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Yahoo! Inc. (YHOO)

Q1 2010 Earnings Call

April 20, 2010 5:00 pm ET

Executives

Marta Nichols – Investor Relations

Carol Bartz – Chief Executive Officer

Tim Morse – Chief Financial Officer

Analysts

Imran Khan - J.P. Morgan

Benjamin Schachter - Broadpoint AmTech

Youssef Squali - Jefferies & Co.

James Mitchell - Goldman Sachs

Mark Mahaney - Citigroup

Justin Post - BofA Merrill Lynch

Spencer Wang - Credit Suisse

Jason Helfstein - Oppenheimer & Co.

Brian Pitz - UBS

Douglas Anmuth - Barclays Capital

Presentation

Operator

Good afternoon ladies and gentlemen, and welcome to the Yahoo! Q1 2010 earnings conference call. (Operator Instructions) I will now turn the call over to Miss Marta Nichols. Miss Nichols, you may begin.

Marta Nichols

Thank you operator and good afternoon. Welcome to Yahoo!’s first quarter 2010 earnings conference call. On the call today will be Carol Bartz, Chief Executive Officer and Tim Morse, Chief Financial Officer.

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 and operational performance, our search alliance with Microsoft, our marketing and product plans, cost initiatives, planned investments, technology improvements and corporate strategy as well as 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 February 26, 2010, as well as in the earnings release included as Exhibit 99.1 to the From 8-K we furnished today to the SEC.

All information discussed on this call is as of today, April 20, 2010 and Yahoo! does not intend and undertakes no duty to update this information to reflect future events or circumstances.

On today’s call we’ll also discuss non-GAAP financial measures as we talk about the company’s performance. These may include total expenses less traffic acquisition costs or total expenses less tax, depreciation and amortization, and stock-based compensation expense, non-GAAP net income and non-GAAP net income per share. Reconciliations of those non-GAAP measures to the GAAP measures we consider most comparable can be found on our corporate website, info.yahoo.com, under Investor Relations.

Carol and Tim have prepared remarks that will last about 30 minutes and then we’ll have a brief Q&A session. And with that I’d like to turn the call over to Carol.

Carol Bartz

Thanks Marta. Hello everybody and thanks for joining us this afternoon. Today we’ll talk about the quarter and our financial results in detail, address some topics of interest including the display and search ad markets, the implementation of our search agreement with Microsoft, and an update on reinvestments. And of course, we’re happy to answer your questions.

First let’s talk about Q1. The economy continues to improve. We delivered what I’d call a solid quarter. Revenues stabilized and profits were up. The headline news is that display advertising grew 20% year-over-year ahead of the market. More importantly, guaranteed display grew by 24% as large advertisers came back. That means their purse strings are starting to loosen up. A lot of them have been lying dormant or only doing the minimum. And now as the economy does better they’re re-emerging to aggressively position their brands online. As the market leader in display, we’re well positioned to benefit from this trend.

As for search, we told you last quarter that we really intensified our focus and efforts around search volume. These efforts, such as marketing search on and off the Yahoo! network, new toolbar and browser offers and search integration across our properties have paid off. As a result I’m very pleased to report that we stabilized our search share and believe it will trend up in Q2.

And of course due to regulatory clearance this quarter, we have more tangible information to share with you on the Microsoft transition.

One last thing before I turn it over to Tim. On a directional note, we started doing some really forward thinking and creative things on the advertising side. They have our sales team, agencies and advertisers really energized. We’re already seeing some of these initiatives help us engage with advertisers on a whole new level. I’ll talk about this and more, but first Tim will cover the financials. Tim?

Tim Morse

Thanks Carol. Although revenue landed roughly 2% shy of the midpoint of our outlook, this quarter we made important strides across a wide variety of areas impacting both our income statement and balance sheet. Today I’ll review first quarter financial performance in detail, provide our second quarter outlook, and additionally outline our full year expectations for the expense impact of the Microsoft search alliance.

I’ll begin with a summary of our headline metrics, revenue, operating income and earnings per share. These numbers were affected by a couple of large items this quarter; namely, Microsoft reimbursements related to our search alliance and the sale of Zimbra, which I’ll separate out for you.

GAAP revenue of $1.597 billion grew by 1% year-over-year, the first growth we’ve registered since 3Q ’08. Operating income of $188 million grew by an impressive 87%, aided by two reimbursements from Microsoft, $35 million of search operating expense reimbursement and $43 million in net transition cost reimbursement. Neither of these reimbursements was included in the outlook we provided in January and we believe you should treat these reimbursements as two separate and unique items.

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