JACKSON SECURITIES, LLC

Research for the Prudent Investor

Date 10/18/06 Yahoo! (YHOO): 3Q06 result,

Current Price $24.15
maintain HOLD rating.
52WK HI $43.66 • Industry: Internet Services
52WK LO $22.88 • YHOO: NASDAQ; $24.15
EPS (TTM) $0.85 • 12-month price target: $33.00
Shares Outstanding 1.4B Buy initiated 7/14/06: $32.23 Downgrade to Hold 7/19/06:
Market Cap. $31B Target: $37.00 $32.24 Target: $33.00
Dividend Yield NA
Price/Earnings (TTM) 27X
Price/Sales (TTM) 5.8X
EV/Revenue (TTM) 8.3X
EV/EBITDA (TTM) 26X
EBITDA (TTM) $1.69B

Brian Bolan
Research Analyst
Technology Company Description
Jackson Securities, LLC Yahoo! is an internet search and technology platform for all media that
300 S. Wacker Dr., Suite 2450 has established itself as the leader in its growing market. Free downloads
Chicago, IL 60606 of applications, tools and other media based products have helped to
Ph: (312) 253-0578 broaden the idea of Yahoo! from more than just a search engine to a
Fax: (312) 986-0560 destination site and platform for new media delivery.
bbolan@jacksonsecurities.com
Valuation and Recommendation:
We believe that investors will no longer afford a large multiple to a growth
company that isn’t exhibiting all the signs that a normal growth company
shows. While some may think the worst may be over, we would rather
remain cautious in our stance at this time. We continue to recommend
investors HOLD shares of Yahoo!.
Jackson Securities, LLC seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decisions.
Please also refer to the important disclosures found on page numbers 6 and 7.
Analyst Certification is found on page number 6.
Yahoo! (YHOO)

First, the Good News

We were pleased to hear that the rollout for Project Panama is on

schedule and the first phase is in motion. While this is good
“headline” news, we do not expect to see a financial impact until
2Q07 results are released. Going forward, we do not believe there
will be headline risk related to the Project Panama issue that
concerned many investors in the prior quarter.

Project Panama, the code name for the improvement in search

monetization, had been delayed from the third quarter into the
latter half of the fourth quarter. We now expect a launch of Project
Panama in the end of the 4th quarter with full advertising
participation in the first half of 1Q07.

Project Panama is expected to improve the relevancy of searches

and drive better monetization rates. While Yahoo! management
has noted in the past that their searches are mostly the same as that
of Google, we note that Google has had superior financial
performance of late.

The rest of the news

The rest of the story on the conference call mostly pointed out
challenges the company will face over the next 12 months. We
believe one of the key challenges will be the question of inventory.

This quote from the conference call tells us that an inevitable shift
is beginning to occur :

“The market is going through a significant transition with

new forms of inventory becoming available from a range of
new and established competitors.”

- Yahoo! CEO Terry Semel

This tells us what many had believed for some time, and that is that
graphical advertising is taking over and new forms of advertising,
such as those advertisements one would see on a web video
production are right in step with the higher end graphical ads. The

JACKSON Brian Bolan 2

SECURITIES, Research Analyst – Technology
LLC
Yahoo! (YHOO)

vast majority of what Semel was referring to is the inventory and

pageview growth of the social networking sites.

Earnings

Earnings met our expectations of $0.11 per share, but revenue was
just slightly below our estimate of $1.137B. During the quarter we
lowered our estimates as the CFO noted that the company would
come in at the bottom half of the guided range.

With the expense of stock options, investors are getting a better

picture of how companies are rewarding their employees. Yahoo!
continues to use stock options to reward employees, and it appears
its offering up more and more stock options in order to retain its
human capital. In the previous quarter, the company spent $100M
on stock based employee compensation in the quarter, or roughly
$9,500 per employee. This quarter saw an increase to $121M or
$11,000 per employee.

Click Fraud

Click fraud almost vanished from the discussion, but this is not to
say that it isn’t still out there. An industry wide problem, click
fraud has been measured at about 14% of all ads that were clicked
on. We believe the number may be a little lower and that it is a
very difficult idea to get your arms around fully.

We still believe that click fraud will continue to plague the

industry as a whole and it will only be a matter of time before the
press plays that tune again. Being an industry wide problem, we
believe the risk to be mostly headline in nature, and not specific to
Yahoo!

JACKSON Brian Bolan 3

SECURITIES, Research Analyst – Technology
LLC
Yahoo! (YHOO)

Valuation

We are maintaining our hold rating on the shares of Yahoo!, and in

the coming weeks we will roll out our estimates for 2007. At that
time we expect to see some change from our current target price of
$33.

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Source: Company reports

JACKSON Brian Bolan 4

SECURITIES, Research Analyst – Technology
LLC
Yahoo! (YHOO)

Source: Company reports, Jackson Securities estimates

JACKSON Brian Bolan 5

SECURITIES, Research Analyst – Technology
LLC
Analyst Certification
I, Brian Bolan, hereby certify that the views expressed in this research report accurately reflect my personal views
about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed in this research report. I may be
compensated in part based on the overall profitability of Jackson Securities, LLC, which includes earnings from
investment banking and all other aspects of the firm’s business.

Important Disclosures
Disclosure of Conflicts of interest:
Neither Jackson Securities nor any of its publishing analysts or their immediate family members has a position in the
securities described herein.

Compensation:
• The research analyst has not received compensation based upon investment banking revenues or from the
subject company in the last 12 months.
• Jackson Securities has not in the last 12 months managed or co-managed a public offering of securities,
received compensation for investment banking services from the subject company or any compensation for
products or services.
• Jackson Securities does not expect to receive or intend to seek investment banking compensation from the
subject company in the next 3 months.

Position as Officer or Director:

Neither the research analyst nor a member of his/her immediate household is an officer or director with the
company/companies mentioned in this report.

Market Making:
Jackson Securities does not make a market in this stock
Explanation of Ratings:
Buy - Expected 12-month absolute performance of +10% or higher
than the market price at which time the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from
the price at the time the rating was issued.
Sell - Expected 12-month absolute performance of –10% or lower than
the market price at which time the rating was issued.

Distribution of Ratings:
Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:
Buys – 65.52% (38 of 58 active recommendations)
Holds – 31.03% (18 of 58 active recommendations)
Sells – 3.45% (2 of 58 active recommendations)

Jackson Securities has provided investment banking services within the previous 12 months with the following
percentage of the companies they have rated:

Buys – 2.64% (1 of 38 active recommendations)

Holds – 0% (0 of 17 active recommendations)
Sells – 0% (0 of 2 active recommendations)

Risks: General economic conditions, economic slowdown/recession, adverse industry news.

Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy any securities
mentioned herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any
securities mentioned herein in any jurisdiction where such an offer or solicitation would be illegal. We are not
soliciting any action based on this material. It is for general information only, and it does not constitute a personal
recommendation or take into consideration the particular investment objectives, financial condition or financial needs
of any clients. Before acting on any advise or recommendation in this research report, clients should consider seek
professional advice. Past performance is not a guide to future performance. Future returns are not guaranteed, and
a loss of original capital may occur.
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appearing on this material only and are subject to change without notice. We endeavor to provide updates on a
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Brian Bolan
Research Analyst – Technology