Sell-Side Reaction to Yahoo Earnings -- Mark Mahaney (YHOO)

| About: Yahoo! Inc. (YHOO)

Mark Mahaney Smith Barney CitigroupCitigroup analyst Mark Mahaney on Yahoo's (YHOO) earnings Tuesday night, from his note to clients:

YHOO: A Positive In-Line Q and Well Set Up The Balance Of The Year

◦ YHOO posted an In-Line & In-Line quarter -- $1,088MM rev./$0.11 GAAP EPS vs. Street at $1,080MM/$0.11. YHOO reiterated 2006 guidance. A key revenue upside area was Search. Given the negative sentiment set-up -- the 11% intra-quarter stock dive & trough valuation -- these results were positive.

◦ Fundamentals were mixed. Y/Y organic rev growth essentially held at 36%, while EBITDA margin was down 200 bps Y/Y to 40% (as expected).

◦ No real change to our estimates -- '06 revenue and EBITDA essentially unchanged; '06 GAAP EPS goes from $0.54 to $0.50 due to increased tax rate.

◦ We would be Buyers At The Open. We are incrementally more positive -- due to the Search revenue upside & strong Display/Branded advertising growth. May 17th Analyst Day should be + catalyst & the Search Engine "Fix" remains key H2:06 catalyst. We view as reasonable a 18X '06 EV/EBITDA, 3.1% FCF yield, with 25-30% organic '06 & '07 cash flow growth.

Did YHOO's fundamentals improve? No. Organic Y/Y revenue growth was approximately 36% (35% after adjusting for deconsolidation in China and accounting for an approx. 1% negative impact from FX), in-line with the 36% Y/Y growth of the December quarter. Intrinsically, we would view this level as robust. On the margin side, EBITDA margins declined 200 bps Y/Y and 300 bps Q/Q to 40.0%. Y/Y incremental EBITDA margins were 34%. Yahoo! is in investment mode in H1, related in part to its search engine improvement focus. Successful execution here should bear nice leverage in 2007.

Were fundamentals better than the Street expected? No. Revenue of $1,088MM, EBITDA of $435MM, and recurring GAAP EPS of $0.11 were In-Line with Street expectations for $1,080MM, $434MM, and $0.11, respectively.

Did the company raise guidance relative to the Street? No. Going into the release, Street consensus for the June quarter was $1,141MM in revenue and $466MM in EBITDA, and the 3 midpoints of the company's new guidance are $1,120MM and $435MM, respectively. And going into the release, Street consensus for 2006 was $4,756MM in revenue and $1,972MM in EBITDA, and the midpoints of the company's unchanged guidance are $4,725MM and $1,985MM, respectively.


In the aftermarket, YHOO traded up more than 6%. On an In-Line quarter. Says a lot about how negative the sentiment was going into the quarter.