Ascendere Associates LLC

J. Stephen Castellano

www.ascenderellc.com
steve@ascenderellc.com

Yahoo! Inc. (YHOO) -- ROIC and Cash Flow Analysis
 Operating profit is projected to stay roughly flat through September 2012.
 Operating capital is also projected to stay flat.
 Free cash flow is expected to increase over the next year, largely as the result of lower R&D spending
and lower capital spending.
 Adjusted operating profit by capitalizing R&D spending and amortizing that expense indicates this is a
low-quality way of improving free cash flow.
 Cutting R&D will hurt the company in the long run. Buying back shares is a waste of cash until there is a
clear operating plan in place.
 Yahoo needs to find ways to generate free cash flow growth through investing in high-returning projects
and cutting low-returning projects.
Ascendere Associates LLC
J. Stephen Castellano

Page 1

September 2, 2011
steve@ascenderellc.com

Summary

Ascendere Associates LLC
J. Stephen Castellano

Page 2

September 2, 2011
steve@ascenderellc.com

Ranking Data as of September 2, 2011
Yahoo! Inc.
NasdaqGS:YHOO
Information Technology
Internet Software and Services

Ascendere Ranking

5 = Best
Rank
Relative Value
1
Operating Momentum
2
Analyst Revisions Momentum 1
Fundamental Quality
1

Price 09/09/11
Shares
Market Cap

CY1 Consensus EPS Est.
CY2 Consensus EPS Est.
Latest Annualized Dividend

14.30
1,263
18,232

$
$
$

0.76
0.84
-

Cash
Debt
Other
Enterprise Value
CY1 PE
CY2 PE
Div Yield

(2,553)
40
40
15,759
18.7
17.1
0.0%

EV/LTM EBITDA
Price/Book

Total Capital
Debt/Capital
Debt/Enterprise Value

11.0
1.3

$ 12,839
-20%
0%

Source: Capital IQ data and estimates, and Ascendere Associates LLC data and estimates.

Ascendere Associates LLC
J. Stephen Castellano

Page 3

September 2, 2011
steve@ascenderellc.com

Implied by Consensus Average

Yahoo! Inc.

Estimate

Estimate

Estimate

Estimate

Estimate

9/29/12

6/29/12

3/30/12

12/31/11

9/30/11

6/30/11

3/31/11

NOPLAT

1,413

1,460

1,483

1,541

1,596

1,598

1,639

Economic Charge

1,286

1,285

1,288

1,287

1,292

1,293

Economic Profit

127

175

194

254

304

Sequential growth

-27%

-10%

-23%

-17%

1,413

1,460

1,483

17,203

17,189

17,232

NasdaqGS:YHOO

NOPLAT
Operating Capital

ROIC (NOPLAT / Operating Capital)8.2%

12/31/10

9/30/10

6/30/10

1,778

1,818

1,674

1,332

1,287

1,126

1,214

305

307

491

693

460

0%

-1%

-38%

-29%

51%

31%

1,541

1,596

1,598

1,639

1,778

1,818

1,674

17,216

17,276

17,299

17,135

16,877

16,463

16,690

8.5%

8.6%

9.0%

9.4%

9.5%

9.8%

10.7%

11.2%

10.5%

Sequential growth

-3%

-2%

-4%

-4%

-1%

-4%

-8%

-4%

7%

-3%

# EBIT Forecasts

8

8

8

18

19

642

665

687

618

542

EBIAT Trailing 12 months

718

754

714

693

678

Depreciation

639

642

649

658

585

586

578

575

539

555

(555)

(559)

(593)

(620)

(730)

(750)

(769)

(714)

(636)

(571)

15
493

63
537

16
563

0
521

28
554

Capital Spending, recurring
Adjstd Working Capital Investment

(12)

26

(46)

34

24

Free cash flow to the entity

791

864

725

766

557

Source: Capital IQ data and estimates, Ascendere Associates data and estimates.

Ascendere Associates LLC
J. Stephen Castellano

Page 4

September 2, 2011
steve@ascenderellc.com

Detail

Ascendere Associates LLC
J. Stephen Castellano

Page 5

September 2, 2011
steve@ascenderellc.com

ECONOMIC PROFIT MODEL driven in part by Consensus Average estimates.
PP&E
Yahoo! Inc.
NasdaqGS:YHOO
Economic Profit Model
Adjusted Working Capital
Net PP&E
Other fixed assets
Operating Capital

Estimate
9/29/12
754
1,639
14,810
17,203

Estimate
6/29/12
722
1,657
14,810
17,189

Estimate
3/30/12
743
1,679
14,810
17,232

Estimate
12/31/11
708
1,698
14,810
17,216

Estimate
9/30/11
742
1,724
14,810
17,276

6/30/11
748
1,741
14,810
17,299

3/31/11
697
1,695
14,743
17,135

12/31/10
742
1,653
14,482
16,877

9/30/10
766
1,549
14,147
16,463

6/30/10
763
1,518
14,409
16,690

3/31/10
760
1,470
14,138
16,368

12/31/09
758
1,427
14,350
16,535

9/30/09
767
1,395
13,194
15,355

6/30/09
791
1,430
12,739
14,961

0.0%
7.5%
7.5%
1,286

0.0%
7.5%
7.5%
1,285

0.0%
7.5%
7.5%
1,288

0.0%
7.5%
7.5%
1,287

0.0%
7.5%
7.5%
1,292

0.0%
7.5%
7.5%
1,293

0.0%
7.8%
7.8%
1,332

0.0%
7.6%
7.6%
1,287

0.0%
6.9%
6.8%
1,126

0.0%
7.3%
7.3%
1,214

0.0%
8.2%
8.1%
1,329

0.0%
8.2%
8.2%
1,349

0.0%
7.6%
7.6%
1,170

0.0%
7.9%
7.8%
1,170

EBIT
823
Interest on Operating Leases
R&D Expenditure
969
R&D Amortization
(840)
Goodwill Amortization
118
Adjustment for Provisions, Nonrecurring and Nonoperating Items
548
Adjusted EBITA
1,618

863
955
(809)
118
544
1,671

857
963
(779)
118
539
1,698

870
972
(750)
118
554
1,764

881
992
(722)
118
557
1,827

844
1,037
(695)
118
525
1,830

838
1,059
(669)
121
521
1,871

830
1,082
(643)
127
613
2,010

732
1,110
(616)
137
568
1,932

645
1,147
(588)
147
436
1,788

601
1,170
(559)
173
410
1,794

514
1,210
(530)
184
289
1,667

654
1,182
(500)
200
(249)
1,287

616
1,199
(470)
240
(388)
1,196

15.2%
12.7%
(205)
1,413
Estimate
9/29/12
1,413
1,286
127
-27%

15.2%
12.7%
(212)
1,460
Estimate
6/29/12
1,460
1,285
175
-10%

15.2%
12.7%
(215)
1,483
Estimate
3/30/12
1,483
1,288
194
-23%

15.2%
12.7%
(224)
1,541
Estimate
12/31/11
1,541
1,287
254
-17%

15.2%
12.7%
(232)
1,596
Estimate
9/30/11
1,596
1,292
304
0%

15.2%
12.7%
(232)
1,598

16.2%
12.4%
(232)
1,639

15.1%
11.5%
(232)
1,778

18.2%
5.9%
(114)
1,818

21.1%
6.4%
(114)
1,674

22.6%
6.4%
(114)
1,680

26.6%
6.8%
(114)
1,553

66.1%
5.4%
(70)
1,217

93.8%
5.9%
(70)
1,126

6/30/11
1,598
1,293
305
-1%

3/31/11
1,639
1,332
307
-38%

12/31/10
1,778
1,287
491
-29%

9/30/10
1,818
1,126
693
51%

6/30/10
1,674
1,214
460
31%

3/31/10
1,680
1,329
351
72%

12/31/09
1,553
1,349
204
326%

9/30/09
1,217
1,170
48
-209%

6/30/09
1,126
1,170
(44)
-143%

1,413
17,203
8.2%
-3%

1,460
17,189
8.5%
-2%

1,483
17,232
8.6%
-4%

1,541
17,216
9.0%
-4%

1,596
17,276
9.4%
-1%

1,598
17,299
9.5%
-4%

1,639
17,135
9.8%
-8%

1,778
16,877
10.7%
-4%

1,818
16,463
11.2%
7%

1,674
16,690
10.5%
-3%

1,680
16,368
10.7%
6%

1,553
16,535
10.1%
25%

1,217
15,355
8.1%
8%

1,126
14,961
7.6%
-2%

Cost of Debt
Cost of Equity
WACC* (implied, or arbitrary override)
Economic Charge

Effective Tax Rate
Operating tax rate
Taxes on EBITA
Increase in deferred taxes (smoothed)
NOPLAT
NasdaqGS:YHOO
NOPLAT
Economic Charge
Economic Profit
Sequential growth
NOPLAT
Operating Capital
ROIC (NOPLAT / Operating Capital)
Sequential growth

Source: Capital IQ data and estimates, and Ascendere Associates data and estimates.

Ascendere Associates LLC
J. Stephen Castellano

Page 6

September 2, 2011
steve@ascenderellc.com

ECONOMIC PROFIT MODEL, SUPPORTING CALCULATIONS
Estimate
9/29/12
637
5,068
4,927
3,780
236
234
14,882

Estimate
6/29/12
649
5,014
4,927
3,780
236
234
14,840

Estimate
3/30/12
661
4,982
4,927
3,780
236
234
14,819

Estimate
12/31/11
673
4,951
4,927
3,780
236
234
14,800
$
254

Estimate
9/30/11
685
4,932
4,927
3,780
236
234
14,793

6/30/11
697
4,936
4,927
3,780
236
234
14,810

3/31/11
686
4,918
4,919
3,735
250
235
14,743

12/31/10
692
4,861
4,803
3,682
256
43
146
14,482

9/30/10
770
4,810
4,421
3,656
265
224
14,147

6/30/10
860
4,764
4,642
3,641
288
215
14,409

3/31/10
830
4,700
4,586
3,600
288
134
14,138

12/31/09
829
4,607
4,770
3,640
356
74
74
14,350

9/30/09
807
4,439
3,955
3,501
365
127
13,194

6/30/09
800
4,322
3,628
3,462
396
132
12,739

4,431
(2,808)
545
2,168

4,315
(2,752)
537
2,099

4,248
(2,695)
547
2,100

4,044
(2,612)
567
1,999

3,844
(2,483)
609
1,969

3,890
(2,553)
653
1,990

4,094
(2,789)
731
2,037

4,346
(2,884)
906
2,368

4,100
(2,819)
837
2,118

4,048
(2,760)
911
2,199

4,570
(3,242)
931
2,259

4,595
(3,291)
1,172
2,476

5,077
(3,902)
1,097
2,273

5,029
(3,878)
1,104
2,254

1,415
1,415

1,378
1,378

1,356
1,356

1,291
1,291

1,227
1,227

1,242
1,242

1,340
1,340

1,626
1,626

1,351
1,351

1,440
4
1,436

1,515
16
1,499

1,718
1,718

1,506
1,506

1,463
1,463

754

722

743

708

742

748

697

742

766

763

760

758

767

791

Capitalized R&D, Beginning Balance
R&D Expenditure
Annual Amortization (10yr life)
Capitalized R&D, Ending Balance

4,939
969
(840)
5,068

4,868
955
(809)
5,014

4,798
963
(779)
4,982

4,729
972
(750)
4,951

4,661
992
(722)
4,932

4,594
1,037
(695)
4,936

4,528
1,059
(669)
4,918

4,421
1,082
(643)
4,861

4,315
1,110
(616)
4,810

4,204
1,147
(588)
4,764

4,089
1,170
(559)
4,700

3,926
1,210
(530)
4,607

3,756
1,182
(500)
4,439

3,593
1,199
(470)
4,322

Total Current Assets less Cash & ST Invest
Current Liabilities less Interest Bearing Debt
Cash Shortfall -- Required for Working Capital
Cash -- 3-month Cushion
Total Cash Required for Working Capital

1,586
1,415
545
545

1,525
1,378
537
537

1,403
1,356
547
547

1,282
1,291
9
558
567

1,211
1,227
17
592
609

1,336
1,242
653
653

1,306
1,340
34
697
731

1,461
1,626
164
742
906

1,281
1,351
71
766
837

1,288
1,436
147
763
911

1,328
1,499
171
760
931

1,304
1,718
414
758
1,172

1,175
1,506
331
767
1,097

1,151
1,463
312
791
1,104

Excess Cash (above WC Requirements)

2,263

2,215

2,148

2,045

1,875

1,900

2,058

1,978

1,982

1,849

2,311

2,119

2,804

2,775

Present value of operating leases
Accumulated R&D
LIFO Reserve
Long-term investments
Goodwill
Other Intangibles
Deferred Tax Assets, LT
Other Long-term Assets
Total Other Fixed Assets

Total Current Assets
less Cash and Short Term Equivalents
plus Estimated Cash Required for WC
Adjusted Current Assets
Total Current Liabilities
less Current Portion of Cap. Leases
less Current Portion of LT Debt
Short-term Borrowings
Finance Div. Debt Current
Short-term Finance Div. Loans and Leases
Adjusted Current Liabilities
Adjusted Net Working Capital

Ascendere Associates LLC
J. Stephen Castellano

Page 7

September 2, 2011
steve@ascenderellc.com

NasdaqGS:YHOO
FREE CASH FLOW MODEL -- LTM
Last 12 Months
EBIT
Tax rate
Cash income taxes
EBIAT
Depreciation
Capital Spending, recurring
Adjstd Working Capital Investment
Free cash flow to the entity

Note: Cash taxes paid are probably lower
Estimate
Estimate
Estimate
Estimate
9/29/2012
6/29/2012
3/30/2012 12/31/2011
823
863
857
870
13%
13%
17%
20%
(104)
(109)
(142)
(177)
718
754
714
693

Estimate
9/30/11
881
23%
(203)
678

6/30/11
844
15%
(203)
642

3/31/11
838
16%
(173)
665

12/31/10
830
15%
(144)
687

9/30/10
732
18%
(114)
618

6/30/10
645
21%
(103)
542

3/31/10
601
23%
(92)
509

12/31/09
514
27%
(81)
433

9/30/09
654
66%
(70)
584

639
(555)
(12)
791

642
(559)
26
864

649
(593)
(46)
725

658
(620)
34
766

585
(730)
24
557

586
(750)
15
493

578
(769)
63
537

575
(714)
16
563

539
(636)
0
521

555
(571)
28
554

595
(476)
58
685

611
(434)
88
697

749
(456)
82
958

9/29/12
192
13%
(24)
167

6/29/12
198
13%
(25)
173

3/30/12
187
13%
(24)
163

12/31/11
246
13%
(31)
215

9/30/11
232
13%
(29)
203

6/30/11
191
13%
(58)
133

3/31/11
200
12%
(58)
142

12/31/10
258
12%
(58)
200

9/30/10
195
6%
(29)
166

6/30/10
185
6%
(29)
157

3/31/10
192
6%
(29)
164

12/31/09
159
7%
(29)
131

9/30/09
108
5%
(18)
91

Depreciation
Capital Spending
Adjstd Working Capital Investment
Free cash flow to the entity

158
(140)
(32)
154

159
(138)
22
216

160
(140)
(36)
147

163
(138)
34
275

161
(144)
6
226

166
(172)
(51)
77

169
(168)
45
188

89
(247)
24
66

162
(164)
(3)
162

158
(190)
(3)
121

165
(113)
(2)
215

54
(170)
9
23

178
(99)
25
194

Dividend
Buyback of stock
Other financing cash flows
Other investing cash flows
Adjusted "Free" Cash Flow

(261)
33
(74)

(287)
62
(9)

(254)
66
(41)

(191)
2
86

(310)
(85)

(472)
(392)
179
(607)

(137)
(123)
148
76

62
(317)
(189)

(868)
(789)
985
(510)

(496)
(405)
149
(631)

(385)
(370)
407
(133)

(23)
27
(866)
(839)

(91)
(104)
(540)
(540)

FREE CASH FLOW MODEL-- Qtr
Quarterly
EBIT
Tax rate
Cash income taxes (4qtr avg)
EBIAT

Source: Capital IQ data and consensus estimates, and Ascendere Associates estimates.

Ascendere Associates LLC
J. Stephen Castellano

Page 8

September 2, 2011
steve@ascenderellc.com

METHODOLOGY
Ascendere Associates LLC quantitative research is based on several factors, including: 1) operating momentum 2) fundamental quality 3) analyst revision
momentum; and 4) relative value. A number of these factors are overweighted on what we consider proxies for cash flow growth and return on invested capital.
In our opinion these factors provide a good reflection of a company's value relative to other companies in its sector. Daily return data of our backtests are
available to paying subscribers upon request. Ascendere currently sources raw financial data from Capital IQ.
In our opinion, cash flow growth and return on invested capital are the key drivers of any stock's valuation. By focusing on various proxies for these data points
and other factors such as relative value, we have been able to generate some terrific investment ideas and avoid some significant value traps over our career in
sell side and buy side equity research.
For those interested in learning more about determining a company's value as it relates to ROIC, we recommend reading McKinsey & Company's "Valuation:
Measuring and Managing the Value of Companies" or "The Value Sphere: The Corporate Executives' Handbook for Creating and Retaining Shareholder Wealth."
We also find the reports produced by Legg Mason Capital Management an excellent source of information as it relates to determining the value of companies.

Ascendere Associates LLC
J. Stephen Castellano

Page 9

September 2, 2011
steve@ascenderellc.com

DISCLOSURES
Ascendere is in the business of providing equity research and related consulting services to investors and their advisors. The equity research it provides includes
basic quantitative model portfolios and more detailed fundamental research with respect to individual stocks. In addition, the firm manages stock portfolios for
itself and clients.
Ascendere does not rate stocks on any scale, but does offer individual stock commentary and valuation opinions. With regard to Ascendere's portfolio
strategies, "long" or "high-quality" baskets should generally be considered buys, unless otherwise noted. Stocks in our "short" or "low-quality" baskets should
generally be considered sells, unless otherwise noted. While exceptions may occasionally occur, typically stocks in the high-quality basket are expected to
outperform the S&P 500 over a month's time and stocks in the low-quality basket are expected to underperform. A more relevant benchmark would comprise
of all stocks and ADRs that trade on major U.S. stock exchanges with a market cap above $2 billion.
Ascendere adheres to professional standards and abides by codes of ethics that put the interests of clients ahead of its own. The following are specific
disclosures made by Ascendere:
1) Ascendere may have a financial interest in the companies referred to in this report ("the Companies"). The research analyst covering the Companies
and members of the analyst's immediate family have a financial interest in one or more of the Companies.
2) Ascendere generates revenue from research subscription revenue and portfolio management fees. At any given time it may be long or short any of
the Companies.
3) Ascendere does not make a market in the securities of any of the Companies.
4) Ascendere has not received compensation from the Companies.
5) Ascendere has not managed or co-managed a public offering for any of the Companies.
6) Neither Ascendere nor any of its officers or any family member of the covering analyst serve as an officer, director or advisory board member of any
of the Companies.
7) Neither Ascendere nor any of its officers or any family member of the covering analyst beneficially own 1% or more of any class of securities of any of
the Companies.

Ascendere Associates LLC
J. Stephen Castellano

Page 10

September 2, 2011
steve@ascenderellc.com

DISCLAIMERS
This report is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or sell any securities or related financial
instruments. The report is not intended to be in furtherance of the specific investment objectives, financial situation, or particular needs of any individual
recipient. Investment decisions should be based on an individual's own goals, time horizon and tolerance for risk. The information contained herein accurately
reflects the opinion of Ascendere at the time the report was released. The opinions of Ascendere are subject to change at any time without notice and without
obligation or notification. The officers, affiliates or family members of Ascendere Associates may hold positions in the securities of the Companies. No warranty
is made as to the accuracy of the information contained herein. The views and opinions expressed in the market commentary reflect the opinions of the author
and may be based upon information obtained from third-party sources believed to be reliable but not guaranteed. These opinions are subject to change at any
time based upon market or other conditions. Ascendere disclaims any responsibility to update such views. This information is intended for the sole use of
clients of Ascendere. Any other use, distribution or reproduction is strictly prohibited. Investing in stocks includes a high degree of risk, including the risk of
total loss. This is for informational purposes only and is not intended to constitute a current or past recommendation, investment advice of any kind, or a
solicitation of an offer to buy or sell any securities or investment services. All information, opinions and estimates are current as of original distribution by author
and are subject to change at any time without notice. Any companies, securities and/or markets referenced are solely for illustrative purposes. Past
performance is not indicative of future performance, and no representation or warranty, express or implied, is made regarding future performance.
For Investment Professional use only. NOT FOR FURTHER DISTRIBUTION. Any dissemination or copying of this commentary is strictly prohibited.

Ascendere Associates LLC
J. Stephen Castellano

Page 11

September 2, 2011
steve@ascenderellc.com

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