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Yahoo! Inc. (YHOO)

Q3 2009 Earnings Call

October 20, 2009 5:00 pm ET

Executives

Matt Rowe - Director, Investor Relations

Timothy R. Morse - Chief Financial Officer, Principal Accounting Officer

Analysts

Ross Sandler - RBC Capital Markets

James Mitchell – Goldman Sachs

Spencer Wang – Credit Suisse

Christa Quarles – Thomas Weisel Partners

Neil Gupta for Jason Helfstein - Oppenheimer & Co.

Mark Mahaney - Citigroup Smith Barney

Doug Anmuth - Barclays Capital

Youssef Squali - Jefferies & Company

Imran Khan - JP Morgan

Sameet Simha – JMP Securities

Heath Terry – FBR Capital Markets

Ben Schachter - Broadpoint Amtech

Brian Pitz – UBS

Jeffrey Lindsay – Sanford Bernstein

Jeetil Patel – Deutsche Bank

Justin Post – Bank of America Merrill Lynch

Mark May – Needham & Company

Sandeep Aggarwal - Collins Stewart

William Morrison – ThinkEquity

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Yahoo! third quarter 2009 earnings conference call. (Operator Instructions) I will now turn the call over to Mr. Matt [Rowe], Director of Investor Relations. Mr. Rowe, you may begin.

Matt Rowe

Thank you. Good afternoon, everyone and welcome to Yahoo!'s third quarter 2009 earnings conference call.

Before we begin, I would 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.

The 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 10K filed with the SEC on February 27, 2009, our form 10Q filed with the SEC August 7, 2009 as well as in the earnings release included as Exhibit 99.1 to the form 8K we furnished today to the SEC. All information discussed on this call is as of today, October 20, 2009 and Yahoo! does not intend and undertakes no duty to update this information to reflect future events or circumstances.

On today’s call we will 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 will be referred 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 Morse, Chief Financial Officer.

And now I’d like to turn the call over to Matt.

Timothy R. Morse

Thanks, Matt. Good afternoon and thanks for joining us today. Carol came down with something earlier this morning. It’s nothing serious but she has asked that I lead the call today on her behalf. And since we will see many of you at our analyst day next week, we decided to keep this call focused on our third quarter. We will talk more about our long-term plans in a week’s time.

Before diving into the financials, I would like to share a few operational highlights from 3Q. We rolled out our new homepage 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 will now turn to the financials.

I am 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 am going to refer to sequential trends on this call much more than we have in the past, since they tell us more about what is 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, the ad 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.

Read the rest of this transcript for free on seekingalpha.com