Yahoo! Inc. Q4 2008 Earnings Call Transcript

 |  About: Yahoo! Inc. (YHOO)
by: SA Transcripts


Good afternoon ladies and gentlemen, and welcome to the Yahoo! Q4 2008 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. 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 and good afternoon, and welcome to Yahoo!'s fourth quarter earnings conference call. On the call today will be Carol Bartz, Chief Executive Officer, and Blake Jorgensen, Chief Financial Officer.

Before we begin, I'd like to remind you that this call's discussions will contain forward-looking statements that involve risks and uncertainties concerning Yahoo!'s expected financial performance, as well as Yahoo!'s strategic and operational plans. Actual results may differ materially from the results predicted and reported results should not be considered indicative of future performance.

The potential risks and uncertainties include, among others, the impact of management and organizational changes; the implementation and results of Yahoo!'s ongoing strategic and cost reduction initiatives; Yahoo!'s ability to compete with new or existing competitors; reduction in spending buy or loss of marketing services' customers; the demand by customers for Yahoo!'s premium services; acceptance by users of new products and services; risks related to joint ventures and the integration of acquisitions, and the possibility that their parties may in the future make proposals to acquire all or part of Yahoo!, or take other actions which may create uncertainty for our employees, publishers, advertisers and other business partners; and the possibility of significant cost of defense, indemnification, and liability resulting from stockholder litigation.

Other potential factors that could affect the company's business and financial results are included in the company's annual and quarterly reports which are on file with the SEC. All information discussed on this call is as of today, January 27, 2009 and Yahoo! does not intend and undertakes no duty to update this information to reflect future events or circumstances.

On the call today we will discuss some non-GAAP financial measures as we talk about the company's performance, including operating income before depreciation, amortization and stock-based compensation expense, which will be referred to as operating cash flow; adjusted operating cash flow, revenue excluding traffic acquisition costs, which will be referred to as revenue ex-TAC; free cash flow, non-GAAP net income and non-GAAP net income per share. Reconciliations of these non-GAAP measures to the GAAP measures the company considers most comparable can be found on our corporate website,, under Investor Relations.

We have prepared remarks that should last about 25 minutes. Then we'll have a brief Q&A session with Carol and Blake. Jerry Yang will join us for Q&A as well.

And now I'd like to turn the call over to Carol.

Carol Bartz

You know, Marta, I should have understood all those risks before I took this job. Well, welcome everybody and thank you for joining us today. It's been eight days since I joined Yahoo! and I'm telling you I'm already feeling at home. The customers have been great; the partners and Yahoo!'s all over the world have been very welcoming. I've been getting emails by the hundreds from them and I've been spending my days meeting with as many people here as I can. I've encountered a wonderful energy, a real can-do attitude, a robust product pipeline and a tremendous dedication to making the experiences of our users and advertisers the best they can possibly be.

In fact, as an outsider reading the press last year, it was easy to assume that Yahoo! was fully distracted by external turmoil and that there was very little happening in the operating business. What I've learned in my brief time here is just the opposite. There's been a substantial and accelerating product innovation focused on creating even better experiences for all of Yahoo!'s customers.

To be sure, there are also fundamental issues that need to be addressed; sharpening our strategic focus, improving the pace of decision making, and continuing to streamline the business. I intend to move quickly to tackle these core issues and to capitalize on all the incredible opportunity that exist here at Yahoo!. I'll be saying more about that in a moment.

But first, let me summarize Yahoo!'s Q4 performance and then Blake will give you a more detailed discussion of the results. I'll then offer some thoughts on my first two weeks, and address a couple of questions that are probably on your minds.

Starting with Q4, you all know the weak global economic environment is impacting everyone and, of course, we were no exception. Revenue was down 1% to $1.8 billion, within the range given in October. On a constant currency basis, revenue grew 3% year-over-year. Despite the macro picture, there were some real bright spots in performance, display and search.

Aggressive cost management efforts allowed adjusted OCF to come in at $542 million, above the midpoint of the outlook. Delivering on profitability expectations is a real achievement in this environment and the company has to be congratulated for that.

I'll have some additional thoughts to share, but before I do, let me turn the call over to Blake to provide more financial detail. Blake?

Blake Jorgensen

Thanks, Carol. I'm very excited to have you onboard, and the entire Yahoo! team clearly appreciates the energy and excitement you've brought to your first weeks at the company. The online advertising business has felt many of the same pressures as other sectors of the economy over the last several months. Larger advertisers across many vertical categories have reevaluated their marketing approaches, spending less on brand advertising and directing more dollars into performance marketing.

Despite the extraordinary distractions of 2008 and a weakening economy, we delivered over $7.2 billion of revenue and over $1.9 billion of adjusted operating cash flow for the year. We are very proud that we delivered on our operating cash flow outlook even as we invested in many new products. Including the $350 million upfront payment from AT&T we received earlier this year, we delivered over $1.3 billion of free cash flow.

Now, I'd like to review our Q4 results. Throughout today's call, my reference to growth rates will refer to year-over-year growth unless I otherwise indicate. As you will see in our Q4 results, the trends in our major revenue lines were mixed.

Worldwide owned and operated search revenue grew 11%, and the US stood out as a bright spot with 18% growth. US queries were up more than 10% and RPS grew in the mid-single digits. International search revenue was down, but closer to flat, on a constant currency basis.

Worldwide owned and operated display revenue declined 2%, continuing the deceleration we've seen since Q3 '08, when the softer economic environment began to impact our revenues. The affiliate business declined approximately 4%, as we continued our efforts to improve affiliate network quality. Listings revenue was down 4% as a result of the sale of Kelkoo, which occurred in late November. Excluding Kelkoo from both Q4 '07 and Q4 '08, the listings business would have grown approximately 5%.

These trends contributed to fourth quarter revenues, which was within the range we provided on our last earnings call. For the quarter, total revenue was down 1% at $1.8 billion. Revenue would've grown 3%, except for an $80 million negative currency impact.

Tight expense management enabled us to deliver $542 million of adjusted operating cash flow for the quarter, which exceeded the midpoint of our outlook. Our press release includes a summary of the items excluded from adjusted operating cash flow.

During Q4 we undertook the cost reduction initiatives that we previewed with you on our last earnings call, which included a significant headcount reduction, restructuring of certain business partnerships, outsourcing of various business support activities, reduction of non-headcount related spending, and facilities consolidation. We ended the year with approximately 13,600 employees, down over 1,600 from the end of Q3.

We believe that these initiatives will result in over $400 million of annual run rate cash cost savings, and we also continue to tightly manage costs and look for additional efficiencies as this year unfolds. We ended the year with $3.5 billion of cash and marketable securities. We've positioned our portfolio in highly rated securities and money market funds and deposits with top rated institutions.

At the end of the year, the value of our direct and indirect investments in publicly traded securities such as Yahoo! Japan, and Gmarket were valued at approximately $9.4 billion, or over $6.50 per share. The value of these interests has been volatile during the recent market turmoil, but we continue to believe that these are very valuable assets. These figures include the value of the shares of held by Alibaba Group, of which we own approximately 40%, but they do not include estimates of the value of Alibaba Group's other privately held businesses, such as Taobao and Alipay, which we believe provides significant additional value.

We did not repurchase shares during the quarter. Given the economic environment and the conditions in the capital market we have maintained a conservative and flexible approach to our capital structure.

Now, turning to operations. In our marketing services business, total fourth quarter GAAP revenue was $1.6 billion. Total marketing services revenue, ex-TAC, was $1.16 billion. Owned and operated search revenue grew due to increases in both volume and RPS in the US market. We are pleased that over the last four months our US web search share has stabilized according to comScore, demonstrating that the search product investments we've made over the last couple of years are paying off. Owned and operated display revenue softened further in Q4, declining 2%. Both US and international display revenues were down, though international would have shown positive growth on a constant currency basis.

Similar to what we saw in Q3, non-guaranteed inventory and pricing continued to grow strongly. But we've seen more pressure on the guaranteed side. While some advertisers are cutting budgets, we believe we've been the beneficiary of major advertisers and agencies consolidating their ad buys with fewer players as they seek to improve returns on their ad spending.

Our strong relationship with our users continue to make Yahoo! a top choice for online campaigns, because of our strong user engagement, with page views up at Yahoo! over 15% in Q4. While we continue to believe that online ad spending will hold up better than traditional media in 2009, advertisers are shortening their lead times giving us less visibility into the demand pipeline than we had a year ago.

I noted that our affiliate business was down in Q4 as we continue to push network quality initiatives to improve ROI for our advertisers. With the change in the macro picture, we've also renewed our focus on the economics of both our current partnerships and potential deals in the pipeline.

As we expected, fees revenue for the quarter declined 12%, principally as a result of the ongoing transition of our broadband partnerships to an ad revenue sharing model. We are recognizing revenue from the $350 million AT&T upfront payment over four years on an accelerated basis. So, the fee revenue recognized from that payment will decline in future periods.

Looking at the geographic breakdown, US GAAP revenue increased 2% and revenue ex-TAC decreased about 1%. International GAAP revenue decreased 10% and revenue ex-TAC decreased 5%. Excluding currency impact, international GAAP and ex-TAC revenue grew approximately 5%.

On the cost side, we came in below our Q4 cash cost forecast, as adjusted for the items noted in our press release. We continue to tightly control both headcount and non-headcount spending.

I'd like to expand on two Q4 P&L items that were not included in our October outlook. First, we recorded $108 million in restructuring charges in Q4 for severance, facilities and other restructuring costs. The $108 million was offset by an $18 million credit related to the reversal of stock-based compensation expense as a result of the workforce reduction.

Second, we recorded a $488 million non-cash goodwill impairment charge related to our international segment. As part of our annual assessment of our businesses, we determined that the carrying amount of goodwill in our European reporting unit exceeded its fair value by this amount. Our press release includes a table that provides a bridge between our negative $0.22 a share GAAP EPS and our positive $0.17 non-GAAP EPS based on these items.

To sum up Q4 and 2008, we performed well in a challenging operating environment. We grew revenue in key areas, focused on cost reduction initiatives and delivered on our cash flow goals.

Turning to 2009, we're providing Q1 guidance, but due to economic uncertainty in today's market, we will not provide guidance for the full year. We expect GAAP revenue for the first quarter of 2009 to be in the range of $1.525 billion to $1.725 billion. We expect TAC to be approximately 27% of GAAP revenue for the quarter. We expect Q1 operating cash flow to be in the range of $365 million to $415 million.

While these expectations are below last year's performance, I would like to remind you that we had a strong first quarter of 2008. The softness in the economy did not begin impacting Yahoo! until Q3 and then became more pronounced later in the year.

Although we are not providing guidance for the full year, I would like to point out several items that the investment community should factor out of their 2009 models. First, Kelkoo contributed $80 million of revenue during 2008. Following the sale of Kelkoo during Q4, we do not expect any Kelkoo revenue in 2009.

Second, we expect fees revenue recognition from our broadband partnerships to decline by approximately $80 million in 2009. Third, we expect fee revenue from our voice-over-IP and subscription music business to decline by approximately $65 million in 2009, since we have transitioned out of those businesses. And fourth, at today's rates, we expect currency to have a negative $200 million impact on GAAP revenue in 2009.

We expect our effective tax rate to be between 40% and 43%, and our cash tax rate for the year to be between 15% and 17% as we anticipate that we will utilize most of our remaining NOL balance during 2009.

Although the difficult economy has reduced our visibility into 2009 revenue, we believe the substantial product and platform investments we've made over the last year, along with our aggressive cost reduction initiatives and strong balance sheet, have positioned us well for the challenging conditions that lie ahead.

With that, I'll turn the call back to Carol.

Carol Bartz

Thanks, Blake. As I mentioned in my opening comments, there is a great deal to be excited about here at Yahoo!. The company has made strong progress on a number of innovations for users and advertisers, including developing major new platforms like APT from Yahoo!, which is simplifying the process of buying and selling display advertising, and YOS, which will enable more seamless development and more social user experiences; launching multiple new innovations in search, including Search Assist, SearchMonkey and BOSS; allowing user votes to influence the content shown on our sites with Yahoo! Buzz, and, of course, much more.

Also very importantly, Yahoo! grew its share of user engagement and time spent online. In the US, Yahoo! exited the year with the top ranked sites across 11 categories, including major destinations like our home page, mail, finance, news and sports. And users continue to spend more time on Yahoo! than anywhere else online.

Users come to Yahoo! by the millions to search, communicate and find, particularly when major world events occur, because they trust us to provide them accurate, timely and compelling information. One recent example, Yahoo! News set a daily traffic record last week on inauguration day, with our biggest news audience ever. We counted over 12 million unique visitors who logged over 300 million total page views and watched nearly 2 million video streams of the inaugural festivities throughout the day via our live feed from ABC News.

Yahoo!'s strong user relationships are very valuable to our advertisers. For that reason, we are the leader in branded advertising. And while that business faces more pressure in a tougher ad environment, it's great news that segments of our ad business are growing. In recent years, acquisitions, product investments and changing incentives have come together to produce big gains in the company's performance advertising offerings. This was all very deliberate. The company made thoughtful investments, took decisive steps, and as a result, now has a broader array of services to offer advertisers.

With advertisers cutting and consolidating budgets, and seeking greater efficiency and visibility in a tough macro climate, our ability to deliver better return on marketing dollars is actually driving growth with several large advertisers. Many new products, enhanced features and sales plans are in place to build on these successes this year. In fact, there are many exciting things on the roadmap for 2009 that we look forward to sharing with you in the future.

Now, as I said earlier, that does not mean there aren't problems and issues to address. This organization is extremely complex and we need to bring more clarity to our strategy, speed innovation, be maniacally focused on our users and their experience, and always remember that great products will bring users and advertisers to Yahoo!. The good news is that these things are all absolutely addressable, and I'm excited about the challenge and encouraged about I've seen so far.

Now, before we turn to your questions, let me address a couple I'm sure that are on your minds, since I'm hearing them repeatedly. First, did I come to Yahoo! to sell the company? The answer is no. I'm here because I see a tremendous collection of assets and because I want to help make Yahoo! even stronger for our users, advertisers, employees and our shareholders.

Second, am I planning to immediately sell the search business? I did not arrive here with preconceived notions about anything. I'm still learning about the business, and our integrated search and display model. It's very, very easy from the outside to have a strong opinion about what Yahoo! should or shouldn't do, not just about the search business, but I'm finding out about everything.

Like all of you, my opinions as an outsider were influenced by all the extraordinary attention we received last year. But now as an insider and CEO, it's my job and my responsibility to do what's best for our customers and our shareholders. After a short time on the job, it should be obvious I'm still working my way through that thought process. That said let me make a few observations about search.

Search is a very valuable part of our business, understanding the intent and goals of our users as they seek information online is extremely useful to our franchise in many ways. There's been a lot of talk about Yahoo!'s position in the search market, but some of the most important Yahoo! search stories are being overlooked. We've been introducing new features and capabilities to search at a faster pace over the last year, and in late 2008 Yahoo! query share began to stabilize. Our share remains almost three times the size of the number three player.

The fact is, that the quality of our search product is improving and the share staff supports that. Providing the best quality product that we can give our users always makes sense in search or anywhere else, that kind of focus increases the value of the product, which is good for our brand and good for our shareholder, no matter what our long-term plans.

Now before we turn it over to your questions, let me reiterate once again how excited I am to be here. I'm focused on the company's most important issues, both the immediate and the longer term. I'm very encouraged by the numerous product and platform successes Yahoo! has had last year, and I'm impressed with the increasing cost discipline and the product roadmap for 2009. I look forward to the challenges ahead and to helping all of you better understand Yahoo!'s strong position and potential.

Blake and Jerry are here with me take your questions. Operator, I turn it over to you.

Question-And-Answer Session


Thank you. We will now begin the question-and-answer session.

(Operator Instructions).

Our first question comes from Youssef Squali from Jefferies & Company. Please go ahead.

Youssef Squali - Jefferies & Company

Thank you very much. It's Youssef Squali. Carol, congratulations on the new assignment.

Couple of quick questions. First, I guess, as you look at Yahoo! today, can you just help us understand, what are the key two or three elements that you feel you need to figure out and you need to kind of find a solution to which would affectively determine whether you decide to remain independent? And then, Blake, O&O search was up 11%, how do you reconcile the fact that your market share has actually stabilized? You may even have picked up some market share over the last couple of months, and yet the year-on-year growth in O&O search has been declining. It was 20% in Q1 of '08; it's about 11% now. Thanks.

Carol Bartz

Well, Youssef, as I said, I didn't come here to sell the company. As far as getting more out of the wonderful asset this company already has, it is really bringing clarity to our strategy, making sure that we continue to increase our audience and their time online, making sure we have a site that is so friendly and easy to use, and yet full of engaging content. So a product focus here I think is extremely important. But it's too early to say more than that.

Blake Jorgensen

And, Youssef, on the O&O search issue, I think part of what you are getting at, we haven't seen the market share improvement we mentioned the last four months in comScore. But really, if you look all the way back through early in the year, we've stabilized our comScore share, while many of the smaller players have continued to lose share. I think what we are seeing today in the fourth quarter and as we move into 2009 is really the impact of the economy and much of the advertisers on RPS. We are tending to see PPC growth, but click yields and fewer commercial queries starting to impact overall revenue for search in general, and clearly search, both here in the US, as well as internationally.


Our next question comes from Ben Schachter from UBS. Please go ahead.

Ben Schachter - UBS

There've been press reports about various Board members meeting with people like Microsoft. I was wondering if you could talk about who is going to be leading the discussions with Microsoft. And also on AOL, beyond price, what are the key factors that are driving decisions around that potential partnership or acquisition? Thanks.

Carol Bartz

Well, let me answer that. We don't have any comments on press reports that come from nowhere, and that will be our consistent theme throughout this conversation and the conversations we have in the future.

Blake Jorgensen

Next question.


Our next question comes from Jeffrey Lindsay from Sanford Bernstein. Please go ahead.

Jeffrey Lindsay - Sanford Bernstein

Thank you and thanks for taking my question. I'm going to ask two questions. First, just from your review, Carol, of what you've seen so far, what are you most concerned about in terms of what you've seen at Yahoo! already? And then my second question for Blake is, why did you feel the need to accelerate the revenue recognition from the AT&T payment? Thank you.

Carol Bartz

It's interesting. I'd say what I'm most concerned about, and I did mention twice in script, is this organization is very complex and therefore it is hard for people to get speedy answers and to be able to make decisions. The good news is that's fairly easy to fix. I say fairly, because any time you are moving people around an organizations, it takes a little bit of time to settle down. But I'm telling you, there are some really smart people here and they really are motivated to work for a topnotch company. They just need a little help in their sort of lines of communication and channels and so forth, and good news is I happen to be pretty good at that kind of stuff. So that would be it.

Blake Jorgensen

And, Jeffrey, on the AT&T payment, we did not choose to accelerate it. That's actually the generally accepted accounting principle. We account for the upfront payment over the life of the deal, which is four years, and we base the accounting of that on the churn rate that we audit between AT&T and ourselves. So it is a response as to how we are actually churning off those accounts over time. And we've always I think indicated it would be more front-end loaded than backend loaded during that four year period.


As a reminder, please limit yourself to one question. Our next question comes from Imran Khan from JP Morgan. Please go ahead.

Imran Khan - JP Morgan

Yes, hi. Thank you for taking my questions. A question regarding international search revenue. I think, Blake, you talked about international search revenue was flat on a constant currency. Is that because of economy or do you think you are losing market share in the international market? Because it seems like it's lower than your competitors' constant currency growth rate. Thank you.

Imran Khan - JP Morgan

Yeah. I think the key here for us in the international business is we've a very diverse international business, both in Europe, which has clearly seen currency issues with the euro, but also a very strong position due to our affiliate relationship in Korea, which has had a massive devaluation of the Korean won. So strong market share in many of the emerging market countries and many of the Asian countries, primarily impacted by Europe and Korean currency changes. Next question.


Our next question comes from Mark Mahaney from Citi. Please go ahead.

Mark Mahaney - Citi

Thanks. I wanted to ask about what are the implications perhaps of your Q1 guidance, which has gross revenue down midpoint 11%, EBITDA down midpoint 18%. You went through a series of factors that would cause that kind of essentially margin compression, FX, some losses on high margin businesses. Is that it or is there also new investment areas that you're particularly focused on that could be of the same magnitude as the APT program that you had for display advertising in '08?

Blake Jorgensen

Yeah, Mark, thanks. This is Blake. The investments in APT are continuing as they have if the past, so there is no new incremental investment there. I think what you are seeing is more caution around revenue across the board, both search and display, with many of the same trends we are seeing in the fourth quarter rolling into the first quarter. Next question.


Our next question comes from Doug Anmuth from Barclays Capital. Please go ahead.

Doug Anmuth - Barclays Capital

Thanks for taking my question. It's on the display business and, Blake, in particular, hoping that you can comment on the magnitude of pressure that you are seeing on premium display CPMs and then also on the list in non-premium. And maybe you can comment, sort of as you have in the past, in terms of the pricing ratio between the two. And then do you think there is anything structural in terms of the pressure on premium? Would you expect it to come back to previous levels as the economy does come back ultimately? Thanks

Blake Jorgensen

Yes, thanks, Doug. I appreciate the question. I think most of the members of our team here believe that the premium class one advertising is seeing pressure primarily due to what you would typically see in a recessionary economy, where branded advertising is often the first thing that goes. We are still seeing a very similar ratio between class one and class two. So while class one has seen pressure, we are seeing massive growth in class two advertising. We would continue to expect to see CPMs hold at similar levels over time. And we are trying to help advertisers maximize their yield between the two class one and class two items. But I think most of what you are tending to see is overall slowdown in volume primarily driven by people moving away from branded advertising that you'd see in a recession. Thanks. Next question.


Please limit yourself to one question. Our next question comes from Ross Sandler from RBC Capital Markets. Please go ahead.

Ross Sandler - RBC Capital Markets

Yeah, just a similar question as the previous one. If you take a like-for-like TAC rate for 1Q, you strip out Kelkoo and the fees revenue shift, I'm getting to a kind of low double digit decline in net revenue. And not focusing on cost, but more on the revenue side, are you seeing trends in January that lead you to more cautious guidance? And if so, is it more on the display side or the search that you are seeing a greater deceleration? Thanks.

Blake Jorgensen

Yeah, thanks, Ross. I want to be careful not to provide insights about January yet other than what we have in the outlook. I think the outlook reflects general caution and trends that we saw from Q4 coming into Q2, both in search and display. And I think a lot of that has to do with the end consumer and advertisers decisions as to how much they are going to spend with the consumer. You are seeing that across all different sectors in industry groups. And we are not making assumptions anything beyond that point. Thanks.


Our next question comes from James Mitchell from Goldman Sachs. Please go ahead.

James Mitchell - Goldman Sachs

Thank you. This is a little similar to Mark's question. But could you discuss where we were in Q4 and where we will be in 1Q in terms of the $100 million in quarterly savings from the restructuring programs? If I look at the guidance, it seems to imply that expenses will be down around

$30 million quarter-on-quarter at midpoint. And I thought that might be more of a benefit to expenses quarter-on-quarter from the restructuring exercise.

Blake Jorgensen

Thanks, James. We are seeing a couple of things that you should remember. One is Q1 costs, particularly for headcount, tend to be the highest for the full year because we are taking a larger portion of benefits expenses and insurance related expenses. We are also still moving through some of the cost reductions. We noted that run rate costs would be down. Some of that requires continued efforts that we are doing today on outsourcing and changing our real estate footprint. And then some of it is balanced by continued investment in our organization. Next question.


Our next question comes from Jason Helfstein from Oppenheimer & Company. Please go ahead.

Jason Helfstein - Oppenheimer & Company

Yeah, hi. Thank you. Carol, can you talk about your view on, and I know it hasn't been a ton of time. But on the off balance sheet assets, obviously, significant value there. Should they stay with the company? Should they be distributed to shareholders, so shareholders could decide if they want to own those companies separately? Thanks

Carol Bartz

I'm certainly aware that that's been a question that shareholders have had. I've looked at it just briefly. Those assets fall in different kind of categories as to what position we hold in the various countries and what kind of businesses actually are there. It also is important to understand, based on the time and the market availability, what you would do or not do. So I don't have an opinion, Jason, but I do truly understand that that's something the shareholders are very curious about and I certainly will look into it.

Blake Jorgensen

Jason, it's been high on her list to sit down and go through international taxes with me, as you can imagine. But I just caution everyone to remember that we have very low tax bases in some of those investments and those investments also require multiple parties to come together on a vision. We are working with three other companies there that all are public companies and that complicates matters. Next question.


As a reminder, please limit yourself to one question. Our next question comes from Jeetil Patel from Deutsche Bank Securities. Please go ahead.

Jeetil Patel - Deutsche Bank Securities

You guys have, obviously, the Yahoo! brand, has been around for quite some time now and it's been pretty strong in the marketplace. But one thing that seems to be evident is, you have a very good position in the demo of 35 plus. And I guess, one argument can be made over the last couple of years, there has been less product innovation, the focus on a younger demographic. I guess, Carol, do you plan to address that or is there any strategy behind or initiatives behind going after younger demographic, particularly as you look at, what seems to be where lot of the growth and lot of the behavioral shifts to be occurring among the consumer out there?

Carol Bartz

That was one of the questions I had of the Board when I was speaking to them in November and December. I have a 20 year old and I've two kids also in the late 20s, so I'm familiar with Facebooks of the world and, before that, MySpace, and see what the kids do. So I am very curious about that demographic. Just a couple of thoughts. First of all, they do grow up and it's interesting watching the older ones who are 27, 29, they are much more interested in looking at Yahoo! Finance and News, and some of that. They don't have all day to just throw pictures up on Facebook and chat constantly, because guess what, they are off the dole.

So one thing I would say, I want to make sure that we serve the demographic that we have now very, very well. Also what I would tell you, the good news is, that crowd is very finicky. And just as MySpace was extremely hot and then moved over to Facebook, who knows what's going to come next and who knows whether Yahoo! can grab that property and be successful. So we have a lot going on. We are dabbling at it with YOS and other things. And so I think our demographics, actually I was surprised, because this is one of the things I talked about. We actually have the demographic that serves the entire web, sort of young to older. So we just have, I think, we can just get some growth from these other areas, so I agree with you.

Blake Jorgensen

Next question.


Our next question comes from Gene Munster from Piper Jaffray. Please go ahead.

Gene Munster - Piper Jaffray

Hey, good afternoon. And, Carol, you talked about a strategic focus and a sharpening and also about a roadmap for 2009 that you’re going to share with us in the future. And there is obviously a lot of excitement from investors about the impact you’re going to have on Yahoo! And I realize this isn’t a perfect science, but is there any sort of guidelines that you can give investors in terms of timing and when some of these changes are going to take place.

Carol Bartz

Well, Gene, I thought I’d buy the New York Times tomorrow.

Blake Jorgensen

She’s just kidding.

Carol Bartz

I’m just kidding, I’m just kidding. No, hi, Gene. How are you doing? I don’t want to commit to number of days or so forth. It's going to be evolving over the time and I am very committed by the way to getting out and speaking to our shareholders, to having an Analyst Day, because unfortunately for the reasons you all know the company was very internal focused the last year and I really want to get this external focus so that we’re open and you understand our priorities and what our thoughts are. I really want to understand our product pipeline better, understand the quality of those products, because again I have a total maniacal interest in delighting our customers. Because, if we delight our customers, advertisers will come. And if we delight the advertisers and make it easy for them to buy space and to deal with us, we’ll get more consumers and it's just a virtuous loop. So give me some time and things will be rolling out as I start understanding them. But my promise is to really communicate with you guys.

Blake Jorgensen

Thanks. Next question.


Our next question comes from Martin Pyconic with Wonderlic Securities. Please go ahead.

Unidentified Analyst

Yeah, thanks. I would like to not ask a question about Microsoft or search. But, Carol, as you've come in, in the first couple of weeks here considering your heritage before, what’s your assessment of the sales force? Obviously it’s a tough economy and so forth. But to what extent is the turmoil of last year been a issue? How much refocusing, reengineering of the sales force do you think is needed at this point in your quick assessment? Thanks.

Carol Bartz

Anyway, thanks for the new question Martin, and that's great. I’ve met with the sales leads. I haven’t had a chance yet to actually get in front of the sales force. I’m going to one of their big sales meeting here in a few weeks, and then I'll be able to have a beer with them and that’s the best way to get to know a sales force. I'm very impressed with the sales leaders. They are sharp. They are focused. They know what their job is. They understand the business, so I'd be surprised if they didn't hire good people. Just because I kind of know what sales leader should look like, I don't, I'd like it better if I’d been around a bunch of just the sales people other than their email saying, I’m glad that I’m here, and all that kind of stuff. But the leaders are good, so I'm taking that as a positive.


As a reminder, please limit yourself to one question. Our next question comes from Sachin Shah from ICAP. Please go ahead.

Sachin Shah - ICAP

Congratulations, Carol, on your new position. I just wanted to find out or clarify, is everything on the table for the company? I know you are getting up to speed on the company, and so I just want to understand or clarify is everything on the table, including a search partnership with Microsoft, potential partnership with AOL or Time Warner? Any other companies that you may be talking to, just to create shareholder value?

Carol Bartz

Well, it's my job to make sure that as a company we look at anything that makes sense long term for the company and creates shareholder value. What I do want to caution, however, it's very easy to have different shareholder interests, and some be very short term so they can jump out, some be long term. And so it's our job to make sure that we are looking at the bell curve of shareholder value. And by the way that also means maybe we should divest of some things, maybe we ought to focus a little more on the company. So, yes, everything’s on the table. But I really would, I guess, just plea that this is a fantastic Internet property, and it really doesn’t deserve everybody trying to pick it and pull it apart because, if you look at the stats, the stats are amazing. The users that come here, the amount of time they stay online, how they value the properties with 11 of our properties been number one. This is not a company that needs to be pulled apart and left for the chickens. So that’s my Wisconsin coming through. But it's my job to make sure that if there is something interesting to look at, we look at it.

Blake Jorgensen

Great. Next question.


Our next question comes from Sandeep Aggarwal from Collins Stewart. Please go ahead.

Sandeep Aggarwal - Collins Stewart

Thanks for taking my question. Another question, actually on the search side. When you had launched the new search platform, the expectations were that over time Yahoo! will abridge the gap with other, in terms of, other players for revenue per search, as well as maybe stabilize, and over time, maybe gain market share. This quarter you said your RPS grew in US 5% or so, and then you are stabilizing market share. So I wanted to know at this stage where you are in terms of catering that upside which you probably guided two years back? And what all is needed for you to basically achieve the kind of wish list type of targets?

Blake Jorgensen

Thanks. It’s Blake here. Just as a quick reminder on the stats, so worldwide search revenue grew 11% and the US grew 18%, and in that we had query growth up in the double digits and RPS growth up in the high single digits. I think we believe we’ve been closing that monetization gap. Obviously, we’re chasing constantly moving target, which is no surprise to you guys. But we're I think building off of the roadmap first with Panama and now with our continued innovation with Search Assist, SearchMonkey, and that has helped stabilize the share. I think also important to remember is our huge O&O audience and a major amount of searches that get driven off of some of our core properties that help us in that process. At the same time, when we first discussed closing the gap we also didn’t anticipate some of the economic downturn that we’re facing today, and we’re certain that some of that will continue to impact our business in the coming year. But our efforts on the technology side will continue to focus on closing the gap. We believe there’s a huge amount of upside and we have a very exciting product roadmap that will get us there. Thanks. Next question.


Our next question comes from Heath Terry from FBR Capital Markets. Please go ahead.

Heath Terry - FBR Capital Markets

Great. Thank you, Carol. I was wondering if you could, you talked earlier about some of assets that you see at Yahoo!. I was wondering if you could kind of give us your list of what you feel like the top three or four assets are that you’re looking at focusing the company around as you continue to re-craft things probably when joining the company.

Carol Bartz

Well, I tend to think that the number of people that come through our front page, the number of people at our Yahoo! Finance, fanatics like I used to be, the number of people who really depend on Yahoo! News for their ability to stay in touch with what’s going on, the more people we can attract as they mature, and by the way, even as there is actually a great opportunity because as the baby boomers age, they’re not as phobic, tech phobic as perhaps the older people are now. So I think we have an opportunity to really grow the number of users from top to bottom. But it really does depend on some great products and these products interacting better, the ability, like through something like Buzz, to put the most relevant stuff that users want to do, the ability to do some customization for people, that’s the kind of stuff I’m, so I’m tending to look at what our products are, because if we have strong products, then we will attract the audience that just beats everything and it isn’t just search. It's really about people coming for content and information.

Blake Jorgensen

Next question.


Our next question comes from Justin Post from Merrill Lynch. Please go ahead.

Justin Post - Merrill Lynch

Thank you. This might be for Jerry or Carol, but just wondering how integrated do you see your search with display as far as sales force and technology. Is that something that you just really can’t break apart and do they really feed off of each other? What’s your view on that?

Carol Bartz

Let me answer that because I’ve been digging into this. I’m going to answer it by saying that there is a lot of pieces. I find it very fascinating that everybody says search. Well, search is like a house and there are different rooms. And so, if you’re talking about search, are you talking about the living room part of search or the bedroom part of search or the kitchen part of search. All of it is part of a complex that allows users to search and advertisers to monetize that search and for us to get money for that. So there are very, very different parts. Some are easier to break apart, some aren’t, and that’s the kind of thing that I’m certainly learning and focusing on and certainly have some great people here explaining all this to me and helping us figure out how to make this asset even stronger, whether we keep it or sell it. The thing you have to remember is, this is an important asset for the company and it's important to invest and to keep it, and it's important to get the best value if we decide to sell it. So it’s that simple.

Blake Jorgensen

Next question?


Our next question comes from Christa Quarles from Thomas Weisel Partners. Please go ahead.

Christa Quarles - Thomas Weisel Partners

Hi, Carol. You mentioned a couple of times the complexity of Yahoo! And I guess as you look at the proliferation of products across the universe at Yahoo!, do you believe that there needs to be a consolidation? And as you think about that process, what, in your mind, will Yahoo! stand for? Is it about being a leader in all of the products that you choose to remain in? Is it okay that you would potentially be removing EBITDA from the mix by cutting off, distracting products, if you will? I'm just trying to get a sense of what at the heart do you believe the Yahoo! brand should stand for?

Carol Bartz

Well I think the Yahoo! brand used to stand for the best information site on the internet. The place that you come, the front page you walk through to decide how you are going to start your day and how you are going to manage through the day. The problem with a lot of these properties is I think they can defocus from what the simplicity of the core strategy is. So yes there is complexity with a lot of different products and by the way the complexity even gets stronger as you go internationally because a lot of the international properties did some one-offs here and there. So, that’s one of the things that any new person coming in would take a look at because frankly I don’t have a stake in the gain that way.

I didn’t sign up to do Yahoo! for gardeners or something. So it gives us a chance with kind of clear eyes to say what should we consolidate? What should we focus on and so forth and that’s one of the things that I will be doing with the team over the next months. But we definitely, definitely have very, very strong products and we are going to make those stronger.

Blake Jorgensen

Next question.


(Operator Instructions).

Our next question comes from Mark May from Needham & Company. Please go ahead.

Mark May - Needham & Company

Thanks. I think all the good questions have been asked but maybe I will ask this just, Carol: Staying innovative in this industry means being able to stay relevant in the future and Yahoo! is an Internet media company at its heart. I think most of the media companies are kind of valued based on the audience and usage of their property from a share perspective. A lot of the sites on the web today that have the greatest usage like YouTube and Facebook have very little revenue and probably hard to justify some of the valuations that have been placed on companies like that at least today. The idea is, with all that usage eventually, will be able to monetize. I guess the question is, from your perspective, how do you view putting investments either in projects or in new businesses that you may be looking to acquire where it’s hard to justify the valuations today. But you know that these are the coolest properties with the most usage by the audience and in order to stay relevant and innovative, you have to make those kinds of investments.

Carol Bartz

Listen, I think it’s important to look at things that don’t seem as economically interesting in the beginning, and we’ve got to do that to stay relevant, you’re absolutely right. But I also want to caution the balance to that and that is that you can easily talk about innovation or relevancy as constant change; and our users don’t need constant change, they need dependable, very, very deep partnership with where they get their information, the fact that it’s good information, the fact that it’s, how they want to see it, whether it’s video, whether it’s microblogging, whether it’s social, whether it’s news, finance. So it’s a combination of making sure we can monetize what we have as well as giving some sizzle to the users but not have everything be this constant churn.

Blake Jorgensen

Next question.


Our next question comes from William Morrison from ThinkEquity. Please go ahead.

William Morrison - ThinkEquity

Thanks, Blake. I want to ask one clarifying question. Earlier when you were talking about the Class I and II, I think you said they’re still in the same ratio relative to each other,

but at the same time you said Class II was seeing massive growth and Class I, I’m assuming is not seeing massive growth. Can you just clarify which ratio has stayed the same and what’s causing the difference in the growth rates? Thanks.

Blake Jorgensen

Yeah, so Class II is still very small relative to overall dollar revenue in display. So, if you look at the ratio of dollar revenue for Class I versus Class II, that’s what I was referring to so while Class I has not grown very fast, Class II has grown very fast but there hasn’t been a major shift yet in the mix and that’s the ratio that I was referring to. Next question.


Our next question comes from Brian Bolan from Sturdivant & Co. Please go ahead.

Brian Bolan - Sturdivant & Co.

Yes, thanks for taking my question. Certainly this quarter looks very good especially on a cost basis. Can we expect to see further cost cuts going forward and at the percentages you made for this quarter?

Blake Jorgensen

Yeah, I’ll answer that and Carol may want to add to it. I think you should assume that particularly with the uncertainty around revenue we will keep a razor focus on costs. I don’t think we will have a massive cost reduction effort as we did in the last quarter. It will be drifting towards more of a focus on efficiency and cost management that is part of the overall organization. We clearly want to continue to invest in key areas of the company but at the same time we want to continue to build a much stronger more efficient company by removing core costs or determining what parts of our organization we should not do ourselves and we might choose to have other parties help us with outsourcing costs.

Carol Bartz

Well I’d like to thank all of you for frankly, asking good questions and not getting too pushy on questions that you knew I couldn’t answer or wouldn’t answer. I look forward to meeting you and look forward to a long relationship that’s very, very positive. Thank you.

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