The $100 million golden goodbye

Yahoo's recently fired chief operating officer is reported to be leaving with a golden parachute of between $60 - $100 million. His failure to drive advertising revenue caused his demise, but it may be a company-wide problem.

Just over a year after he was appointed, Yahoo Chief Operating Officer Henrique de Castro has been let go by the company. The high profile hire had clearly fallen out of favour with CEO Marissa Mayer who, in a leaked memo, said the decision was all hers. “I made the difficult decision that our COO, Henrique de Castro, should leave the company,” she wrote.

There is talk that de Castro could walk away with between $US60 and $US109 million from his 15 month tenure at the struggling internet giant.

If that number seems staggering, it’s because it is staggering.

Yahoo’s share performance over that time would suggest a company that is defying the doubters and demonstrating significant future upside. During 2013 the share price more than doubled from $19 to over $40. During the same period Google’s stock rose just 56 per cent despite continued revenue and profit gains in all of the company’s key operations.

Yahoo’s stock price is no doubt keeping the likes of hedge fund powerbroker and Yahoo board member Daniel Loeb happy – but revenues are not showing the same sort of trajectory.

Third-quarter revenue was down 5 per cent year on year; income was down 39 per cent for the same period. For Q2 it was more of the same – revenue year on year down 7 per cent, income (non GAAP) down 13 per cent; and in Q1 it was the same again – revenue flat and income down 3 per cent year on year. Reports are when Yahoo announces Q4 results on January 28 it will be more of the same.

Four straight quarters of declining revenues meant de Castro was on borrowed time, especially because prior to his hiring Yahoo’s two years of zero effective growth had led to a serious erosion in share price and market confidence. De Castro’s real remit wasn’t as an operator, he was brought in to bring in large scale advertiser spends – the sort of thing he was alleged to have been successful at during his time at Google. At the very least it was expected that Yahoo might be able to mirror the growth trajectory of the digital advertising category, which is growing at a reported 8-10 per cent clip per year, rather than face similar revenue challenges of legacy media outlets such as newspapers and magazines.

Ultimately the hire of de Castro was an unsuccessful one. If the reports of de Castro’s $109 million parachute are indeed correct, he will walk away with just under 20 per cent of Yahoo’s total 2013 earnings. Not bad for a hire widely reported to be the wrong guy from day one.

What does this mean for Mayer? It’s hard to say. Anyone paying attention to Yahoo’s earnings over the past 12 months could see that there was a significant disconnect between the company’s performance and its stock price. Still, it didn’t seem to matter – Yahoo’s Asian investments in Alibaba and Yahoo Japan are what are really exciting investors and pumping the share price. However, ultimately Mayer’s remit as CEO is about kickstarting the US business. In short,  she must arrest the revenue decline by winning back advertisers’ confidence and wallets.

So far Mayer has found form in spending Yahoo’s money – dropping $1.1 billion on Tumblr and acquiring 22 other businesses in 2013 alone – yet hasn’t shown her skills in improving the amount the company makes. Yes, turnarounds take time but at some point if the revenue isn’t there the formations of the strategy must be. Neither seem to be visible right now. And for the sake of a more competitive digital advertising industry, Yahoo needs to find a way to return to greatness.

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