There have been two developments of note at Yahoo! Inc. this week. One was the news that Yahoo was forced to make an unflattering disclosure against its wishes, although investors don’t seem terribly unnerved by the information that came out. The other was an analyst’s report reminding investors that Yahoo’s value doesn’t have much to do with its core business anymore.
For some reason, Yahoo didn’t want to tell investors that a contract with a single company, Microsoft Corp., accounted for 25 percent of its $5 billion of revenue last year and 31 percent of its $1.1 billion of revenue last quarter. Those are need-to-know data points by any reasonable standard.
Before last quarter, Yahoo had disclosed that the contract with Microsoft was responsible for “more than 10 percent” of its revenue during 2011 and 2012 -- without specifying how much more. Yahoo’s management would have continued getting away with this kind of obfuscation, had it not been for some meddling staff accountants at the Securities and Exchange Commission’s division of corporation finance.
Think about it this way: If somebody you knew came to you asking to borrow money, you should be able to get a straight answer if you ask how much other debt that person has. “More than $10,000” isn’t the right response if the amount is actually more than $30,000.
The information about Yahoo’s dependence on Microsoft is significant because it goes to the issue of concentration risk. If one company accounts for an unusually large portion of another’s revenue, this may be riskier than if the revenue sources were more evenly spread out.
Here’s how the new disclosure in Yahoo’s latest quarterly report came about. In April, an SEC staff accountant, Patrick Gilmore, sent Yahoo Chief Executive Officer Marissa Mayer a comment letter, which noted that Yahoo in its annual report had said its search agreement with Microsoft represented more than 10 percent of revenue during 2011 and 2012. Gilmore said “please tell us what consideration was given to quantifying the percentage or amount of revenues attributable to the Microsoft arrangement to more clearly demonstrate the significance of this concentration.”
(The search agreement “provides for Microsoft to be the exclusive algorithmic and paid search services provider on Yahoo Properties,” according to Yahoo’s filings.)
Yahoo responded that it would disclose the information in its 2013 annual report, if necessary. The SEC then told Yahoo to provide it with the amounts for 2012 and the first quarter of 2013. Yahoo did so in August, but asked the SEC to keep the data confidential. No way, the SEC said. Gilmore in a September letter told Mayer to disclose the information, starting with Yahoo’s third-quarter report. So that’s what Yahoo did. The correspondence between Yahoo and the SEC was released this week.
Granted, there may be more important matters facing Yahoo, whose shares closed yesterday at $40.22, up 18 percent since Nov. 12 when the company filed its latest quarterly report. The vast majority of Yahoo’s value nowadays lies in its 24 percent stake in closely held Alibaba Group Holding Ltd., although there is no clear timetable for an initial public offering by the Chinese e-commerce giant.
This week, RBC Capital Markets analyst Mark Mahaney released a report estimating that Yahoo’s stake in Alibaba was worth $36 billion. By comparison, Yahoo’s stock-market value is about $40 billion. So even if Mahaney’s figure is only a wild guess, you get the point. Yahoo’s website -- or for that matter, the revenue it gets from Microsoft -- isn’t worth all that much, relatively speaking. Mahaney previously had pegged Alibaba’s value at $26 billion.
That said, Yahoo shouldn’t be trying to hide the ball when it comes to important disclosures about its main business. Kudos to the SEC’s staff for catching this. And it wouldn’t hurt if Yahoo figured out how to revive a business whose underlying value is just a step or two away from small-cap stock territory.
(Jonathan Weil is a Bloomberg View columnist.)
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