Posted by: Rob Hof on October 20, 2009
Yahoo managed to beat third-quarter profit forecasts easily on slightly higher-than-expected revenues. Shares rallied in after-hours trading by about
3% 6% (the higher number coming as the conference call proceeds). Here’s the press release.
Yahoo said it earned 13 cents a share on gross revenues of $1.58 billion, down 12% from a year ago, and net revenues of $1.13 billion. However, 5 cents of that profit came from the sale of Yahoo’s stake in China’s Alibaba.
That’s still slightly ahead of forecasts. The company was expected to earn 7 cents a share on gross revenues of $1.52 billion, or $1.12 billion after payments to advertising partners. A year ago, Yahoo earned 4 cents a share on $1.33 billion in net revenues.
“With revenue coming in above our guidance and flat sequentially, we had a solid third quarter that signals our major businesses have stabilized,” Yahoo! Chief Executive Carol Bartz said in a statement. “With new products like Yahoo! homepage, our brand revitalization campaign and expansion in the Middle East through Maktoob.com, our execution is improving and we’re focused on what we do best — being the center of people’s online lives.”
Yahoo also said it expects gross revenues of $1.6 billion to $1.7 billion in the fourth quarter. Operating income before depreciation, amortization, and stock option costs is expected to be between $400 million and $450 million. Both of those are somewhat higher than Wall Street forecasts. Operating income after those costs is forecast at $135 million to $155 million.
Expectations were muted before the announcement. That was not only because the Internet portal was expected to report a drop in profits and sales. By now, everyone’s also expecting online ad revenues, especially from the display ads that are Yahoo’s mainstay revenue source, will fall for the first time since 2002.
On the call, investors will be looking to see if Yahoo is seeing any signs of a turnaround in ad spending. Google reported a strong third quarter last week, spurring hopes that a rebound in search ads would lead to an uptick in display ads as well.
Investors also will be listening for insight on the impact of recent cost-cutting under Bartz. And they’ll be looking for news on the status of the search deal with Microsoft, though given that it’s unlikely to pass regulatory muster until well into next year, Yahoo probably won’t have much to say.
And the call begins (SeekingAlpha has a more complete first-draft transcript):
First up is Chief Financial Officer Tim Morse. He says Bartz is out sick, which will make this call a good deal less entertaining. (Though he proves to be an affable host.)
Morse goes through various initiatives Yahoo undertook in the quarter, most of all the Microsoft search deal. And he goes over the numbers, saying they show "stabilization."
Revenue performance exceeded Yahoo's own midpoint forecast by $75 million. Less impact from changes in ads than expected.
Yahoo-owned display ads: second straight quarterly improvement, though down from a year ago. Good news in mix, with guaranteed placements outpacing non-guaranteed (those that run through ad networks like Yahoo's own Right Media)--mid-single-digit range. Non-guaranteed declined as a result of axing annoying ads. Instead of $75 million revenue hit, only got $15 million because of slower rollout and less impact.
Encouraging signs of stabilization in search too. Query growth up and revenue per search only slightly down. (Not getting all the numbers, but you can catch details on recorded call in a few hours.)
On costs: Didn't hire as quickly as planned. Also improved infrastructure cost.
Spent $18 million on branding campaign in the quarter.
Recorded $98 million gain from selling stake in Alibaba.
$4.5 billion in cash and marketable securities at end of quarter.
Spent $99 million on capital spending. Less than expected because of lower data center spending and improved utilization of them. Expect $200 million in cap ex in the fourth quarter.
No plans to liquidate or spin off remaining Asia holdings, including Yahoo Japan.
Expect $45 million in brand campaign spending in fourth quarter, which will be peak but not the end of this ad spending.
Update on Microsoft: Plan to continue search innovation--not so much in algorithms, which he says is not the key innovation needed going forward, but in better search experience... "without the billions required to keep up in the arms race." (Google no doubt would beg to differ on this perspective.)
Algo (natural search) platform will migrate to Microsoft first, then the search ad side, which will take more time. Plans to use experience from its Panama transition a couple years ago (several Microsoft search leaders helped on that when they were at Yahoo).
And now to the analysts' questions:
Q: What's the display run rate going into Q4? Any onetime benefit in Q3, like Cash for Clunkers?
Morse: Overall, couple of encouraging things in Q3: 1) Grew from Q2. 2) Guaranteed grew strongly for second quarter in a row. That says things are starting to loosen up. Nothing onetime in nature.
Q: Why Yahoo so much slower in search ads than Google?
Morse: Tough to compare to Google. I gotta focus on Yahoo. We were down 1%, much less than previous quarters. That feels to us like stabilization. And revenue per search down only slightly. And queries grew double-digit from a year ago.
Q: Quantify impact of discontinuing Search Submit. And loss of eBay deal.
Morse: eBay deal immaterial. (No answer on Search Submit.)
Q: Was guaranteed ad improvement by design by Yahoo vs. nonguaranteed?
Morse: That's where we feel we have tremendous strength and we feel we can win in the future. Ad spending is starting to free up, and we are a great value proposition for advertisers.
Q: Status of stock buyback program?
Morse: Took advantage of favorable stock prices in quarter, but I didn't hear anything firm on future intentions.
Q: Gross margins flat, first time in two years. Sustainable?
Morse: I won't look out and predict where the rates are going to go. There's a change occurring in Yahoo that will value that kind of work--get costs down or make sure they don't go up as much. Energy, data center, bandwidth, etc. They're on a nice roll.
Q: Quality of display ads on home page improving--any changes made to improve? And what's the sellout rate on the home page?
Morse: Nothing out of the ordinary. Relaunched home page. Some great acceptance. We always expect strong seasonality in the holiday period, the fourth quarter.
Q: No improvement in Yahoo-owned search and affiliate growth anticipated in Q4--why?
Morse: Expect some improvement.
Q: Page views up 5% year over year, from 13% year over year in 2008--why?
Morse: Mail was a couple points better than that. Home up in double-digits, upper teens. Tough comps in News because of Olympics and financial crisis. Closed Geocities and some other properties.
Q: Status on selling some of Yahoo's smaller businesses?
Morse: Nothing answer.
Q: Hired 200 people in quarter--who? And how much more to go?
Morse: Mostly on product side. Science side of display and search experience. Some in sales--we're putting some more feet on the street. There are a lot of people who want to work at Yahoo, and see the turn coming.
Q: Impact of shutting down Search Submit and paid inclusion?
Morse: Paid inclusion: part of the $60 million lower revenue per quarter expected from ad changes. But many other things contribute to that as well.
Q: What to expect from analyst day next week?
Morse: No 2010 guidance.
Q: How's new home page doing?
Morse: Well, but hasn't rolled out to everyone, since it's opt-in.
Q: How's mobile monetization going?
Morse: It's a focus for our future growth. Reach really improving--on 1900 devices. 35 million mobile users in U.S. Monetization will improve.
Q: Factoring affiliate losses into Q4 guidance?
Q: Impact of Microsoft search deal on headcount?
Morse: $650 million in GAAP improvement in operating expenses from deal. Most related to headcount efficiencies.
Q: Why search revenue growth declined even further?
Morse: Nothing to do with Microsoft agreement. Q3 '08 was peak of revenue monetization, so tough comparison from a year ago. Still investing in these (search) businesses.
Q: Status of branding efforts.
Morse: It's very very early. In other words, not saying yet because not sure of impact. It really is about revitalizing the company. Refreshing how people think about Yahoo. Had been fuzzy the last couple years. Underspent on brand during that time. We're just getting back to what we ought to be. It really does define our identity and where we're going to go. Going forward, it'll become more product-focused.
Q: How's AT&T sales relationship going?
Morse: Not material yet. More feet on the street.
Q: How's ramp-up of behavioral (ad) targeting going?
Morse: Getting better and better about the science of display advertising. Having the right ads follow you from property to property. Tremendous value in this for advertisers. Will be lifeblood of anyone who wants to be really great in advertising.
Q: Right Media exchange--stop selling non-guaranteed inventory from Yahoo itself through the exchange?
Morse: I don't know anything about that. Not part of $60 million lower quarterly revenue from ad changes. Incorrect.
Q: Updates on divesting non-core businesses like dating or HotJobs? Or any acquisitions?
Morse: Won't say.
And that's it.