# Yahoo's Sleight of Math Turns Free Cash Flow Positive

(Bloomberg) -- How do you turn negative \$2.5 billion into positive \$3 billion? Pay close attention. Here's the mathematical equation:

(Non-GAAP Financial Metric)² x (Yahoo) = Absurd

Yahoo CFO Ken Goldman turned up this week at a Citigroup investor conference for a chat and a post-sale victory lap about a company whose internet businesses were worth more than \$45 billion to Microsoft in 2008 but are now in line to sell for less than \$5 billion. He rattled off some nice-sounding numbers about Yahoo, including this:

"And over this past four years [we] had free cash flow of approximately \$3 billion -- actually a little over \$3 billion. ... [W]e have been very, very focused on free cash flow."

If you have a quick peek at the graphic below derived from Yahoo's financial statements for 2012 to 2015, you'll see the actual reported figure is negative \$2.5 billion in free cash flow. You may also notice in the prior four years, from 2008 to 2011 -- presumably a period when Yahoo was not "very, very focused on free cash flow" -- the company disclosed a positive \$3.6 billion in free cash flow.

Here's how to arrive at Goldman's preferred free cash flow number: You Yahoo it.  See that negative \$3 billion in free cash flow that Yahoo reported for 2015? That's not really the number, because it's dragged down by about \$3.3 billion in cash taxes on a partial sale of Yahoo's stake in Alibaba, the company's most valuable asset to which the ugly internet bits of Yahoo have been attached like a barnacle. Same for 2012. Yahoo prefers to consider that its free cash flow for that year excludes cash taxes of about \$2.3 billion related to another Alibaba stock sale. There you go. More than \$3 billion in beautiful Yahoo magic.

Mind you, Yahoo's preferred free cash flow numbers don't exclude some one-time gains when they make Yahoo's free cash flow look better. For the first half of this year, for example, Yahoo's preferred free cash flow number included nearly \$250 million in proceeds from a sale of land Yahoo had owned in the Bay Area and a \$190 million tax refund.

Both of those are -- like the taxes on the Alibaba share sales -- one-time events. Without those two gains, Yahoo's free cash flow for the six months ended June 30 would have been about \$290 million rather than the reported figure of \$723 million.

Sure, free cash flow isn't a standard metric under U.S. generally accepted accounting principles, and companies can further adjust it to their heart's content. But actual cash money has left the building in the case of Yahoo's tax payments. And cash flow is arguably the most important number in any business, because cash is what keeps the lights on.

What Goldman is doing shows the dangers of the mathematical gymnastics that public companies do to massage their earnings within an inch of their life. Investors may be savvy enough to work out how companies present their finances in the best possible light, but it's harder when those gussied-up financials -- like "\$3 billion in free cash flow" -- are presented later, stripped of any context.

None of this bizarre, Yahoo-style math will matter in a few months after the company is safely tucked in Verizon's burly arms. But Goldman's fuzzy math is a lasting reminder of how truly absurd Yahoo was and ever shall be.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

1. Reminder: Free cash flow is broadly defined as the cash left over from a company's business operations at the end of each financial period, minus its spending on buildings, new furniture and other capital expenses.