Yahoo’s business may be weaker than people realise.
Yahoo shareholder Eric Jackson believes Yahoo is only earning $US190 million in annual EBITDA, or earnings before interest, taxes, depreciation, and amortization. EBITDA serves a way to gauge the operating profitability of a business. Jackson arrived at that number after digging through the company’s SEC filings.
Analysts are expecting Yahoo to earn $US1.1 billion in EBITDA, but much of that will come from “temporary high-margin revenue” says Jackson. If you back out these one-time items and examine the core business, Jackson says the company is only doing $US190 million in EBITDA, which is roughly the size of AOL.
We’ll get to how he got his number in a second, but here’s why it matters to Jackson.
He believes the $US1.1 billion of EBITDA disguises the true state of Yahoo’s business. He thinks it’s not as healthy as people think. He thinks Yahoo needs to cut headcount. But, because people aren’t seeing the true state of the business, they don’t understand why he thinks Yahoo needs to trim staff.
Of course, I have long argued that Yahoo’s core business is obscenely over-staffed. Not just a little, but a lot. I agree with Marc Andreessen’s advice to Marissa Mayer back in 2012 that she should immediately let go of 10,000 people. Although Yahoo reports in their 10-K that they have 12,500 “full time and fixed term contractors,” they never state how many “variable term contractors” they employ. Yahoo has played this game long before Mayer showed up as CEO, but she has carried on the tradition with a vengeance. I believe there could be up to another 6,000 “variable term contractors” that Yahoo employs around the world. For a core business that’s only “really” pumping out $US190 million a year in EBITDA on a regular basis, that’s way too many.
Here’s how Jackson gets to the $US190 million in EBITDA:
- In 2012, when Yahoo sold its stake in Alibaba, it entered something called a “TIPLA agreement” which is worth $US550 million. That money was paid over time, and there is $US199 million to be recognised this year.
- Yahoo sold some patents to Alibaba and Yahoo Japan last year which will net $US80-$US90 million in extra EBITDA.
- Yahoo Japan revenue to Yahoo through royalties/other deals is ~$US253 million.
- Subtract that from the estimated $US1.12 billion in estimated EBITDA, and you have $US590 million.
- Jackson says stock based compensation is rolled into Yahoo’s EBITDA. While this is common, it’s not particularly helpful for measuring the health of the core business. Yahoo has $US400 million in stock based costs. If you back those out, you get to $US190 million.