Tag Archives: engineering

Yahoo! CEO Mayer’s Four Pronged Strategy for Success

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Acquisitions and Strategy

The age old expression “you have to spend money to make money” drove Yahoo (YHOO) and CEO Marissa Mayer to acquire Tumblr for $1.1 Billion. Yahoo already owns several social-media focused business units like Flickr, GeoCities, Koprol, Snip.it, and Bix. Buying Tumblr caught the most headlines, but Yahoo also acquired eight other companies in the second quarter: Summly, Astrid, Milewise, Loki Studios, Go Poll Go, PlayerScale, Rondee, and Ghostbird Software. The Tumblr acquisition adds a massive blogging platform to accompany the successfully rebooted Flickr photo service. Tumblr focuses on blogging in the purest form – simple paragraphs and heavy use of media, with a nod to extensive community commentary. A quarter-million new blogs are created every day, and each creates more internet real estate for Yahoo’s display advertisements. Mayer’s strategy is to focus Yahoo on four key areas: Search, Mobile, Display, and Video. The advertising market in these segments looks to be held by Google (GOOG) and Facebook (FB). If Yahoo is to continue to exceed financial expectations in CEO Marissa Mayer’s four areas of focus, success hinges on driving searches and advertisements with user-generated content.

Earnings and Revenue

Yahoo continued to buyback shares as part of the $5 Billion buyback program announced last year. On the Q2 2013 earnings call, CFO Ken Goldman announced that $1.9 Billion in shares remain to be repurchased. With less common stock shares outstanding YHOOepsperelatedin the market, buybacks will drive earnings per share (EPS) higher and the price-to-earnings ratio (P/E) lower. A positive EPS and low P/E are both fundamental indicators of a healthy, profitable company. Yahoo’s relatively low P/E of 7.91 is not uncommon for similar companies [see graphic, right].

To help pay for the share buyback and all of Yahoo’s acquisitions, the company sold $846 million of their preferred shares of the Alibaba Group, the Chinese E-Commerce giant. With new companies being acquired at an increasing rate and a $1.9 Billion left to buyback, Yahoo is burning through cash. Between the end of Q1 2013 and the end of Q2 2013, the company’s cash stockpile decreased by $600 million. $4.8 Billion in cash remains on their balance sheet after Q2 2013 though, so Yahoo is not at risk to dip into the red anytime soon.

YHOOsurpriseFurther fundamental analysis suggests that Yahoo is still an attractive investment even after the stock has gained over 60% in the past year. The Beta of just 0.83 shows that the stock is less volatile than the rest of the market. A low beta is ideal for a long position in the stock, since the share price is less likely to have sweeping changes and fluctuations, potentially giving investors more time to contemplate a change in position. The PEG ratio average for Yahoo’s industry is 2.97%, while the entire S&P stands at 1.98%. The PEG ratio – the P/E divided by the expected growth rate – is 1.28% for Yahoo, showing that Yahoo is less expensive compared to the rest of the market. Quarterly earnings reports are a huge perception of performance and health, and Yahoo’s Q2 results continued the company’s earnings beat.

CEO Marissa Mayer’s Strategies are Working

 

The revolving door of candidates at Yahoo’s CEO position for the past few years left the company misguided and lacking a vision. Mayer’s leadership has energized Yahoo’s employees and given the company a firm direction. With the Tumblr blogging platform now a part of Yahoo, Mayer is looking to solidify Yahoo’s business in mobile and display, as she mentioned in the Q2 earnings call. Aside from turning Yahoo’s financials around, Mayer has changed the culture at Yahoo immensely. Since Mayer started at Yahoo in July 2012:

YHOO1yr

  • The stock price has gained over 50%
  • Falling revenue ($7.5 Billion in 2008 to $5.5 Billion in 2012) has stopped falling
  • Employee attrition has decreased 59% year over year
  • 12% of new hires are Old Employees returning

In one of the most clever business moves in recent memory, Mayer decreed that employees would no longer be able to work remotely from offices due to widespread reports of an unproductive remote workforce. Any employee who cannot adhere to this policy “should quit.” Without the morale impact of a layoff, Mayer effectively trimmed resource costs and increased efficiency. I doubt that this move was a layoff in disguise, but the result of better teams and cutting costs is very similar.

With a clear business strategy in four key areas, a competent leader who is reshaping the culture, and rising earnings results, don’t be surprised if Yahoo’s stock continues to rise.

Rally Corp’s Recent IPO and Outlook

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Rally Corporation (RALY) is a company based in Boulder, Colorado, and just had a very successful IPO in April. The offering price enjoyed a nice 30% bump on the day of the IPO, making any institutional investor who grabbed pre-IPO shares pretty happy. Rally develops software as a service tools for organizations that use the popular Agile Development Methodology. Agile is a methodology for teams to plan work into short “iterations” of a few weeks. This contrasts the traditional Waterfall methodology, where project requirements are defined and then developed over many months or years. Rally Corp is brand new to the public market, so the stock price doesn’t have much history for us to refer to, but we can look at the fundamentals to set the stage for our analysis. Rally is a tiny company with a Market Cap of just over 400 million, and has been burning through cash at a widening rate over the past four quarters, while increasing revenue at the same time. Founded in 2001, Rally has never been profitable, even with a strong upward trend in revenues and an upward trend in margins since 2009. Those encouraging trends may point to untapped potential and future returns. Let’s breakdown the software market, economic factors, and the company’s leadership before we make any conclusions.

Economic factors benefit Rally immensely. The Technology sector – the primary user group of Rally’s products – still enjoys unemployment around 5%, well under the national average. A healthy tech sector that shows no signs of slowing means more users, demand, and growth. Unlike the automotive industry, which is tied closely to overall economic health, Rally’s products are not cyclically tied to sweeping changes in the economy. Like other software services, adopting Rally’s core product can be a subject of great debate in a workplace, purely for the fact that software adoption is difficult to change quickly, and because software developers can be very opinionated. Just as a company can take forever to shut down a legacy system, a long time is needed to migrate away from Rally, especially in slow moving, monolithic companies that Rally is increasingly providing services to. For investors however, this ensures that Rally’s revenue stream will remain consistent and protected, thanks to the slow-to-change clients and the still booming tech sector.

Rally is the market leader in agile development software. The twelve year old company has an impressive customer list, with more than 1/3 of Fortune 100 companies as clients according to their S-1 filing. An important trend to consider that will continue to support Rally’s income is that more and more companies are adopting the agile development methods that Rally is designed to complement. The increased effectiveness of Agile shown by numerous studies has turned thousands of CEOs in all industries to lead their organizations to adopt Agile. With more organizations operating in the Agile framework,  Rally’s customer base continues to expand.

Regarding profitability, Rally has tried to expand its product line horizontally, by offering another SaaS product called Rally Portfolio Manager that plugs into the existing suite, but at an additional cost. I attended the company’s RallyON conference in 2012 before the company went public, immediately after the launch of Rally Portfolio Manager. Both users and employees admitted that the product was lacking in features at the time. While the Rally Portfolio Manager is the logical next step for the company, at this time I wouldn’t expect it to quickly start adding to the bottom line. I’m extremely familiar with Rally’s core product, and must admit that nothing is stopping another company from offering a similar product for a lower price – or worse – for free. The barrier to entry in the big business market is too great for a small start-up though, and such a competitor wouldn’t be able to pop-up overnight and immediately steal all of Rally’s Fortune 100 clients. From an investor perspective, due to the high visibility of the B2B software industry, any competing company will be seen and analyzed by Wall Street analysts well in time to make any trades.

The leadership at Rally Corp is exactly what an investor would like to see at a recently IPO’ed start-up. CEO Timothy Miller has been with Rally for the past ten years, continuing his career in technology. Ryan Martens, the Founder and CTO, has prior start-up experience and extensive experience in application development. CFO Jim Lejeal has founded and managed several companies, and has the most experience of the bunch in regard to publicly traded companies. These leaders are well-positioned to guide the company to customer growth and financial success.