Table of Contents
The company’s annual report provides the yearly information on the different financial, strategic and management decisions and changes made in Yahoo for the year 2013. Annual reports provide a wealth of information such as cash flows, profits and losses. This information will be used to make speculations and analysis on the current state and future of the company. The information is organized into tables and other diagrams. Other significant statistics featured in this section include key ratios.
Section two contains in-depth information of the financial and strategic concerns within Yahoo, as well as their impact on the operation of the company. This section uses the current data on pricing, net income to retained earnings and revenue to accounts receivable, as well as other financial information to make conclusions on the urgent concerns in Yahoo. Additionally, the section also contains strategic concerns such as customer bargaining power, client behavior and overall strategic architecture.
Section 3 is concerned with the aligning and integration of the financial and strategic concerns with Porter’s five forces model. The objective in this section is to address any financial and strategic concerns using Porter’s principles. Lastly, the recommendations sections point out the way forward for Yahoo in terms of its strategies and decisions.
Yahoo Inc. is a principal transnational digital media and internet service corporation that broke ground in the internet sector. The company was founded in 1994 by Jerry Yang and David Filo as a search engine company where it has made tremendous leaps in terms of growth and service differentiation (ComScore 17). Since then, the basic Yahoo search engine has been complimented with finance engine, electronic mail service, news portals, web directory, and social media services such as content sharing and communications (ComScore 45). The company has a vision to offer highly personalized digital experiences to its clients across different gadgets and countries together with linking those consumers to advertisers (Yahoo, 2012b). At present, the strategy leader, Marissa Mayer, is charged with the responsibility of furthering the company goal (The Times of India, 2012). Yahoo’s main source of income lies in the network between advertisers and consumers using different products in their portfolio. Currently, Yahoo is among the top five hundred companies in Fortune 500 categorization.
Yahoo’s main competitors are AOL, MSN and Google in the Internet information provider industry. Conversely, since MSN is a branch of Microsoft and AOL is a derivative of Time Warner Company, little financial data can be used for financial analysis. The most significant news that must be addressed before the analysis commences is the recent attempted takeover of Yahoo by Microsoft in late 2014. While it has little significance on the outcomes of the analysis on profitability, the takeover influences shareholders’ opinion on investments in the company. By current statistics, Google shares have reached approximately 85% within the search market while Bing and Yahoo account for 6.2% and 3.3% respectively (United States Securities and Exchange Commission 34).
|Cash and Cash Equivalents||$2,667,778||$1,562,390||$1,526,427||$1,275,430|
|Other Current Assets||$460,312||$359,483||$432,560||$300,325|
|Total Current Assets||$5,652,713||$3,452,536||$4,345,548||$4,594,772|
|Deferred Asset Charges||$0||$0||$0||$0|
|Short-Term Debt / Current Portion of Long-Term Debt||$0||$0||$0||$0|
|Other Current Liabilities||$296,926||$194,722||$254,656||$411,144|
|Total Current Liabilities||$1,290,232||$1,207,361||$1,625,872||$1,717,728|
|Deferred Liability Charges||$1,082,831||$859,173||$563,023||$616,645|
|Stock Holders Equity|
|Total Liabilities & Equity||$17,103,253||$14,782,786||$14,928,104||$14,936,030|
|Cost of Revenue||$1,620,566||$1,586,997||$2,682,074||$2,871,746|
|Research and Development||$885,824||$919,368||$1,028,716||$1,210,168|
|Sales, General and Admin.||$1,641,819||$1,619,481||$1,751,754||$1,825,702|
|Other Operating Items||$35,819||$33,592||$31,626||$39,106|
|Add’l income/expense items||$4,647,839||$27,175||$297,869||$187,528|
|Earnings Before Interest and Tax||$5,214,207||$827,516||$1,070,393||$574,220|
|Earnings Before Tax||$5,214,207||$827,516||$1,070,393||$574,220|
|Equity Earnings/Loss Unconsolidated Subsidiary||$676,438||$476,920||$395,758||$250,390|
|Net Income-Cont. Operations||$3,945,479||$1,048,827||$1,231,663||$597,992|
|Net Income Applicable to Common Shareholders||$3,945,479||$1,048,827||$1,231,663||$597,992|
Table 1: Income and Balance Sheet (United States Securities and Exchange Commission 39)
This section of the document reflects the cash flows that indicate inflows and outflows. The information is organized into financing, investing and operating activities. The cash flow investigation allows for an in-depth evaluation of the expenses and incomes of the corporation as well as on the modifications on its cash account. Yahoo has steady positive cash inflow from its investing and operating activities and cash expenditure from its financing dealings. The presence of Yahoo at the international level created a negative effect on the exchange rates for consolidated statements.
Yahoo also experienced positive cash flow from operating activities in the same period. By the close of the financial year 2010, the cash flow stood at $ 1.2 billion and approximately $1.35 billion by the end of 2011 (United States Securities and Exchange Commission 164). It is imperative to note that Yahoo has been able to augment their cash profits despite the yearly net income in 2011 remaining at 85% of that of 2010 (United States Securities and Exchange Commission 44). The company realized a trivial drop in investing matters with considerably lower expenditure on acquisitions of marketable debt securities, as well as property. This increased the acquisitions in 2011 compared to 2010. However, there were no other noteworthy incomes or outflows connected to finance issues (United States Securities and Exchange Commission 45). The cash flows for Yahoo indicated the excellent health of the corporation concerning its investing, financing and operating decisions that are replicated throughout other sections of this analysis.
The assessment of the ability ofYahoo to produceearnings out of its equity andassets uses ROE as the main device.
Table 2: return on Equity for Yahoo 2013 (United States Securities and Exchange Commission 39)
In keeping with the asset turnover ratio, Yahoo is generating barely 30% of its assets in revenues yearly. Therefore, $1 in assets produces 30 cents in income that indicates a 25% drop from the year 2010 (United States Securities and Exchange Commission 67). The enhancements in operational effectiveness could generate higher ratios and improve employment of its capital. The acquisitions of new companies in the related field could assist Yahoo in realizing such progress given the investments end up being valuable.
The financial concerns discussed include,property plant and equipment to depreciation and amortization, net income to retained earnings and cash to profit. Yahoo continues to purchase, assets and other companies that included the acquisition of indefinable assets. Amortization of innovations and purchased intellectual property rights is considered part of the cost of revenue. Amortization of intangibles in 2012 showed a 7% increase that was approximately $2 million when compared to 2011 (United States Securities and Exchange Commission 58). The annual increase in amortization of intangibles between the two years was mainly generated by the addition of intangibles linked to an acquisition in during the last period in 2011. Cash created by running activities is driven by the remaining profits, altered for non-cash items, dividends attained from equity investees and working capital differences. Non-cash alterations include stock-based compensation costs, amortization of intangible assets, depreciation, tax benefits from stocks, deferred income taxes, and revenues in equity interests (Yahoo Annual Report 2012 19). Yahoo realized net cash expenditure in 2012 principally due to the tax payment in the sale of Alibaba Group Shares that amounted to approximately $2.3 billion (United States Securities and Exchange Commission 59). The expected cash flow projections for every reporting unit were based on a five-year prediction while the terminal value depended on the Perpetuity Growth Model. The five-year estimates and associated assumptions were a derivative of the most updated yearly financial forecast that was used in guiding the planning process during the last quarter (Yahoo Annual Report 2012 16). Some of the main assumptions in approximating prospective cash flows comprise, among other aspects, income and operating cost growth rates, capital expenditure, working capital levels and terminal value growth rate.
In terms of product portfolios, Yahoo has invested in a myriad of Internet-based and mobile-based innovations including Yahoo Home Page, communities, search engine, networking and other entertainment products (ComScore 14). The company has managed to make in-roads in many different sectors and market segments. For instance, Yahoo Groups and Yahoo Answers cater to the needs of academic and communal groups that have the need for forums. Other products such as Yahoo Music, Yahoo Movies and Yahoo Kids offer a range of entertainment options that are highly stratified to meet the specific needs of its users (CNN 21). This diversified approach has significantly helped the company to stay afloat despite turbulent times in the mobile and Internet industry that act as their key areas of revenue (Yahoo Annual Report 2012 25).
The pricing strategy for most of Yahoos’ products has also been very unstable and inconsistent. While they have practiced fairness in the search engine by demanding and issuing payment according to the amount of traffic form other distribution partners (ComScore 23). However, across the board, other products such as start-up businesses in Yahoo Ecommerce range from $40 to about $300 on a monthly basis (Danova 34). This is averagely higher than the standard market price. The same is true of their pricing strategy for domains, web hosting and search engines (ComScore 56).
The development of Web 2.0,as well as the growth in data-miningpotentialwithin the knowledge sector, canallow Yahoo to expand drastically in the coming stage.A large percentage of the overall revenue realized by the company is generated overseas in the Americas, China and the rest of the continents (Danova 36). Asia is a particular location that has largely been unexploited by Google, the leading competition in the Internet and mobile industry. The innovative organizational strategyin preparationalongside the potential hiring ofa new CEO in rival Google mightoffer Yahoo an excellent opportunity to displace it as the dominant internet service provider globally (Yahoo Annual Report 2012, 9).The financial pointerssustain the vision of expansion for Yahoo largely because of the prime position in solvency and liquidity (Danova 78).Creditorscurrently perceive Yahoo as a firm having very low riskand therefore, hold the potentialof realizing finances forfuture expansion withease if capital restructuring is implemented (CNN 23).
The threat of new entrants into the Internet and mobile industry is very high. This is due to the relatively low start-up costs as well as the ease of networking and advertisements. However, Yahoo’s position in the market is somewhat secure since it has adopted an aggressive acquisition strategy that suppresses any competition from new entrants. Therefore, the main competition lies between Google, Yahoo and Microsoft while minor competitors include AOL and other less significant companies (Yahoo Annual Report 2012 33). The main Yahoo approach has been to use economies of scale as well as brand equity to make the competition very tight.
The threat of substitute products is similarly high within the sector. The main reason for this high level of threat lies in the detailed resemblance of the products developed by each company. It is practically possible to substitute yahoo products with Google’s and vice versa. For instance, both Yahoo and Google have a search engine that produces similar results when executed (ComScore 19). Yahoo has attempted to differentiate itself by offering a “one-stop-shop” that provides information, goods and services while Google offers more defined products such as Google Drive and Gmail rather than a general approach. These modest differences separate Yahoo from its rivals and account for its loyal consumer base.
It is unfortunate that the internet and mobile industries are quite complex, interconnected and current. Therefore, the customers have a high bargaining power and this has been a major aspect when determining the prices for Yahoo’s products and services. The company has a vast network of distribution, and this means that their products are used by a large segment of people. Its products have to change prices according to other factors such as consumer behavior, cost of production and other legal expenses constantly. Buyer price sensitivity is also high since rival companies such as Google and Microsoft conduct comparison exercises with the aim of attracting more buyers with cheaper prices (Yahoo Annual Report 2012 34).
Yahoo has managed to suppress the bargaining power of suppliers in the Internet industry. Most of the suppliers for the company consist of services such as third party web hosting, security and search engine maintenance (ComScore 5). These types of services are not competitive therefore; Yahoo is able to juggle several suppliers. However, the company has maintained a cordial balance between quality products and services and affordable suppliers. In the future, there will probably emerge a problem with keeping certain suppliers due to different factors such as supplier-to-firm concentration, as well as other factors.
Lastly and most significant, the level of competitive rivalry is a factor that Yahoo struggles with in most of its strategies. The major rivals in the mobile and Internet industry are Google, Microsoft and AOL. Within the internet and mobile industry, Yahoo’s level of profitability is most influenced by the threat of new entrants (Danova 41). No matter how small the entrant into such a market, Yahoo experiences an increased threat as it lowers the market share. In fact, a larger percentage of the company’s expenditure is dedicated towards mergers and acquisitions with the intention of reducing the number of competitors (Wells 178).
The investment costs are a common device that greatly influences the amount of competition between Yahoo, Google and Microsoft. High costs of entry allowed Yahoo to cut down the competition considerably and lowered the threat of new entrants. Most start-up and medium enterprises lack the massive capital required to engage in large-scale operations. These businesses end up being easy targets for acquisition and mergers. A related point is that, due to the large scale of operations and portfolio base, Yahoo is able to enjoy economies of scale that further makes it competitive. The company experiences lower unit costs and can therefore use economies of scale to their advantage. Apart from these conventional methods, Yahoo has also used exceptional strategies to survive in the mobile environment. By threatening to engage in costly price wars, Yahoo has managed to ward off most competitors including Microsoft.
In order to counter the threat of substitution, yahoo should increase their level of differentiation. Currently, most of Yahoo’s products closely mirror those of Google making it very difficult to grasp a larger market share. By differentiation, Yahoo can lower the competition by offering an alternative. Yahoo products, such as Flickr, should be given more priority as they represent a different approach that has not been adopted by Google and Microsoft. At this point, the pricing strategy can also be reformulated to ensure that there is a significant switching cost for the buyers. In this way, consumers of Yahoo products will find it unprofitable to use substitute goods and services.
Yahoo needs to employ several strategies to tackle the high bargaining power displayed by its customers. This level of power is generated by high levels of similarity in products and services across different companies. Therefore, Yahoo should invest in aggressive research and development strategies that will ensure the technical team can come up with fresh and innovative proposals for all current and future products. In this way, the company can be able to sharply differentiate its products and justify increased prices without losing its customer loyalty. For instance, Gmail and Yahoo Mail are quite similar e-mail services provided by different rival companies (Yahoo Finance 22). By developing a unique feature or product, Yahoo can avert any competition with its rivals. It is imperative that these strategies are implemented under careful observation from the management department for any setbacks that may hamper the realization of future benefits.
Yahoo can overcome the issue of aggressive competition from its rivals by launching a powerful competitive strategy. This strategy comprises innovation at all levels of the company as well as reducing the advertising costs, Currently, Yahoo uses a large part of their expenditure on online and offline advertising. By coming up with cheaper and effective ways of advertising, the company can use the excess revenue to increase production and offset the competition. Furthermore, Yahoo will need to develop their products and services according to the particular market segments in different locations. Currently, the general, “one size fits all” approach adopted by the company has resulted in standardized products that fail to cater to the needs of various users.
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