This summary is based on the first quarter fiscal 2008 earnings call conducted by Yahoo! Inc. (YHOO) on April 22, 2008.
Chief Executive Officer, Director: Jerry Yang
President: Susan L. Decker
Chief Financial Officer: Blake J. Jorgensen
Investor Relations: Marta Nichols
Key Investors Issues
- The earnings per share increased to 37 cents from 10 cents in the prior year quarter.
- Quarterly revenue grew 9% over last year to $1.818 billion.
- For Q2, the firm anticipates GAAP revenue in the range of $1.730 billion to $1.930 billion.
First Quarter Fiscal 2008 Financial Highlights
- During Q1, the firm recorded approximately $29 million of cash costs related to the strategic workforce realignment that was announced on its January call. The company implemented the workforce realignment in February, as planned.
- Yahoo! also recorded approximately $14 million of costs for outside advisors related to Microsoft’s unsolicited proposal. Given that neither of these costs items were included in its outlook and does not reflect the run-rate for the business, the firm will discuss results normalized for these items, as well as its reported numbers.
- Third, as previewed on January call, the company is increasingly managing its business around GAAP revenue because it views it as a better measure of the overall advertising reach than revenue ex-TAC. The firm will be providing its revenue outlook for Q2 on a GAAP basis and it will give the investment community direction on its TAC expectations to aid in this transition.
GAAP revenue was $1.818 billion in the first quarter, up 9% over Q1 2007.
Revenue, excluding TAC came in at $1.352 billion, advancing 14% year over year. These results exceeded the midpoint of January revenue outlook ranges on both a GAAP and an ex-TAC basis. Acquisitions and exchange rates each contributed approximately 2% to ex-TAC growth.
In marketing services business, first quarter GAAP revenue was $1.572 billion, up 7% over last year’s first quarter.
During last year’s first quarter, the firm recognized search affiliate revenue from Yahoo! Japan on a gross basis and also recorded the related TAC payments. As a result of its Q3 2007 sale of Overture Japan to Yahoo! Japan, the firm no longer recognizes revenue under this model and instead recognizes the net revenue for services provided to Yahoo! Japan. While this change reduced the GAAP marketing services revenue by approximately $110 million to $130 million on a year-over-year basis, it had only a minor impact on revenue ex-TAC.
Marketing services revenue ex-TAC was $1.107 billion, up 13% versus the prior year. Owned and operated marketing services revenue was up 15% over last year on a revenue ex-TAC basis, with O&O search up 16% and O&O display up 15%. The firm’s core marketing services business continues to grow faster than its overall growth rate and it is confident about the rest of the year. The firm also continues to expect this year’s investments to provide a strong base for growth in 2009 and 2010. As expected, revenue ex-TAC from the affiliate search business declined slightly in Q1. The company anticipates that this business will be flat to slightly down on a year-over-year basis for the balance of 2008.
Within marketing services business, some of the major categories, including auto, pharmaceuticals, telecom, and consumer packaged goods continued to report strong double-digit growth in Q1. The firm saw some softening in finance, travel, and retail - areas that have been affected by recent economic trends. The firm’s diverse base of advertisers and industries has produced good overall growth and helps to offset cyclical weakness in different sectors. The Internet has evolved into a mainstream advertising vehicle since the last recession and industry dynamics are much different now. Advertisers’ budgets may fall but the firm believes the compelling ROI of online ads compared to other media may cushion the impact on its industry.
The firm generated $245 million of fees revenue in the first quarter, up 21% from the same period last year.
The company’s strategic relationships with AT&T and Rogers have been renewed to reflect the market environment in which ad revenue sharing is the prevailing economic model. Yahoo! expects that these renewals to have a negative impact on its revenue ex-TAC of between $150 million and $200 million in 2008 compared to its prior run-rate. This impact will consist of both higher TAC payments in marketing services business and declining portal fees in the fees revenue line.
The firm received a $350 million payment from AT&T during the quarter as part of the restructuring of its broadband relationship. The company will recognize this revenue over the four-year life of the contract. The firm expects the fee line in its P&L to be flat for 2008 with year-over-year declines in the back half. While these headwinds will reduce its overall revenue growth in the first few years of the renewals, the management believes that these strategic partnerships with key leaders in the broadband business offer large and growing advertising opportunities on both the PC and on mobile devices. U.S. revenue ex-TAC increased 17% year over year. International revenue ex-TAC increased 7%.
The firm ended the quarter with approximately 13,800 employees, down from 14,300 at year-end.
This includes approximately 600 new hires, offset by the impact of the strategic workforce realignment.
- The effective tax rate for the quarter was 39%.
Free cash flow was $647 million in the first quarter.
In Q1, the firm received a $350 million payment from AT&T in connection with the renewal of its broadband partnership. Excluding this one-time item, the free cash flow for the quarter was $297 million, representing 69% of operating cash flow.
