Yahoo unveils ‘SpinCo’. Well it can’t be plainer than that surely?

Yahoo Inc: New management has finally accepted what the markets have been trying to discount for some time; that with Jerry Wang’s legacy investments in Alibaba and Yahoo Japan, Yahoo was beginning to look like an investment trust. New CEO, Marissa Marr’s decision to split off the remaining (15.4%) stake in Alibaba into a new investment holding company therefore will provide investors with greater clarity on the value of this holding, albeit in itself, it does not alter the current value proposition for Yahoo shareholders. The headline from Yahoo may advertise that the manoeuvre will be “tax free”, but what this really means is that the tax liability is merely being transferred into a new bucket rather than being avoided. If the Alibaba stake was being discounted for this tax liability within Yahoo therefore, there ought to be no reason to assume that the discount will no longer apply when it is within the new vehicle. Perhaps we should have taken heed of the working name being given to this new company, “SpinCo”!. In the meantime, Ms Marr’s transformation of the core Yahoo business is proceeding slowly. Mobile revenues are rising rapidly (so what’s new?), but this has yet to translate into a turnaround in either Yahoo’s revenue or EBITDA trajectories which continue to erode. The markets need a healthy competitor in search to Google and will no doubt continue to wish Yahoo well, although the shuffling of its pack of investments can only distract attention for a limited duration before markets return to question this disparity in the implied growth rate being priced into the core business versus the limited delivery.

Trading Q4 FY14: After Q3’s excitement with the Alibaba listing and IPO gain, Yahoo’s Q4 returned to the more mundane job of running the core business where YoY revenue growth slipped from Q3’s +1% to a -1% YoY decline (probably mainly fx) and adj EBITDA fell by -14% to $409m (-13% to $1,362m for FY14; but -26% to $941m post stock comp). For Q4, revenues excl TAC declined by -2% to $1,179m, o/w search was flat at $462m (incl paid clicks +10% but price per click -7%) and display declined by -5% to $462m. Post stock comp, net income was down by -52%, partially recouped at the EPS line (-48% YoY from $0.33 to $0.17) due to the further contraction in share base (-7% YoY), while the adj EPS figure declined by -35% YoY from $0.46 to $0.30.

Outlook Q1 FY15: Co is guiding for revenues of $1,110m/$1,150m (vs $1,133m), revenues excl TAC of $1,020m/$1,060m (vs $1,087m), adj EBITDA of $200m/$240m (vs $306m) and adj operating income of $50m/$90m (vs $149m).

Note *1: Q3 results provided greater clarity on the potential gains tax liability on the groups holding in Alibaba with an estimated $3.28bn of tax due on the $10.32bn of realised gain at the recent IPO, an effective rate of 32%. The group has not clarified whether this potential gain liability on the Alibaba book value will be affected by its transfer to an investment company holding structure.