Internet Outsider

Trust Me, You Don't Want To Miss This One (Fox Business News on Apple's AMD Deal)

My colleague at SAI, Michael Learmonth, reported this gem of a blooper on Fox Business News this morning:

At 9:27 this morning, Fox Business co-anchor Alexis Glick eagerly reported Apple (AAPL) had taken an 8% stake in AMD. Fox's guest contributor, Charles Payne, immediately analyzed the deal and pronounced it a brilliant move for both parties.

The problem? It wasn't Apple buying AMD.  It also, unfortunately, wasn't a mysterious pan-Arabian country called "Abu Dubai," as Glick announced when she corrected the Apple report. (It was Abu Dhabi.)

Marvelous transcript on SAI.

Microsoft Hallucinating? Or Planning to Buy Yahoo?

I'm going to go out on a limb here and assume that Microsoft division president Kevin Johnson is not a moron. So I'm also going to assume that, when Johnson said yesterday that Microsoft plans to grow its search share from 10% to 30% and its online ad share from 6%, he could not possibly be imagining that Microsoft could do this on its own.

So how could Microsoft actually achieve those goals?

Answer? (And there's only one). Buy Yahoo.

Buying Yahoo would give Microsoft 30% search share instantly. It would also boost Microsoft's ad share close to that 40% goal.

I continue to think that a Microsoft acquisition of Yahoo would be disastrous for Yahoo (not to mention creating an annoying one-time tax hit for us long-term Yahoo shareholders). But what such an acquisition would do to Yahoo is irrelevant. If Microsoft comes in with a Murdoch-like offer, Yahoo won't be able to refuse.
 
See Also:
Microsoft's MSN: Still Sucking Wind After All These Years
SAI's Microsoft Online Key Data Spreadsheet

Recession Watch: We're Probably Already in One

Over at Silicon Alley Insider, we've been tracking recession signs for the past few months.  Enough bad news is coming out now from enough industries now that I think it's reasonable to assume that we're already in a recession (Economists can't pinpoint recessions without the benefit of hindsight, and most recessions usually start while economists are still predicting that we won't have one).

Of course, whether we are technically in a recession or not is irrelevant--it's the trend that matters.  And the trend is still getting worse. We continue to believe that the growing weakness will eventually hit online advertising, hurting AOL, Yahoo, Google, and others.

For example, in the past 24 hours, here's what's happened:

• FedEx cuts outlook, blames higher prices and economic weakness.
• Starbucks has weak quarter, blames economy and price inflation.
• Internet Brands reduces size/price of IPO.
• New York Times reports weak October revenues, especially in retail advertising...

Full recession timeline and background here.

Okay, I'm Back. Thanks for the Patience.

Silicon Alley Insider is up and running, with several of us now posting full time (Peter Kafka and Dan Frommer from Forbes and Michael Learmonth from Variety). We'll be launching another site soon, so time will continue to be in short supply. But enough of you have sent kind notes asking that I get Internet Outsider going again that I'm going to make it a priority.

For now, most of what you'll find here will probably also be available elsewhere: Silicon Alley Insider, Huffington Post, and other sites.  I'll be the only writer here, though, and in contrast to SAI et al, everything will be in the first person.

Thanks again for the patience.  It's great to be back.

Play the Google Earnings Sweepstakes!

Yes, it's late, but we're playing the game again this quarter--over at Silicon Alley Insider.  Step right up and place your bets (until 4pm today).  May the best analyst win!

Yahoo (YHOO): Q3 Stronger Than Expected

From Silicon Alley Insider: Yahoo Q3 Earnings Analysis
SAI Key Metrics Analysis (web-based spreadsheet)

KEY POINTS

Overall: Revenue is re-accelerating, and more importantly, search-monetization is improving (Revenue per Search increased 20%). Traffic growth was also solid (Earlier in the quarter, some Comscore data suggested that Yahoo's user-growth had peaked).  Margins declined, which is a concern, but costs are easier to control than revenue, and we expect management will focus on efficiency later in Q4 or in early 2008.  Bottom line: Company finally headed in right direction again.

Revenue ex-TAC at high end of guidance range. In light of display weakness through quarter and chaos at Yahoo, this is good news.  Overall revenue up 12% year over year, an acceleration from Q1 (7%) and Q2 (8%).

U.S. revenue growth accelerating, as a result of search monetization improvements and, surprisingly, display growth. The search news, especially, is very encouraging.  Search revenue on US "owned and operated" sites accelerated to better than 30% year over year, driven primarily by improved click-through rates (due to the new search algorithm).  Even display accelerated, with U.S. display up 20% (from low teens in Q2).  US revenue up 13% Y/Y vs. 5% in Q2.  On the negative side, International revenue decelerated to 9% from 15%.  This is puzzling, especially in light of favorable currency trends. Management blamed  the cleansing of crappy affiliates and says international search algorithm improvements should kick-in in Q4.

Owned and Operated sites (Yahoo sites) revenue continue to accelerate, which is also good news: Up 24% in Q3, vs. 18% in Q2 and 14% in Q1.  This segment contributes far more profit than the "Affiliates" so growth here important.  The Affliate network will contribute less than 10% of the company's revenue ex-TAC in Q4.

Guidance for Q4 essentially unchanged. Range has been reduced on both ends.  Given slight top-line out-performance this quarter, combined with the acquisitions of Blue Lithium and Right Media, the Q4 guidance seems light, which will trouble some people.  CFO Jorgenson also suggested some Q3 revenue gains were one-time (but then later reversed self and said "seasonal strength.")  We suspect the company issued intentionally conservative guidance.

Operating margin declined again (bad), especially in the U.S. U.S. op margin declined from 35% last year to 28% this year. Management is "not happy" about the margins, but blamed some of it on accelerated hiring in Q3.  It's time for some strategic cost cutting (read: layoffs). International operating margin rose a point Y/Y to 22%.

Free cash flow up modestly year over year (9%), but was goosed by decline in CAPEX to $150 million vs. about $250 million last year.  This growth is relatively weak, especially in light of the revenue growth.  On positive side, company is well-positioned for strong FCF growth in 2008.

Off-Balance Sheet assets (Alibaba, Yahoo Japan, Gmarket) valued at $9.2 billion end of quarter, or $6.50 a share. 

Conference call notes (uncorrected)...
Disclosure: I have a long-term position in Yahoo.

Where I've Gone...

Apologies for the light posting of late.  Have been spending most of my time on Silicon Alley Insider.  Should be back to more frequency here soon, but please feel free to check out SAI (www.alleyinsider.com).  Thanks.  Henry