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Yahoo! (YHOO)

Q2 2011 Earnings Call

July 19, 2011 5:00 pm ET


Timothy Morse - Chief Financial Officer and Executive Vice President

Marta Nichols - Director of Investor Relations

Carol Bartz - Chief Executive Officer, President and Director


Spencer Wang - Crédit Suisse AG

Brian Pitz - UBS Investment Bank

Jordan Rohan - Stifel, Nicolaus & Co., Inc.

Youssef Squali - Jefferies & Company, Inc.

Anthony DiClemente - Barclays Capital

Benjamin Schachter - Macquarie Research

Justin Post - BofA Merrill Lynch

Douglas Anmuth - JP Morgan Chase & Co

Herman Leung - Susquehanna Financial Group, LLLP

Scott Kessler - S&P Equity Research

Jeetil Patel - Deutsche Bank AG

Jason Helfstein - Oppenheimer & Co. Inc.

Ross Sandler - RBC Capital Markets, LLC

Mark Mahaney - Citigroup Inc



Good afternoon, ladies and gentlemen, and welcome to the Yahoo! Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Marta Nichols. Ms. Nichols, you may begin.

Marta Nichols

Thank you, Stacy, and good afternoon and welcome to Yahoo! Second 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 may contain forward-looking statements concerning matters such as our expected financial and operational performance, our long-term financial objectives and negotiations regarding Alipay, 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 products 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-Q filed with the SEC May 10, 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, July 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.

Carol and Tim have prepared remarks, 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

Good afternoon, everyone, and thanks for joining us. We have a lot to cover, so let's get started.

Our results in Q2 were a mix of good, encouraging, and at the same time, unsatisfactory. First was good. Expenses were well managed, profits were up and we bought back a lot of stock. We're making clear measurable progress in Search, and we have continued to accelerate the launch of sites on our new publishing platform. But we know 2 issues are top of mind for you after seeing today's announcement: where are we with Alipay and what happened to Display this quarter? So I'm going to address both of those upfront. Tim will then talk more about the results, and I'll finish with an update on our Search Alliance and new publishing platform progress.

With regard to Alipay, we've been working on this negotiation continuously, in fact, daily. We're moving in a direction that's consistent with what we told you at our May 25 Investor Day. We told you then that the parties have been working with 2 agreed-upon principles in mind. One, ensuring that intra-company relationship between Alipay and Taobao is structured to preserve the value within Taobao and, therefore, Alibaba Group. And two, ensuring that Alibaba Group is appropriately compensated for the value of Alipay.

We have made substantial progress on the definitive agreements. But until every word is finalized and every document is signed, we're simply not done. We'll continue to work in earnest on the definitive agreements in a manner that best serves the interest of our shareholders.

Now let's turn to what's unsatisfactory. Our overall ex-TAC revenue was at the low end of our guidance range. That was entirely due to U.S. Display, which did not perform the way we expected. Overall, Display revenue ex-TAC was up 5%. Display in EMEA was up 27%. And in APAC, it was up 20%. However, the Americas region was flat, with U.S. Display down unexpectedly. Obviously, I'm not happy about our U.S. Display performance. Let me tell you what happened, why it happened, and what we're going to do to fix the problem and reaccelerate Display growth.

In the first half of Q2, Display revenue in the U.S. was pretty much consistent with our expectations. But as the quarter progressed, we saw increasing softness, especially in June. Let me be clear what this was not. Business was not about new competitive developments. It was not about the economy, although the economy didn't help as we saw softness in the CPG, auto and retail categories.

Finally, it was not about engagement, which grew nicely in Q2 as you can see from the engagement metrics on our IR site. Rather, the root cause is the comprehensive changes we discussed with you at our Investor Day, changes to our U.S. sales leadership, which led to changes to our sales org structure, and then to changes in our sales force. In May, we made a decision to reorganize the U.S. field organization and to move aggressively to position ourselves from our rapid Display growth in the future.

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