Posted by: Rob Hof on July 21, 2009
Yahoo’s second-quarter earnings are out now amid muted expectations. Its profit rose to $141 million, or 10 cents a share, from $131 million, or 9 cents a share a year ago. Net revenues fell to $1.14 billion from $1.35 billion a year ago, and gross revenues were down 13% to $1.57 billion. Yahoo was expected to report a profit of 8 cents a share on exactly that revenue level.
So here’s the upshot: Yahoo beat forecasts on profit by a couple of pennies, thanks to cost-cutting, on sales that precisely met expectations. Just a few minutes into after-hours trading, however, its stock is down
2% 4% after closing down 1.5%, to $16.75 a share, before the report. Despite the higher-than-expected net profit, investors, who have driven shares up about 30% since the start of the year, likely were disappointed with operating earnings, which came in below analysts’ forecasts. Operating profit for the quarter fell 25% from a year ago, to $101 million.
Worse yet, display ad revenues on Yahoo’s own sites fell 14% from a year ago, a little worse than the 13% drop in the first quarter—no sign of a turnaround there. And search ad revenues fell 15%, far worse than Google’s 3% growth. That won’t help Yahoo in its negotiations with Microsoft over a search deal.
What’s more, Yahoo’s outlook for the third quarter came in somewhat below what Wall Street had hoped: $1.45 billion to $1.55 billion in revenues, operating income of $55 million to $65 million, and operating income before depreciation, amortization, and stock-based compensation of $330 million to $370 million. The Street had been betting on about $425 million in EBITDA on revenues of about $1.55 billion.
Here’s the full release, with the liveblog of the analyst call to begin shortly, after the jump:
And the call begins with CEO Carol Bartz introducing new Chief Financial Officer Tim Morse.
Considering the economy, I'm pleased with our results. Our teams did a good job of containing our costs.
Overall we're seeing less fear in the marketplace and advertisers are making plans.... But it's just too early to call (a turnaround).
Three themes in the quarter:
1) great leadership team in place.
2) continue to define audience priorities, like home page, mail, and media properties, as well as advertising.
3) focused on external and internal business properties.
Now Morse makes his debut. GE taught him a lot about organizing and streamlining, which he will apply at Yahoo.
Now to the results: The economic environment continues to be challenging. Despite revenue decline, user engagement strong, with overall page view up 7%.
On topline results: ahead of our guidance midpoint. Only a 6% decline after currency and special items last year.
Search query volume rose 9% but revenue per search fell. Broad softness across all sectors persists.
On display, which was down 14% on Yahoo properties. U.S. down 11%, a little better than in first quarter, international down 20% but down 5% after currency.
Telecom, consumer products rose slightly over first quarter, but down from a year ago. Automotive stabilizing.
We're confident that when the economy does recover, we'll be one of the first places advertisers will come.
Traffic acquisition costs were 28% of revenue, expect 26% in Q3.
Listings revenue down 21% to $106 million but only 6% before last year's Kelkoo sale. Fees revenue down 8%.
$95 million in capital spending.
Will need to invest in business in branding and other areas. "We need these investments now" to be ready for an upturn.
$9 billion in value for overseas businesses, including Alibaba in China, which equals $6 a share.
We're continuing to see mixed signals in the advertising market. Will be making changes that might affect revenue; Carol will talk more about that later.
Morse now talks about what his priorities are and what he will do. Fair number of buzzwords and marketing-speak ("looking forward to operationalizing these priorities"). One thing that stands out is an intention to keep streamlining, no surprise.
Now back to Bartz: Our vision, quite simply, is to strive to be the center of people's online lives. (Critics have been saying they're not sure anyone can be the center in a splintering online media landscape.) One of every 2 Internet users come to one of Yahoo's sites per month. First in news, sports, and finance visitors.
Our home page continues to be the big dog. But we're not satisfied. Trying to listen to users better. Says new home page is now available in the U.S. Best example yet of Yahoo's open strategy: Facebook, MySpace, eBay, and other outside apps.
We are Internet kingmakers at the center of the Internet ecosystem. a two-hour link from Yahoo to the New York Times sent 9 million page views to the paper's site, breaking records.
We also need to focus on the ad experience. It's no secret that many of our users are put off by a few irritating ads that run over and over. They know the difference between annoying ads and good ones. She implies these are on the way out (bye-bye, dancing office workers?).
Aiming to reposition Yahoo's brand, and will spend heavily on that. Also will spend $75 million on improved ad platforms. Also expect efforts to improve ads to take $75 million out of revenue line related to getting rid of those annoying ads.
Just did deal with AT&T for the telecom company's 13,000-person sales force to sell Yahoo ads.
I'm excited by the foundation we've laid for the company. We're uniquely positioned to win our game. We know what we are, and more importantly, we know what we have to do to win.
Now to the Q&A:
Q: Any impact from Bing yet? Bartz: I think actually Bing's a good product. But too soon to tell how it will do long-term.
Q: Where will best return be on spending--display or search ads? Bartz: Search business declining quarter over quarter not a meaningful trend. It was more revenue per search pressure. Some of it was purposeful--advertisers chose less keywords and so forth. On investment priorities: will be on user. If we can increase our audience, which we know we can, we're going to drive both display and search revenue. What we really need to provide to our advertising partners is an engaged audience.
Q: Why is revenue per search down so much in U.S.? Morse: If you look at all the cost per clicks, they're not all that different (from Google). (Not sure he answered that question.)
Q: What contributed to increases in listings and fees? Morse: Sequentially only up slightly (listings) or down slightly (fees). So nothing really drove that.
Q: Do you get any money for links to Facebook and MySpace in the new home page? Bartz: No. It really is about making sure we improve the whole relevance of Yahoo back to being the center of their online life.
Q: Where will additional spending be? Bartz: Adding people back into products and engineering. Salespeople too. Morse: Yahoo has drained buckets that needed draining (managers and executives, presumably) and now needs to fill selected buckets (engineers, products, sales).
Q: How should we think of the cost basis of the company if revenue stays flat? Morse: Not sure how to define it because of the uncertain economy. Over the long term, we're gonna drive margin expansion. Bartz: Ad spending will shift online, so we have that factor going for us. The revenue will not stay flat forever. (Not sure when, though.) The investments we're making will actually make us more efficient. That's the reason we have the guts to make the investments now.
Q: How much of the $75 million incremental spending in the third quarter will be transient, like on new salespeople? Bartz: Most of it is really people. The branding and the whole campaign of advertising is just starting, but will go on for at least a year. So right now, consider that a cost within the system.
Q: What changed that made traffic acquisition costs higher than expected? Morse: Affiliate business higher, and they involve more cost.
Q: APT, Yahoo's newish display ad system: How inefficient is the buying process today, and what's the goal? Bartz: APT is certainly part of the process of making the buying easier. Two existing ad platforms need to move onto APT. It was sort of overpromised. Great architecture, just needs to move through more releases. On efficiencies: We have to throw a lot of bodies at these things, because the processes are inefficient. Over time, a year or more, can take many of those bodies out.
Q: Any change in the types of advertisers buying guaranteed (premium) ad space vs. nonguaranteed (remnant, like Yahoo Mail) now? Bartz: Some advertisers trying non-guaranteed ads that were only doing guaranteed ads before.
Q: Yahoo search advertising vs. affiliate search sites--why former get so much worse and the latter better? Bartz: I don't think there's a trend here. A couple of affiliates just had a good quarter. We're just not that far off.
Q: Philosophy on distribution deals: Bartz: It really is profitability. If it makes sense, it makes sense.
Q: Planning more acquisitions? Morse: Who knows what events bring? No answer, in other words.
Q: On search, what caused lower revenue per search? Does scale matter, in relation to recent talks (first and very veiled reference to Microsoft search talks)? Bartz: Of course, scale matters in search.
Q: Why was the new home page launched today, ahead of schedule? And what are monetization opportunities? Bartz: Held up the launch a bit. Talked about launching next week awhile ago. Decided to do it near earnings. We feel really good about the opportunity to monetize Metro, the new home page. It's opt-in for the user, so it could take a little time to get a volume of people on it. There's a lot of opportunity to do new things with users, experiment with advertisers. Could take time, though.
Q: What levers can you pull to improve revenue per search? And how will new home page affect search? Bartz: Trying to target ads better and match them to the right people. Very prominent position for search on the new home page.
And that's it for the call.