Yahoo, Inc. (YHOO)
Q3 2009 Earnings Call Transcript
October 20, 2009 5:00 p.m. ET

Executive

Matt Roe - Director, Investor Relations
Timothy R. Morse - Chief Financial Officer

Analysts

Ross Sandler - RBC Capital Markets
James Mitchell - Goldman Sachs
Spencer Wang - Credit Suisse
Christa Quarles - Thomas Weisel Partners
Anil Gupta - Oppenheimer & Co. Inc.
Mark Mahaney - Citigroup Smith Barney
Douglas Anmuth - Barclays Capital
Youssef Squali - Jefferies & Co.
Imran Khan - J.P. Morgan
Sameet Sinha - JMP Securities
Heath Terry - FBR Capital Markets & Co.
Benjamin Schachter - Broadpoint AmTech
Brian Pitz - UBS
Jeffrey Lindsay - Sanford C. Bernstein & Co.
Jeetil Patel - Deutsche Bank Securities
Justin Post - Bank of America/Merrill Lynch
Mark May - Needham & Company
Sandeep Aggarwal - Collins Stewart Llc
William Morrison - ThinkEquity
Gene Munster - Piper Jaffray

Presentation

Matt Roe

Thank you. Good afternoon, everyone and welcome to Yahoo''s third quarter 2009 earnings conference call. Before we begin, I''d like to remind you that today''s call will contain forward-looking statements concerning matters such as our expected financial performance, our marketing and product plans, our cost initiatives, planned investments, corporate strategy and our expectations for the economy in general and online advertising in particular. Actual results may differ materially from the results predicted in our statements and reported results should not be considered indicative of future performance. Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are described in our Form 10-K filed with the SEC on February 27, 2009 our Form 10-Q filed with the SEC August 7, 2009, as well as in the earnings release included at Exhibit 99.1 to the form 8-K we furnished today to the SEC.

All information discussed on this call is -- as of today, October 20, 2009 and Yahoo did not intend and undertakes no duty to update this information to reflect future events or circumstances. On today''s call we''ll also discuss some non-GAAP financial measures as we talk about the company''s performance. These will include operating income before depreciation, amortization and stock-based compensation expense which we will refer to as operating cash flow, revenue excluding traffic acquisition costs which we will refer to as revenue ex-TAC, non-GAAP net income and non-GAAP net income per share. Reconciliations of these non-GAAP measures to the GAAP measures we consider most comparable can be found on our corporate website info.yahoo.com under Investor Relations. We have prepared remarks that will last about 15 minutes, then we''ll have a brief Q&A session with Tim Morris, Chief Financial Officer.

And now I''d like to turn the call over to Tim.

Timothy R. Morse

Thanks, Matt. Good afternoon and thanks for joining us. Carol came down with something earlier this morning, it''s nothing serious but she''s asked that I lead the call today on her behalf. Since, we''ll see many of you on our Analyst Day next week we decided to keep this call focused on our third quarter. We''ll talk more about our long-term plans in a week''s time.

Before driving into the financials I''d like to share a few operational highlights from 3Q. We rolled out our new home page in eight of our largest countries. We introduced fantastic new updates to mail, messenger and mobile. We launched the first global brand campaign in our history and we announced acquisitions like Maktoob and Xoopit that will expand our leadership positions in communities and content and help us to enter important new markets. And last but not least we also announced our search deal with Microsoft. With that brief operational overview I''ll now turn to the financials.

I''m happy to report that our 3Q revenue came in above our guidance range. Overall the theme for third quarter was stabilization as we saw strength in key areas of our business after two straight quarters of deceleration. Given the changes in the economic climate since 2008 I''m going to refer to sequential trends on this call much more than we have in the past, since they tell us more about what''s currently happening in our markets.

Revenue was $1.575 billion which was down 12% from last year, but more importantly flat compared to second quarter. Excluding the impact of currency rate fluctuations in divested business lines revenue declined 7% versus last year.

Revenue performance exceeded the midpoint of our guidance range by $75 million. That favorability was driven by two dynamics. First, we had quality initiatives announced on the July earnings call had the intended beneficial impact on users but a lesser downward impact on 3Q revenue than originally anticipated. Second, our affiliate business was stronger than we expected. My narrative today will address both these dynamics in more detail but let''s begin with the underlying trends in O&O, display and search.
First up is display where we registered our second straight quarter of sequential growth. And our year-over-year performance moderated to minus 8%. The quarter-over-quarter improvement was led by the U.S. at 2% growth and we experienced gains in key industry segments such as consumer products, entertainment and finance.

Most importantly however we saw good news in terms of the mix of display revenue with guaranteed placements outpacing non-guaranteed. Revenue from guaranteed placements grew sequentially in the mid single-digit range, as a result of better overall yield. The non-guaranteed side of our business declined sequentially due to our ad quality initiatives but still grew 37% year-over-year.

We originally estimated that the revenue impact of the ad quality initiatives would be $75 million on a full quarter basis and roughly 50 million unfavorable in third quarter. Instead, the unfavorable 3Q impact was $15 million as a result of slower implementation and better backfill of a low quality adds at higher than expected rates.

Panning out to the bigger picture we expect the impact of this initiative to grow to $25 million in fourth quarter and level out at 60 million quarterly by the beginning of 2010. That would put the annual unfavorable impact at roughly $240 million instead of our original 300 million estimate.

Turning now to O&O search, on a year over year basis revenue was down 19% as expected with strength in queries more than offset by declines in RPS. However, we also experienced encouraging signs of stabilization in this business. After sharper sequential declines in the first half, third quarter results declined just 1% compared to 2Q.