What You Should Know From Yahoo’s Earnings Call *** MARKET FOOLERY ***

What You Should Know From Yahoo’s Earnings Call *** MARKET FOOLERY ***


Chris Hill: We’ve got the latest from Coca-Cola,
Yahoo, Intuitive Surgical. We’ll dip into the Fool mailbag. But let’s start with Intel.
First quarter profits came in higher than expected, Simon. That doesn’t appear to be
the headline, though, because they lowered guidance, and they are cutting about 11% of
their workforce. That is not insignificant. Simon Erickson: 12,000 jobs, right? This should
surprise absolutely no one, because PC shipments have just been declining year-over-year for
the last five years. Hit the peak in 2011, we’ve seen year-over-year PC shipments decrease
since then, about 300 million shipments last year. But just like Intel is right in the
middle of it, PC chips are less in demand right now by the global market. So, what do
you do? You go out and try to buy growth. We saw Intel acquire Altera last year, $16.7
billion acquisition. Broadcom did the same thing with Avago, $37 billion acquisition.
You want to expand and get more content with existing customers, buy another customer list
and get bigger. But it’s a challenging environment out there, to say the least. Hill: We talked about that last year. I remember,
because when they bought Altera, we were sitting in this studio essentially saying, “Sure,
they’ve got the money, but what are they going to do with this thing?” Matt Argersinger: Right. And I have to say
— I think Simon is right — there’s just so much consolidation, the overall pie is
shrinking in so many markets. At the same time, I feel like I’ve read almost every quarter
that Intel is cutting several thousand jobs. I’m wondering who’s left working there at this point?
Erickson: Yeah, exactly. Argersinger: I can’t imagine what their workforce
is today compared to, say, five years ago. It could be half, I don’t know for sure. Erickson: And they’re trying to get more and
more custom chips. This is not about just the processors that are in PCs anymore. The
Internet of Things, we talked a lot about that. Autonomous cars are going to need some
smart chips in them, too. Altera was making programmable logic chips, which are custom-designed
and able to do very specific things. And the future of smart devices; it’s out there, but
it’s not there today, that’s why you say 12,000 jobs being laid off. Hill: The stock is up a little bit, and time
and time again, we see company X come out, good quarterly results, they lower guidance,
and guidance trumps results and the stock drops. We’re not seeing that today. I’m assuming
it’s because of the job cuts. Do you think the optimism in Intel and the management is
warranted? Erickson: I think it’s difficult to say today,
Chris, because I think demand is going to be the name of this. Right now, efficiency
is the name of the game. You’re cutting jobs, trying to vertically integrate, you’re going
out and buying growth like we’ve seen in semiconductor companies out there. The to-be-determined
piece is, is demand going to be what we think it is out there? There’s a lot of demand,
like we said, from Internet of Things, smart devices, all these have semiconductor and
processing chips in them. We haven’t seen that demand yet. I think that’s the question
we have to answer before we can peg the valuations for Intel that you’re seeing right now. Hill: Alright, let’s move on to Yahoo. I had
said, on the podcast yesterday, that the first 78 questions during the conference call were
going to be about the sale of Yahoo. And we’ll get to that. But, anything stand out in terms
of the quarterly results, Matty? Argersinger: Not really. Unfortunately, more
of the same. Revenue was down 11%, the search business continues to suffer as it has for
a long time. Paid clicks were down 21%. I was looking back, Marissa Mayer has been at
Yahoo almost four years. And if you look, back in 2012, Yahoo’s revenue that year was
just under $5 billion. Well, the revenue of the last 12 months? $4.8 billion. So, slightly
down in four years. And you think about all the changes, the moving parts, the acquisitions.
And to really not see any kind of revenue growth is pretty astounding. Still, I mean, this is a business that generates
a lot of cash, about $1 billion a year in operating cash flow, which is why, of course,
we’ll get to it, why there’s interest on the acquisition side. Still about a billion unique
visitors per month to Yahoo properties, which is impressive. And of course, you’ve got the
15% stake in Alibaba still, big position in Yahoo Japan. There is obviously value and
assets that people want. And it’s a business that’s still generating a lot of cash. Hill: Over and over on the conference call,
Marissa Mayer communicated a very clear message, which is, “We are taking this sale very seriously.”
And when you look at some of the operational moves that Yahoo has made in the last three
months, it absolutely looks like they’re walking the walk on this one. They’re shutting down
offices in different locations, they’re closing down different verticals that haven’t been
as strong as some of the other ones. Yesterday we talked a little bit about Yahoo Sports
and Yahoo Finance being among the stronger verticals. So, I think Verizon’s the lead
horse. Argersinger: I agree. Hill: What has Verizon done in terms of acquisitions
in the past? In term of how they go about them? Do they just write a big check? Is there
stock? I’m trying to think, in terms of Yahoo shareholders, or anyone who’s looking at this
thinking, “Well, wait a minute, if there is value there, maybe I should buy a couple shares
of Yahoo just because maybe they do get bought out at a premium.” Argersinger: Well, we can use the latest example
from Verizon, when they acquired AOL last year. Similar business to Yahoo. They paid
all cash, $4.4 billion. I think it was a $50 takeout price, so AOL shareholders got a nice
return. That business had kind of a Renaissance there for a few years, and they got a buyout
price from Verizon. Can’t really do that with Yahoo. I think Verizon is the clear leader.
If you look at why they did the AOL deal, it was really to expand mobile video advertising.
And they can do a lot of that with Yahoo, as well, but Yahoo, of course, has a $35 billion
price tag on it right now. There has to be some premium beyond that, given the number
of players we have in the acquisition hunt right now. And Verizon just doesn’t have the
balance sheet. They’re a huge company, but they’d have to
take on a lot of debt to do an all-cash deal in this case. So, I think they’ll probably
pay with some stock, if they’re going to do the Yahoo deal. Whether or not that is appealing
to Yahoo shareholders, I don’t know. I have to say, reading about the soap opera of this
acquisition, it reminds me a lot of Dell a few years ago. I just feel like Dell dragged
on. We knew it was either going to be taken private or acquired. And there were players
coming in and out of the deal, Carl Icahn got involved at some point, and eventually,
of course, it was taken private. I just wonder how long this is going to drag out, given
the number of interested parties and the diversity of what people want to do — acquire the whole
company, acquire assets of Yahoo. It’s going to be fun to watch … well, maybe not fun. Hill: And, Simon and I were talking earlier
this morning. I thought of a sports analogy, where one team is looking to trade for a star
player, and the opposing team says, “Okay, we’ll trade our star player, but you have
to take these three other players, too, who aren’t as good, and they have bad contracts.” Argersinger: “Take those contracts, give us
some cash.” (laughs) Hill: And that’s the thing. I’m sure, if you’re
Verizon, you’re looking at Yahoo and you’re just thinking, “Can we just take these segments?”
It makes sense to me that Verizon is looking to add content to their pipes. So, looking
at Yahoo Sports, looking at Finance, looking at some of the other verticals. But, if I’m
Yahoo, (laughs) I’m not just selling Yahoo Sports. Argersinger: No. I think your earlier point
was good. Say what you will about Marissa Mayer, if she leaves this year, which is most
likely, after the acquisition, shareholders, since she came in, have actually done pretty
well. I think Yahoo has probably about a double in stock since she came in. It’s kind of under-performed
the market recently, but I think she’s done a good job. She certainly has a shareholder
mindset. So, I think she has positioned the company, as you said, for a full sale of the
company. And she wants the highest price she can get for shareholders, obviously. Why wouldn’t
she? She has a lot of shares herself. Erickson: Yeah. And the point like you were
making, Chris, everybody is competing for our time these days. You can only check so
many apps or go on so many websites every single day. Yahoo and Marissa Mayer had the
right strategy all along. “Hey, we want to be a part of your habits on a daily basis,
and we’re going to build the products around those.” I just think Yahoo was in a difficult
position because they were so far behind that transition to mobile, where everyone was checking
apps on their phone. Now, I do check Fantasy Football quite a bit during the season, I
will admit. But I just don’t think Yahoo was as established as they wanted to be in your
daily habits. Hill: Intuitive Surgical’s shares are hitting
a new high today after first-quarter profits came in much higher than expected. Revenue,
also higher than expected. This is one of those quarters, Simon. (laughs) This is why
you own this stock, for quarters like this. Erickson: Oh, yeah. Beautiful razor and blades
model that we’ve seen here with Intuitive Surgical. Even better, when the razors and
blades are both really expensive. Matty, you mentioned the Renaissance earlier, talking
about Yahoo. Let’s talk about the da Vinci systems that Intuitive Surgical is selling– Hill: Oooh, nice.
Erickson: –for robotics surgery. Argersinger: (laughs) Well done, Simon. Erickson: They shipped 110 da Vinci systems
in the quarter. By a 3:1 margin, they’re selling their newest Xi systems. These are the more
expensive, more utility, the table moves underneath them, able to do more procedures. So, you’re
selling at the high end of the systems, which is great, when the razors are the most expensive
razors you can sell. And then, looking at the blades, they’re just selling more and
more consumables to compliment those. We saw the number of procedures up 17% in the previous
quarter, and then 14% in the previous year. Mostly from general surgery, in the abdomen,
skin, stuff like this, and urology, too. So, they’re expanding what the da Vinci system
can actually be used for, also. This is great. They’re seeing further growth in 2016, this
is exactly what you want to see in a company like that. Argersinger: And, we’ll use the Renaissance
again here. If you look at the stock, I didn’t realize it was sitting at an all-time high,
but this was — go back to 2012, there was a really big slowdown. They were almost in
that transition phase to the new platform. And there were all these questions of cannibalization,
people are used to the old platform, why would they move on to the new one? Plus, I remember
Andrew Left from Citron had a short report around that same time, and the stock got really
butchered at that point. But gosh, it’s up, it’s almost doubled since that low. Erickson: And like you said, the company’s
at an all-time high now. P/E is still at 40, which is rich by many investors’ bloods. But
keep in mind also, 75% of revenue is now from recurring sources. Great to see. The instrument
and accessory revenue is growing 16%-plus here. That’s even higher than the top line
is growing. So, you’ve got a modelable company, Wall Street likes predictable, modelable companies,
and they’re willing to give those P/Es that are high, like in the 40 range. Hill: I’m reminded a little bit of Caterpillar,
from the standpoint of, if you think about who their customers are, it’s huge businesses,
it’s countries that are making major purchases, and they have to be planned out, in some cases,
years in advance. And in the case of Intuitive Surgical, albeit on a smaller scale, you have
kind of the same thing going on, where hospitals are saying, “Okay, do we want to write a seven-figure
check for this surgical system? If so, when do we want to write it? We have to plan for
that.” All that sort of thing. So, just selling a few extra machines in a given quarter makes
all the difference in the world. Erickson: Huge up-front costs. And you look
at those customers, you were talking about Caterpillar, you’re using machinery that’s
going to be constructing a giant construction project, putting up a building, doing something
really big — it has to be dependable for you. Quality and brand really matters for
a company like that. Intuitive Surgical, probably the most important industry of all, healthcare,
for something that has to do well, you want to go with a company that’s a leader. Intuitive
Surgical has been at this for years. It’s been multiple recommendation on the Rule Breaker
scorecard, as we just saw that platform growing. I think it’s in a great place right now. Hill: Coca-Cola’s sales fell for the fourth
straight quarter. I know, Matty, that the strong dollar hurts Coca-Cola, because about
three quarters of their business is outside of the United States. But, I’d just like to point out
that sales fell for the fourth straight quarter. Argersinger: Right. (laughs) And it is, because
we are talking about Coca-Cola, speaking of predictable and modelable. It’s one of those
businesses where you don’t expect, really, any downside. The world’s consumption of fizzy
or non-fizzy beverages should continue to rise as wealth expands and emerging markets
grow. But it’s been tough going for Coca-Cola. It really is because people are consuming
less soda. Good thing for health reasons, especially in North America. They’ve done
really well in the still beverages, waters, teas. It just hasn’t been enough to offset
what they’re seeing in the soda markets. I’ll say this, too, about Coca-Cola, and actually
the entire consumer staples sector, really — this was and is an expensive stock, going
into this quarter. So, I’m not surprised that it’s selling off a bit after these earnings.
Even if you think the dollar stabilizes or weakens, which would help Coca-Cola; maybe
soda stops declining, it flattens out, and they have some wins on the still beverage
side — this isn’t business I expect to grow more than the pace of global GDP. So, maybe
low single digits over a long period of time. And yet, the stock is trading for about 23
times this year’s earnings. That’s a pretty high valuation. Hill: That’s pretty spicy for a business as
mature as Coca-Cola is. Argersinger: Right. And of course, Coca-Cola
deserves a premium. I think it’s a premium business with huge competitive advantages.
The dividend now is over 3%, so there’s some value potential in the stock, but I don’t
think at this price. Hill: Yeah, for anyone who looks at Coca-Cola
and thinks, “I’ll buy this for the dividend portion of my portfolio,” you can do that,
but the stock is down about 4.5% today, which is the biggest drop in a couple of years,
and has essentially wiped out the dividends of the last 12 months. Argersinger: Right, and so this is a tough
one. It’s a consumer staple and a staple in many people’s portfolios. At this price, I
don’t know what kind of total return you can expect from here. Hill: [email protected] is our email
address. From Andy Storch in Orlando, Florida: “In January of 2011, I was 31 years old, and
had just moved from Los Angeles to San Francisco to start a new job. I had some money from
an old 401(k) to invest and went looking for investing podcasts, and coincidentally found
yours the first month that you started. I got hooked right away and have listened nearly
every day since. I’ve learned a ton about investing and established my new philosophy
of only investing in companies that I understand and want to hold for 20-plus years, which
has served me well with stocks like Nike and Starbucks more than doubling since I bought
them that year.” Argersinger: Right on. Hill: Well done. “I’ve also since subscribed
to several Motley Fool services and benefited greatly from them. The highlight of the last
five years was when I traveled to Sydney, Australia for business just after Joe Magyer
moved out there, and I reached out after listening to him on the podcast many times. We met up
for a few beers while I was down there. Thanks again for the great podcast and investing
education! Here’s to one thousand more.” That’s great, that’s fantastic.
Argersinger: Yeah. Erickson: Alexandria is no Sydney, Australia,
but we do have good beer up here, too. Hill: (laughs) We do. Andy, if you’re out
here, if your travels bring you this way, come on by. Before we wrap up, I had said
earlier in the week I wanted to say a few thank yous. I want to thank a couple of people.
One is Mac Greer, who produces our radio show and helped launch Market Foolery when we started
nearly five and a half years ago, and he produced the first few hundred episodes. Thank you
to Jeremy Phillips, who was our boss at the time, who gave us the green light, which was
great, because Jeremy’s very much one of those “go ahead and try it, see what you can do”
kind of people. And, I would be remiss if I did not thank
Tom and David Gardner, who founded The Motley Fool in the early 1990s and set the tone for
everything our company does. It’s 2016, and I’ve been here a long time. I’m happy to say
our company is now at the point where we compete with other businesses. And that’s great. It’s
not always easy, but it’s great to be at the point where we are competing with other businesses,
because when Tom and David started this company in the early 1990s, they had to a lot more
than just compete. They were dismissed, they were laughed at, they were threatened, both
from a business standpoint and a personal standpoint, because, here’s the thing — when
you seek to disrupt a massive industry, the massive industry doesn’t like it at all.
Argersinger: (laughs) No, not at all. Hill: And the massive industry is going to
fight back. So, thank you to Tom and David for starting all this in 1993. We’ll see if we can
keep it going. Thanks for being here, guys. Argersinger: Thank you Chris.
Erickson: Thank you.

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