Jeff Bagley
A Quick Look at Yahoo's Earnings
10/08/03 06:16 PM EDT
Update YHOO
After the cost of stock options, there's little free cash flow left.
Don't get me wrong, I don't like to bash stocks based on valuation, and I'm not a big fan of expensing options. But despite Yahoo's eye-popping growth, there are a few interesting--and disturbing--facts that I've gleaned from reading Yahoo's earnings release:
(1) Included in Yahoo's year-to-date "free cash flow" of $326.3 million is a tax benefit from the exercise of options of $85.8 million. Using Yahoo's tax rate of 38%, this equates to a tax deduction of $225.8 million for the first nine months of the year. That $225.8 million would be equal to employees' net gain on the exercise of options, which is taxable to the employee and thus deductible for the corporation. That isn't included in compensation expense.
(2) I don't have period-end shares outstanding (which isn't a lot to ask, don't you think?), but shares outstanding increased by 15.3 million from the end of the year till July 30th of this year. (Diluted shares outstanding used in the calculation of EPS actually increased by about 30 million year-over-year.) If the company wanted to keep the share count constant by repurchasing shares, they would need to pay about $600 million at current prices, less the $203 million received in the first nine months of the year for issuance of stock.
So that's at least $400 million in real expense, which puts the company's year-to-date free cash flow of $326.3 million in a different light. Sure the shares were trading lower earlier this year (and thus the cost of repurchase would be lower), but remember that I am including shares outstanding as of July 30th, and cash received from the exercise of options for the whole nine-month period. In any case, you catch my drift.
(3) Using the Black-Scholes model, the company last year would have recorded an after-tax expense of $482 million for options grants. I'm no fan of this methodology, but the numbers jibe with the share-repurchase way of looking at the cost of these options.
Another thing, too...according to the company's proxy statement, there are a total of 132 million stock options outstanding. What will be the cost of offsetting this dilution?
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