Dear Mary Meeker.......
A local buddy of mine e-mailed me this letter that he said he sent to Mary Meeker and a bunch of other people, who appear to be media and shareholder types. He seems to like some of my themes that we have discussed on this thread. The "Meekerisms" at the end are hilarious.
Dear Ms. Meeker:
I read with pleasure the article about you in the recent issue of Barron's. You certainly have a true grasp of the power of the internet, and you have made your clients a significant amount of money. My concerns, as outlined below, are multifaceted and include the distinct possibility that you, Morgan Stanley, and many individual shareholders will be significantly and negatively impacted when the valuation of these internet stocks return to reality. I draw specific attention to Yahoo!, a stock to which you gave a great deal of attention in the Barron's article. In this letter, I question the undisclosed conflicts that arise from Morgan Stanley's involvement with Ziff Davis, Softbank and Yahoo!.
I write this letter assuming that nobody other than management has a better grasp of the Yahoo! business than you. So I don't need to go through the fact that is has a $25 billion fully-diluted market capitalization, about $200 million in revenue (virtually all of which comes from banner advertising), and insiders have been actively selling stock for the past two years. I also don't need to tell you that there are no fewer than eight similar services, some of which are operated by the largest media companies in the world. A few of these alternative services include AOL, Excite, Snap (NBC), Go (Disney), MSN (Microsoft), and Lycos. The cost of entry is low, the services are offered for free, and the competition is always just a click away, as you analysts like to say. So here is my problem.
1) Are you aware that Softbank accounted for one-third of the third quarter revenue growth? In the third quarter, Softbank accounted for 8% of revenue, up from 1% in the second quarter. Given the low variable costs in the business, I would guess that most of this wound up in their earnings. This fact, which was not disclosed by management on their conference call, was solely responsible for beating street revenue and earnings estimates. Yahoo! quietly filed these facts deep in the text of their 10-Q statement. As you know, Softbank owns about 30% of the common stock of Yahoo!. They also own about 70% of the equity of Ziff Davis (I will get back to this later). I would guess that most of this revenue came from E*trade, using part of the $400 million that Softbank invested about five months ago. Not meaningful, you say. Read on.
2) Are you biased at all due to Morgan Stanley's exposure to the defaulted Ziff-Davis Loan? You did a great job selling the Ziff-Davis IPO, junk bonds, and bank loan earlier this year. Justifies your multi-million dollar salary I presume. I am sure Softbank, who pulled $2 billion out of the deal, is very happy. They are now able to use that money to support Yahoo! directly through investment and indirectly through suspect advertising contracts from related companies. Too bad Ziff-Davis is virtually bankrupt, only six months after the IPO. I saw in their 10-Q that the bank loan you provided will be in default soon. Are your credit folks breathing down your neck to get that ZD Net internet IPO done to repay Morgan Stanley? How are the class action law suits going? Just curious. I would never go so far to say that the half billion dollar common stock investment in Yahoo! held by Morgan Stanley Asset Management is a factor in any of what we have discussed so far.
3) Do you think Yahoo! should have sold additional stock to Softbank last July? With little to hype in the second quarter (as management decided not to disclose the Softbank revenue), Yahoo! decided to do the following two transactions (both of which worked from a hyping standpoint). Spilt the stock, and sell $250 million additional stock to Softbank, raising their percentage by a meaningless 1%. This sale of common stock was at about $91 per share. Is Morgan Stanley management upset that it was their money (due to the ZD loan) that Softbank used to buy this stock and to buy the stock of E*trade (in turn used to support Yahoo! with advertising revenue)? Yahoo! management stated that they had no immediate use for the cash, other that possible acquisitions. Since the sale, Yahoo! has completed acquisitions, but decided to use their stock. It appears to me that this sale to Softbank wasn't very shareholder friendly since they have not used any of the money and their stock price has since doubled. Why didn't they wait? Given the direct and indirect links between Morgan Stanley and Yahoo!, you should consider making them a subsidiary. You could do a merger of equals, as your market values are not too far apart.
4) Do you think Yahoo! dramatically reduced CPMs recently to meet Q4 street expectations? If you have spent any time on the Yahoo! service recently, you may have noticed that every page has a banner. Significant demand? Or reduced CPMs? Given what Infoseek management said recently in Forbes about the trend of CPMs and the fact that Yahoo! as of last quarter refused to provide CPMs going forward, I would guess the latter. Is this business model sound? Will it ever be? If 8% of revenue comes from Softbank, some percentage comes from barter and sex ads, and CPM rates are plummeting, what does that say for Yahoo! in 1999?
5) Are you aware that only 40% of the 40 million registered accounts are active? In the Barron's article you referenced the 40 million users. In response to a question on the third quarter conference call, Yahoo! management begrudgingly stated that only 40% of these users were active. Therefore the 40 million number that you use is way overstated, and includes dormant accounts and some level of double counting. As you may know, it is very difficult if not impossible to de-register. I was surprised to see you touting this number. Most of the other free services have user bases that are not dramatically different than Yahoo!.
6) Have you ever asked for a break-down of which users are driving the page views? Do you think that a small percentage of heavy users are driving the vast majority of the page views? For instance, if 500,000 heavy users (such as chatters) viewed 200 pages per day, that would account for about 70% of the page views. Unlike my other comments, I don't have any information on this. Maybe you should ask management. While you are at it, ask them for the median duration of a page view I predict it would be around two seconds.
In closing, I have a few "Meekerisms" for you.
Don't make your career a short one. Don't fall in love with a stock, a management team, or worse, a web site. Don't confuse a cool web site with a sound investment, you are smarter than that. Hmmm, Eli Lilly cures diseases, web sites don't. Don't breath your own exhaust. Remain skeptical of management, they will use you. Protect your clients, your firm, and your long term reputation. Analysts can be rewarded for calling both the ascent and the descent.
Regards and Happy Holidays |
