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Yahoo! (YHOO)

Q1 2011 Earnings Call

April 19, 2011 5:00 pm ET

Executives

Timothy Morse - Chief Financial Officer and Executive Vice President

Marta Nichols - Director of Investor Relations

Carol Bartz - Chief Executive Officer, President and Director

Analysts

Brian Pitz - UBS Investment Bank

Spencer Wang - Crédit Suisse AG

Rory Maher - Hudson Square Research, Inc.

Youssef Squali - Jefferies & Company, Inc.

Mark May - Needham & Company, LLC

Kenneth Sena - Evercore Partners Inc.

Benjamin Schachter - Macquarie Research

Aaron Kessler - ThinkEquity LLC

Justin Post - BofA Merrill Lynch

James Mitchell - Goldman Sachs Group Inc.

Ross Sandler - RBC Capital Markets, LLC

Heath Terry - Canaccord Genuity

Jeetil Patel - Deutsche Bank AG

Mark Mahaney - Citigroup Inc

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Yahoo! First Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Ms. Marta Nichols. Ms. Nichols, you may begin.

Marta Nichols

Good afternoon. And welcome to Yahoo!'s First Quarter 2011 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 and long-term financial objectives, as well as our expectations for the economy in general and online advertising in particular, the financial and operational impact of our Search Alliance with Microsoft and our strategic operational and product plans. 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 28, 2011, as well as in the earnings release included as Exhibit 99.1 to the Form 8-K we furnished today to the SEC. All information discussed on this call is as of today, April 19, 2011, and Yahoo! does not intend and undertakes no duty to update this information to reflect subsequent 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 may include total expenses less traffic acquisition costs, or TAC; revenue excluding TAC, or revenue ex-TAC; and operating margin ex-TAC. 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. We have prepared remarks, then we'll have a brief Q&A session with Carol and Tim. And with that, I'd like to turn the call over to Carol.

Carol Bartz

Good afternoon, everyone. Thanks for joining us. On today's call, we'll discuss Q1 progress and financial results, update you on the Search Alliance with Microsoft, share our financial highlights and outlook, and of course, take your questions. First, I want to update you all on how we're executing our strategic plan for returning Yahoo! to sustainable revenue and profit growth. We have a lot of proof points this quarter that highlights very tangible progress.

Just take a hard look at some of the key stats. Display revenue is growing in the mid-teens on an underlying basis. After a couple of years of overhauling listings and fees, other revenue is primed to come back into positive territory by year end. We're now shipping the new major tech platforms we've been working on in the past two years and engagement is growing. Yahoo!'s global users were up 13% in Q1, page views on our media properties were up 8% and minutes on those properties were up 17%. The operating momentum we've been building continues as we modernize our technology platform, driving engagements through enriched content, introducing well-received new products and leveraging innovations in digital advertising to boost display revenue growth. Overall, our turnaround is proceeding on schedule, and we are very confident Yahoo! is heading in the right direction.

With all that said, the Search marketplace is encountering some issues related to Microsoft adCenter technology. There is a clear plan to address that, and I'll touch on that more in a moment.

On the financials, we beat the midpoint of our guidance on the top and the bottom. While our GAAP revenue was down over 20%, this is not the story. Without the funky comparisons because of the Search Alliance and other non-comparable items, our revenue ex-TAC would have been flat. Remember that GAAP revenue reflects the impact of divestitures, fee step downs and the two biggies, the required accounting change related to the Search Alliance and of course, the Microsoft rev share.

As you know, the required change in accounting from the Search Alliance hits our GAAP revenue especially hard, but, and this is very important, the accounting change has no impact on the bottom line. To put it simply until all markets are transitioned, revenue ex-TAC will give you the clearest picture of our real business dynamics. In January, we explained that 2011 would be a year of major comparable revenue headwinds because of the items I mentioned a moment ago. And we said that comparisons will get cleaner going forward. That has not changed.

So let's move on and speak to three key elements of our strategy to extend Yahoo!'s lead as a premier digital media company: First, modernizing our technology; second, driving engagement; and third, innovating in digital advertising. So first on technology, we said two years ago that we had to modernize the technology platform that powers our site. Our content was not interactive, it was in silos and we were managing hundreds of sites running on this fare code basis. We've been talking about these investments every quarter, and the payoff is starting to become apparent. We now have 34 sites across the Americas, EMEA and APAC, live on a new global content platform. The pace of our rollout is accelerating with 31 of those sites coming online in just the last 3 months. And this year, we're on target to meet our goal of getting 135 total sites. That's 85 existing and 50 brand new sites on to our more modern, flexible platforms. By year end, we'll have Entertainment, Lifestyle News and other sites rolled out in new markets and new languages, some in places where Yahoo! had little or no presence before. That means more users, greater engagement and more ad inventory.

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