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 Summary: Yahoo has done what it needed to do: report a solid quarter in the high end of the range. The results were not a blow-out and certainly could have been higher. However, they should be enough to allow Yahoo to maintain its current Microsoft stance: no deal unless you raise price. Yahoo has not decided whether to pursue Google outsourcing deal, but clearly still on table.
Conference call starting... Goes from godawful Muzak to technical difficulties to interminable Safe Harbor disclosure. Please see notes below...
Revenue (Net) $1.35 billion, above consensus of $1.32 billion, upper end of range, but not a blow-out (ie, in line with Yahoo pre-release through NY Post this morning). Revenue could certainly have been stronger: Owned and operated properties decelerated again, to 18% (from 22% last quarter). Overall, revenue growth only accelerated from 8% to 9% Y/Y--not what one would call impressive (bar so low they could have fallen over it--as they appear to have)--but revenue ex-TAC up a better 14% (no acceleration). US Growth good. International horrible.
Adjusted EPS: $0.11, versus $0.09 consensus, in line with whispers. Operating income in line with guidance range (high end). EBITDA down year-over-year, especially in U.S. This will be called "investment," but it's ghastly.
Free Cash Flow: Looks impressive at $647 million, but, sadly, this includes $350 one-time payment from AT&T (presumably buy-out of access contract). Adjusted cash flow down 20% year over year: Expected, but lousy. AT&T payment will be recognized will be recognized as fee revenue over four years ($22 million a quarter).
Guidance: Full year revenue guidance range remains the same (bad). Full year operating income guidance and free cash low guidance by $50 million (fine).
See model (below) for details.
Release
Conference Call
SAI Yahoo Financial Analysis
CONFERENCE CALL NOTES
Jerry "very proud." In upper half of guidance! Raising cash flow guidance! Let me take a moment to blow smoke up Yahoo employee posteriors.
"Execution improving". We have cash flow we need to deliver plan to increase revenue (Well thank goodness).
Microsoft: Proposal "substantially undervalues" one of a kind franchise. Same language as before. We believe our momentum will continue. Remain open to all alternatives including a sale to Microsoft. (Ie, we're not anti-Redmond zealots). We're also looking at other options. We will not go any deal that doesn't recognize full value of this company. (No number).
Q1: Display revs up 25%+ year over year. (Well hidden, apparently). Still No. 1 in US (for few more minutes).
Recap of long-term growth drivers: Increase volume and yield across properties. "Must buy" strategy.
Key to strategy: close gap on search monetization. We think we have closed gap. Panama strong (then why experiment with Google?)
Still, display biggest oppty (Because search query share going to less than 10%). Display--positioned to take share. Showing we can do that.
SUE:
This quarter shows we aren't bozos. Greater speed, efficiency, new products, faster.
"Starting point" strategy: 100s of millions start with Yahoo (I'm one). Instead of dozens of properties, a few starting points, links to others. Facilitating social connections, but not as another social network (Answers, Flickr).
Search: goal is 10% compound growth over next three years. This q, we neared goal on global (translation: missed) and exceeded in US. Now trying to differentiate. (Good luck). Search assist, search monkey (open search), mobile search. Relevancy gains (irrelevant).
[Sorry, all this fine, but query share will still continue to shrink. Natural monopoly and Google has it.]
Display: goal: 12% inventory growth. Exceeded that in Q1. Buzz...new beta product (Digg clone). 120 publishers in beta. Yahoo.com has sent 10s millions referral. Partner of choice (totally true).
Financials
GAAP search up 20%, int'l RPS gains 20%. Click yield going up. Maintain improved relevance, should attract higher bidding. Minimum bid changes... rewards for quality. Launch is most significant since launch of Panama. This and others important to 15% RPS gain goal. In Q1, we made that.
OUTSOURCING: We see value in being principal player for both search and display. But, may be more than one way to reach RPS goal. No decision on Google yet.
Display yield: pricing up slightly in US. Price of non-guaranteed ads has doubled, guaranteed up modestly. looking for 15% three-year growth.
BLAKE:
Revenue ex-Tac up 14% (Fine--flat with last quarter).
Net gain of $491 (non cash) from Alibaba IPO.
FOREX contributed 2%, acquisitions 2%. (Organic significantly slower). O and O search +16%, Display +15%.
Marketing services...some sectors still strong double-digit gains. But seeing weakness in finance and retail (blames economy).
AT&T deal: renegotiated: Now ad revenue sharing. Negative impact on revs ex TAC in 2008 $150-$200 million in 2008. Got $350 million payment this quarter. Will recognize over four-years as fees ($22 million a quarter).
13,800 employees: 600 hires, about 1000 fires.
Q2 outlook excludes impact of Microsoft-bid related costs. (huge investment banking, legal, and proxy fees).
Q&A (Dan Frommer reporting)
Why no change revenue guidance? Unstated answer: because that's where the business is. (Not the answer everyone wanted to hear).
Sue: Significant growth in "class 2" remnant CPMs, impressions (Yahoo and Right Media).
Seeing continued differences between search and display. Telecom and tech strong on display, health and autos in search.
Tougher comps on click yield improvements because of Panama anniversary.
Asian assets: Value consistency a big part of YHOO value. May or may not be part of undervaluing. What are hypothetical things you could do with Alibaba or YHOO Japan? Not going to be able to talk about different alternatives. Think position we've been able to achieve in China and Japan are unique. Scarcity value.
On flexibility of AMP: Any ad network open participation. Can partner YHOO inventory as well, and Class 2 inventory already in exchange.
On search component: AMP is primarily display platform. Roadmap includes integrating various forms of advertising sometimes considered search, but runs on same kind of inventory as display. "Content match."
What was one-time event for intl? No one-time event in international. You may be referring to shift for Japan... moving search business. Continued affiliate pressure affecting intl. Drives down overall rev growth. Very strong growth on display side.
MSFT distraction: What percent of growth rate impacted? Our business continued to perform pretty robustly, obviously watching economy and Microsoft uncertainty. Hard to say if any impact from Microsoft. We think we had a good qtr.
Is economic slowdown impacting both display and search? Or just display? Sue: Categories Blake talked about, financial travel and retail, are seeing same weakness (slower growth rates, in some cases modest declines) in display and search. Where we're seeing weakness, it's across both. But we think Internet is evolving into mainstream ad vehicle, and strong ROI components in both search and display.
How do we sustain search revenue once Panama is launched internationally? Pricing. Every launch we've had is global. Timing isn't always coincidental with U.S. launch. Seeing 15%+ RPS growth internationally as well.
60-70% improvement. RPS gap? We do a lot of crawling and testing of competitors in search across each of major variables. Also information that comes back from bidding on deals. Quite a number of inputs that go into that. In U.S. sponsored search have narrowed gap by about 30%... about 60-70% remaining.
Seeing cost savings from some activities we did last summer. As we roll out investment plan, in some cases is driving costs down below where we'd forecast.
Focus seems to be on monetization. What kind of ad inventory growth you're seeing in finance, entertainment, autos, and what's being done to drive inventory growth? Really is an ecosystem strategy. Need both great inventory and great monetization. Still a nascent stage of efficiency and transparency in display market. But we have seen and continue to invest in inventory both on and off network. Continue to be no. 1 in key areas like finance. Some of new launches around Shine and other sites.. trying to target inventory toward more desirable demos.
Preview
Key Metrics
- Gross Revenue: $1.82 billion consensus (guidance range $1.68 billion - $1.84 billion). Expect high-end or above range ($1.85 billion)
- Net Revenue: $1.32 billiion consensus (guidance $1.28 billion to $1.38 billion). Expect at least $1.36 billion.
- EBITDA: guidance range $400-$450 million.
- EPS: $0.09 consensus. Should be plenty of upside ($0.11-$0.14).
- Outlook:
- June: Current consensus: $1.37 billion revenue, $0.11 EPS.
- 2008: Consensus is $5.62 billion revenue, $0.44 EPS. This has to go up by more than the Q1 outperformance.
We expect revenue and EPS to be in the high end of
the company's forecasted range. The company's sources confirmed this
through the New York Post this morning, while also telling the market not to expect a blow-out:
Several sources close to Yahoo! said the company will not blow the lid
off earnings, but will likely beat analysts' expectations of 9 cents a
share and revenue estimates, excluding traffic acquisition costs, of
$1.32 billion.
Translation: EPS will be $0.11-$0.12, versus the
$0.09 consensus. Revenue will likely be $1.36-$1.37 billion, up 16%
(versus the 12% projected).
Given that the company has already essentially announced the
earnings, the guidance is the only remaining question. It has to go up
by more than the Q1 outperformance, or Yahoo will be up the creek.
Why? Because this is not the time to be conservative, especially in the
back half of the year. If Yahoo doesn't raise its guidance
considerably, this will be because it can't. And if it can't, it might
as well sign the bill of sale today at the current bid.
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