Posted by: Rob Hof on April 21, 2009
Yahoo managed to hit earnings expectations on slightly lower-than-expected first-quarter revenues. It also announced it expects to lay off about 5% of its staff. Based on the 13,600 employees as of December, that’s nearly 700 people, more than recent rumors had anticipated. Yahoo had already laid off about 1,500 in December.
Yahoo earned a profit of 8 cents a share, down 78% from a year ago, on net sales of $1.16 billion, down about 13% from a year ago. Analysts were forecasting that Yahoo would earn 8 cents a share, down from 37 cents a year ago, though that included a big gain from Yahoo’s stake in the Chinese Internet company Alibaba, which staged a successful initial public offering of stock. Its net revenues, excluding onetime charges and the commissions Yahoo pays partner Web sites for running ads, were expected to be down 11% from a year ago, to $1.2 billion.
Yahoo’s outlook for the second quarter also appears to be a bit under analysts’ forecasts. From the release, the particulars of the outlook: “GAAP revenue for the second quarter of 2009 is expected to be in the range of $1,425 million to $1,625 million. Non-GAAP operating income before depreciation, amortization, and stock-based compensation expense for the second quarter of 2009 is expected to be in the range of $375 million to $425 million. Income from operations for the second quarter of 2009 is expected to be in the range of $80 million to $90 million.”
The news was greeted with a yawn by investors, who might have been expecting worse. In after-hours trading, Yahoo’s shares were rising a fraction of 1% after rising more than 5% today, outpacing an up day for the overall market.
If there’s one upside to Yahoo’s first-quarter earnings report, it’s that expectations were pretty low. After even Google last Thursday reported a quarter-on-quarter drop in search ad revenues, most people had expected Yahoo—already falling further behind Google for years now—would fare even worse. Yahoo’s far more dependent on display ads, the banners that marketers are cutting spending on even more than on search.
But more than the results, investors will be looking for guidance for the next couple of quarters. Even more, they’ll be listening closely for what new CEO Carol Bartz has to say about the just-announced layoff, any divestitures of operations, and a deal with Microsoft, talks for which have apparently been heating up (at least from the Microsoft side).
I’ll be liveblogging the highlights of the conference call with analysts after the jump, but you can also listen to it here.
But my takeaway after the call? It seems investors are relieved that Yahoo’s cost-cutting is starting to work. But analysts such as Jeff Lindsay of Bernstein Research didn’t hear a coherent strategy for growth, and I don’t think I did either—at least not anything that’s going to help restore growth in the foreseeable future. Bartz seemed to struggle a bit answering some specific questions in that regard—perhaps understandably given the complexity and deteriorating condition of Yahoo’s business. But perhaps investors are mostly awaiting word—not forthcoming today—on a possible deal with Microsoft that would make much of today’s results moot.
And the analyst call begins with Carol Bartz...
What an amazing, busy three months it's been since I joined Yahoo. Learned a lot. How I've been spending my time: I hit the ground running in January beginning with deep dives with executives, sales team, engineering groups, and customers and partners. The most important takeaway: the importance of having a "wow" experience for all of our users.
This means greater investment in creating and maintaining experiences for our users. In some cases, that means discontinuing operations... or meaningful changes in the advertising experience.
Most important services are the high-traffic sites, like home page, mobile, mail etc. Three key goals:
* Globalizing platform to innovate more quickly.
* Build wow products on top of that platform.
* Continue to invest in advertising products.
(None of these seem surprising...)
Supporting those is a new management structure. Ari Balogh in charge of all products. Chief marketing officer is new entrant Elisa Steele. International head to be announced later. Jeff Russakow from Symantec has joined as senior VP of customer advocacy, a new position she had announced previously.
Combining technical and product teams into single organization.
On the layoffs: I want to be clear, this is not the kind of across-the-board cost-driven cut like in December. Instead, it's streamlining existing operations. (I'm not entirely sure what the difference is.)
Now to Chief Financial Officer Blake Jorgensen: Quarter marked by poor economy but aided by aggressive cost-cutting.
Commercial search queries have fallen. International search down 27% or 12% with constant currency.
Display ads, the key area for Yahoo: Yahoo-owned site revenues were down 13% to $371 million. We have seen pressure on guaranteed (that's premium) advertising prices. "We believe that premium display advertising will recover as the economy improves."
Fees revenue was flat.
Ended the quarter with 13,500 employees, down 100 from the fourth quarter.
Says Yahoo continues to be one of the most sought-after places to advertise on the Web. (Problem is, it's not alone in that status anymore.)
Back to Bartz: "The economy clearly remains a challenge for us." But Yahoo has to stay focused on what it can control, which is "creating kick-ass experiences for users." (Finally, she cuts loose with the salty language she's notorious for.)
Tips hat in particular to Yahoo Mobile team. (Indeed, it has seemed to do well there. Now the advertisers have to catch up to the opportunity.)
Now addressing what's on everyone's mind: "Search is a very valuable business for Yahoo. That's all we're going to say about search for today." OK, but I'm sure she'll get more questions from analysts on that.
Finally, she talks up the value of brand advertising, which has taken the biggest hit in this economy compared with search and performance-oriented display ads. She's seeing some increases by automakers and telecom companies.
"Many of these companies will need to reintroduce their brands to consumers and in some cases completely reinvent their brands," she says. Yahoo hopes to provide a prime place to do that.
Now on to the Q&A:
Q: Premium vs. non-guaranteed ad inventory: Bartz: Doesn't break out differences between the two, but says non-guaranteed ads (performance-based or those that are paid for based on clicks, not just views) are growing at double the rate of premium ads.
Q: Cap. ex. down 50%--onetime or continuing? Jorgensen: Cap. ex. very lumpy, so don't use first-quarter as a guide.
Q: Now the long-awaited question on a possible search deal with Microsoft. Bartz: No comment except this: "It's absolutely critical to Yahoo." Customers need an integrated search and display experience.
She also won't call a bottom to the online ad market despite some signs of improvement reported by market researchers in March.
Q: Why aren't you seeing cost savings from previous headcount reductions yet? Jorgensen: In Q4, the 1,600 layoffs--much of the savings was established in the fourth quarter. Also a run rate of $3.2 billion now vs. $3.8 billion now (so costs higher relative to sales).
Q: What's driving slowdown in page views? Jorgensen: Page views grew 8%, which he characterizes as "very good." Did close some properties, which did and will hit page views somewhat.
Q: How do (ad exchange) Right Media and (ad network) Blue Lithium acquisitions affect premium inventory--dilute it? Bartz: It's better than inventory just sitting there (without ads). Jorgensen: Both have allowed us to continue to build more flexibility and a larger marketplace for advertisers both on Yahoo and on other sites.
Q: 8% page view growth lowest in five quarters--when should better growth return? Bartz: Lots of work to do to globalize platform--a couple years. This is not a flip-the-switch. But beyond globalizing, also trying to improve content and the like.
Missed a question, but Bartz notes: "The biggest impact on the business is the economy." She also reiterated praise for Yahoo's sales force, which appears to have made quite an impression on her: "One of Yahoo's underestimated qualities is its sales force."
"We still aren't easy enough to do business with when it comes to buying. Advertisers have been very clear with me." So trying to make ad buying easier. (I hear this a lot as well.) "We can do a lot to just make it easier to do business with us."
Q: Asks about reinvestment in international platform: Bartz notes the crazy quilt of international sites that are different, so it's tough to make consistent changes. "If we're a hot site, advertisers follow."
Q: Any plans to divest other Asian operations besides recent sale of Gmarket stake? Jorgensen: Don't read into that in terms of future Asian investments either pro or con. But Yahoo Japan and Alibaba stakes are different.
Q: What drove revenue pressure? Jorgensen: "The overall economy, we saw pressure everywhere. We saw more pressure in display than in search."
Q: On network traffic quality: Jorgensen: Continuing to focus on core businesses so advertisers get a great return on investments. Seeing same revenue per search declines in partner sites as in Yahoo's own site.
Q: Do you need to invest in search as well as display advertising? Need to remain a principal in search to grow display business?
Absolutely we need to invest in both search and display and the monetization of those." Better customization and visibility and ease for advertisers too.
Won't answer what she calls "tricky question" on search but adds: "Search is important to our users and search is important to our advertisers. It's that simple."
Q: Surprise decline in search revenues: Could that accelerate with loss of Yahoo toolbar deals? Jorgensen: Bigger factor is fewer clicks on search ads resulting in actual sales, so advertisers are reducing their spending to get a better return. Bartz adds: "People are just grazing around" rather than buying as much.
Q: Again on display and how advertisers are spending now: Bartz: "Some advertisers are being very aggressive now. Some frankly have had their budgets slashed so much that they're just trying to pick up where they can. It's all over the map. It depends on how strong the CMO is vs. the CFO."
Q: Status on APT, the new display-ad platform: Bartz: Will be ongoing for a long time, with periodic releases. "It's a big honking important platform for us." Replaces both internal ad serving platform and Right Media outside ad platform. "It was a bigger task than the company understood, frankly." Hope to have a better roadmap during a planned analyst day Oct. 28.
Now Yahoo shares are up 5% after hours, so apparently investors like what they're hearing. But after-hours trading can be volatile and it doesn't always predict what happens the next trading day.
Q: Growth in international display ads--what's driving that? Jorgensen: Smaller markets had exceptional growth quarter off a smaller base. Hard to tell if Yahoo is gaining share.
Q: Global platform investment--what's the size of the engineering challenge? Bartz implies a lot of work needed to be done and finally drops the F-bomb: "We had a lot of people running around telling engineers what do do but nobody was f***ing doing anything. Sorry, I knew that [expletive] would come out sometime."
And that's a wrap.