tumblr had generated nearly $80 million in revenues and was probably worth $320 million. As of April this year, Tumblr had 291.7 million monthly visitors and a total of 136.9 billion posts.

Yahoo’s Failing Attempts

Meanwhile Yahoo continues to push through some last ditch efforts to save a dying company. During the quarter, Yahoo Mail was among the highest rated mail apps in both the App Store and Google Play due to some updates released for the iOS and Android versions. The updated app includes features such as the ability to unsend, better contact directory, and a document preview capability. Yahoo does not publish detailed statistics on its Mail users, but market reports suggest that the company has over 280 million global users of which nearly 81 million live in the US. Verizon is hoping to cash in on these users.

To improve advertising revenues, Yahoo announced new video programming along with opportunities for advertisers. It tied up with Moat, an advertising analytics platform, to improve the viewability measurement to include Yahoo Gemini native video ads. It also launched a new content marketing offering Yahoo Storytellers and a new mobile offering for advertisers called Yahoo Tiles.

Yahoo–Verizon Merger

For the past few months, Yahoo has invited bidders for its ailing business. The deal clubs together Yahoo’s search and advertising business along with its real estate assets. The non-core assets which includes Yahoo’s patents will be sold off separately. The bid invited players like AT&T, Quicken Loans, and private equity firms TPG and Vector Capital who were looking forward to increasing their presence in the digital segment. Yesterday it was announced that Verizon has finally won the deal at a $4.83 billion price tag. Yahoo’s CEO Marissa Mayer will move to Verizon after the acquisition.

Post the acquisition, Verizon will be able to expand its digital set of businesses alongside its AOL properties. Verizon has been building up its Internet and advertising business. Last summer, the company had acquired AOL and with Yahoo’s acquisition it is hoping to become a formidable competitor to the likes of Alphabet and Facebook, especially within the mobile advertising segment. The deal will bring to Verizon an advertising base of over 200 million more visitors. However, neither AOL nor Yahoo brings much by way of personalization that can effectively position Verizon to compete meaningfully in online advertising. Media properties without adequate monetization have no future. In that sense, Verizon is beating on a dead horse. Spending $5 billion to do so is a terrible strategy!

Yahoo’s stock is trading at 52-week high levels of $39.38 with a market capitalization of $37.37 billion. It had fallen to a 52-week low of $26.15 in February this year. Post the merger, the remaining assets of the company are expected to be moved to a new organization which will continue to retain its biggest asset – Yahoo’s stake in Alibaba and its stake in Yahoo! Japan. Analysts value Yahoo’s 15% stake in Alibaba at $32 billion and its stake in Yahoo Japan at $8 billion.

An early pioneer of the Internet, Yahoo! missed all key trends over the years: vertical search, personalization, web 3.0.

Photo Credit: Esther Vargas /Flickr.com

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