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Yahoo! Inc. (NASDAQ:YHOO)

Q1 2013 Earnings Call

April 16, 2013 5:00 pm ET

Executives

Joon Huh – Investor Relations

Marissa A. Mayer – President and Chief Executive Officer

Kenneth A. Goldman – Chief Financial Officer

Analysts

Heath Terry – Goldman Sachs

Anthony DiClemente – Barclays Capital

Doug Anmuth – JPMorgan Securities, Inc.

Carlos Kirjner – Sanford C. Bernstein & Co., LLC

Mark Mahaney – RBC Capital Markets

Ben Schachter – Macquarie Capital

Eric J. Sheridan – UBS Securities LLC

Youssef Squali – Cantor Fitzgerald

Ken Sena – Evercore Partners

Justin Post – Bank of America Merrill Lynch

Brian J. Pitz – Jefferies LLC

Jordan Monahan – Morgan Stanley

Stephen Ju – Credit Suisse

Neil A. Doshi – Citigroup Global Markets Inc.

Operator

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Yahoo! First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Joon Huh. Please go ahead.

Joon Huh

Thank you. Good afternoon, and welcome to Yahoo!'s first quarter 2013 earnings conference call. On the call today will be Marissa Mayer, Chief Executive Officer; and Kenneth A. Goldman, 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 strategy, product plans, and our expected financial and operational performance as well as our investment priorities, stock repurchases and expectations for growth, innovation and monetization.

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-K filed with the SEC, on March 1, 2013, as well as in the earnings release included as Exhibit 99.1 in the Form 8-K we furnished today to the SEC.

All information discussed on this call is as of today, April 16, 2013, 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 non-GAAP financial measures as we talk about the company's performance. Reconciliations of these non-GAAP measures to the GAAP measures we consider most comparable can be found on our corporate website info.yahoo.com, under Investor Relations.

We have prepared remarks that will last about 30 minutes then we'll have a brief Q&A session.

And with that, let me turn the call over to Marissa.

Marissa A. Mayer

Thank you, Joon. Hi, everyone. Thank you for joining today's call. I'm excited to update you on our progress since we spoke in January. We're off to a solid start in 2013. Overall, we saw a continued stability in our revenue ex-TAC, which is essentially flat year-over-year.

I’m pleased with the continued execution I see everyday. Our teams have been working very hard especially in Q1. I discussed on past calls, for getting the company growing at the rate we would like will take several years. Our long-term success will be defined by a series of sprints. We’re reaching the end of the first sprint. The first phase was all about getting people to believe in Yahoo!, making Yahoo! a really terrific place to work and contribute and getting the organization fit.

Now, our focus will shift to the next sprint which is all about building beautiful products and executing well against our business strategy. This will lead to greater user engagement, increased revenue and ultimately growth. The first sprint, focus on talent has positioned us to step up our cadence in product development and develop more beautiful and engaging user experiences in 2013 and beyond.

The commitment we’ve made to make Yahoo! the absolute best place to work is already leading to better employee collaboration, innovation, and execution. As of today, we've implemented more than 567 employee–focused initiatives across the company including a new program that encourages all employees to test and improve our latest products which is yielding exciting new thinking.

As a result of these initiatives, the data is undeniable. Today, more people are trying to work at Yahoo! and more employees are staying. In Q1, the number of resumes we received more than tripled over the course of the quarter. On reflecting on this period last year, the number of candidates applying to Yahoo! has nearly doubled.

Our attrition rate for top talent is essentially half of what it was just a year ago. And with a renewed excitement on Yahoo!, we’re seeing a steady increase in what we call boomerang, former Yahoo!’s who are so inspired by our vision that they have rejoined. In fact, 14% of the hires we made in the first quarter were boomerangs, one in every seven. We also continued to build out our talented leadership teams.

Scott Burke was promoted to lead Advertising Technology. I talked about our commitment to ADTECH and platform, and Scott’s experience at Yahoo! makes him the perfect choice to lead this part of our business. His deep knowledge of our technology and our industry will help us build new monetization products and revenue opportunities.

We also promoted another Yahoo! veteran, Laurie Mann to lead our Search business. Laurie has been instrumental in our Search alliance with Microsoft. He brings technical and operational expertise to ensure that our partnerships and product strategy continue to deliver strong results for the business.

And we brought in great leadership from outside Yahoo! as well, including Bob Stohrer, our new Senior Vice President of Brand Creative. Bob is a creative force of nature. he has held key roles in companies like Clear Channel, Sprint, Virgin Mobile, and [the Anatel] [ph]. We look forward to the leadership, as we continue to evolve the Yahoo! brand and put our products in the center of the world’s daily habit.

Finally, we made two strong talent acquisitions in Q1, Alike and Jybe. These teams bring an incredible mix of engineering and technical talent, which will help us accelerate our efforts in mobile development and content personalization. They’re already moving quickly to amplify their entrepreneurial spirit that’s so prevalent at Yahoo! right now.

Overall, I have been very pleased with how well our talent acquisitions have integrated into the company. You’ll see many of the contributions come to life in our product experiences over the next few months. so stay tuned.

As I’ve said before, companies with the best talent win, and it’s clear we’re now back in the game. Our focus on people and development is paying off with better product execution and it’s the reason we’ve been able to move quickly to launch new more modern version of several of our core products.

In Q1, we launched a completely new modernized Yahoo! Homepage for web, mobile and tablets. The new Yahoo! experience was much faster and much more relevant for our users. It offers a personalized news feed and endless stream of news articles and deeper social integration. We’ve seen impressive trends with deeper engagement across the Yahoo! network and since we launched interactions with the Homepage itself have increased by more than 25%. Time spent, frequency of visits and page views are up as well.

The recent updates to Mail and Flickr continued to yield stronger engagement in Q1. Since launching the new Yahoo! Mail for iOS, Android, and Windows 8 daily active users on our apps are up more than 50% (inaudible) new found presence and multiple platforms. By improving the speed and performance of our products, our users responded by doing more on Mail and Flickr. For example, photo uploads on our Flickr mobile apps have increased over 50% quarter-over-quarter.

Turning to Search in Q1 we once again saw traffic volume increase through affiliate and mobile search as we continued to enhance our underlying search products. In March, we also announced the acquisition of Summly. Because of smaller screens have changed the way we consume information, Summly is a game changer for Yahoo!

It uses a sophisticated set of natural language algorithms and machine learning to deliver quick summaries of stories in web pages. This helps users to access content more easily on mobile devices. For our publishing partners, we believe this technology can help drive a whole new generation of mobile readers to their content. Stay tuned for the integration of the Summly technology in our products in the near future.

Turning to partnership, which I’ve identified as one of our key areas of focus, we’ve recently completed two key partnerships. First, we announced a global agreement with Google to place ads on various Yahoo! properties and co-branded sites using AdSense and AdMob. With this partnership, we’re seeing our network of advertising partners expand, which means we can serve a broader set of ads and make them even more meaningful to our users and earlier this month, we integrated Dropbox into Yahoo! Mail, allowing users to share and store larger files in attachments. Overall, it is still very early, but our product progress is extremely promising and it’s clearly increasing our user engagement.

As I discussed last quarter, we recently realigned our sales organization, while it will take time to see the benefit of this realignment in our numbers, we believe the changes we made will be beneficial to our customers and our teams, and we’re seeing some early progress. In the time I’ve spent with advertisers and agency leads, I am encouraged by what I am hearing. We’re making it easier for customers to do business with Yahoo! and positioning our advertisers, partners and teams for mutual success.

And finally, we continue to fulfill our commitment to shareholders. In Q1, we returned $775 million through additional share repurchases. This leaves approximately $778 million remaining under our $3 billion commitment from the Alibaba proceeds that we announced in September. With that, I'll pass the floor to Ken to talk more about our financial results. Afterwards, I'll talk a bit more about our growth strategies in 2013 and going forward

Kenneth A. Goldman

Great, thank you, Marissa, and good afternoon, and thank you all for joining us today. On the call, I will walk through the Q1 financial results and then I'll provide forward guidance for both Q2 and then update you on the full year view.

For purpose of today's discussion, I will be referring mostly to non-GAAP results. These numbers now exclude stock-based compensation expense and a restructuring credit of $7 million. Our non-GAAP results are now more comparable to those reported by our peers. Our GAAP operating income more closely approximates our guidance as both includes stock-based comp. Please see our earnings presentation located on Investor Relations website for a complete reconciliations between GAAP and non-GAAP results. Before I get into the details, let me quickly review the progress against our financial priorities.

First on revenue growth. While revenue reported ex-TAC was flat year-over-year, growth in search, especially after adjusting for Korea, was once again a highlight. In display, we’re working on a number of initiatives to our properties, which we anticipate will increase user engagement and revenue. Overall, we believe we are on track to show improvements especially beginning in the second half of this year in going forward.

On cost control, as you’ve heard me say previously, we are committed to controlling cost even as we invest in our strategic priorities. And in Q1, expenses and adjusted EBITDA were approximately flat year-over-year. Third on capital efficiency and commitment to shareholders, we have maintained a very strong balance sheet with nearly $5.4 billion in cash and securities at the end of the quarter.

This is down from the $6 billion at year end because we repurchased 38.1 million shares of stock in the first quarter at an average price of $20.35 for $775 million. We also had positive free cash flow in the quarter of a $150 million and our diluted share count at the end of the quarter is now down to approximately 1.1 billion.

So, let me now cover the financial highlights for Q1 as seen on slide five and provide a high level business overview. Again, we will focus primarily on our non-GAAP results, but also including GAAP results in this transition quarter to be absolutely transparent. As I mentioned, Q1 revenue ex-TAC was flat at $1,074 million and within our guided range.

We saw continued strength in our search business through monetization gains and click yield improvements. We’re encouraged as we see more opportunities to improve the search experience for our users and grow this business in the quarters ahead.

Our display business felt some of the impact in lower user traffic and this is reflected in numbers. We believe that our products investments in this area will be instrumental in reversing these trends as we look to increase our ad inventory and optimize pricing.

Now, looking at the numbers, search revenue ex-TAC grew 6% to $409 million. Adjusting for the impact of closing the Korea business, which was primarily search, year-over-year growth would have been 10%. Display revenue ex-TAC declined 11% to $402 million and other revenue ex-TAC grew 10% to $264 million. This line benefit from the ongoing amortization of the Alibaba TIPLA payment of $34 million per quarter.

Adjusted EBITDA of $386 million in the quarter exceeded high end of our guidance by $26 million due to improved expense controls. Non-GAAP operating income was $224 million, a decrease of 3%, resulting in the same non-GAAP operating margin of 21% compared to prior year. GAAP operating income, which includes stock-based comp as I guided to last quarter, was $186 million, which is $11 million above the high end of our guided range.

Non-GAAP net income was $420 million, up 26% from Q1 2012 driven by the continued growth of our equity investments in Alibaba and Yahoo! Japan and a favorable tax rate of 16%. Non-GAAP EPS was $0.38, up 39% year-over-year. GAAP EPS was $0.35, up 51% from prior year.

Capital spending was $70 million a quarter, which was lower than historical levels as certain spending was delayed into future quarters this year. And we continued to generate significant free cash flow of $150 million. As noted, we ended the quarter with cash and marketable securities of just under $5.4 billion.

So now, let me walk through the financial results for Q1 in more detail, and I will discuss the business drivers and revenue detail by business line. And you can see the key business drivers on slide 6 and revenue ex-TAC detail by source on slide 9. You would notice also we have excluded the operations of Korea from the metrics to show like-for-like comparisons.

In terms of Search, our Search business performed well in the quarter, and Search revenue ex-TAC was 6% year-over-year despite the negative headwind from Korea of $13 million. Excluding this, year-over-year growth would have been 10%.

As we look at the search metrics, again excluding Korea, paid clicks grew 16% in Q1, while price-per-click fell 7%. Similar to last quarter, growth in paid clicks was driven again by higher click through rates and improvements in the user experience. We were able to improve overall click yield this quarter by optimizing the number in formatted ads shown on the Yahoo! search results page and also limiting some lower quality ads.

Overall, price-per-click was down in Q1 primarily due to a higher mix of lower monetizing affiliate party traffic, which brought the overall rate down. On the plus side, price-per-clicks on our higher monetizing owned and operated traffic were up modestly year-over-year. The RPS guarantee for Microsoft lapsed in the U.S. and Canada at the end of March. There was still a gap in monetization and we will work with Microsoft to improve our search monetization.

Now, let me turn to Display. Revenue ex-TAC fell 11% in the quarter. Overall trends are consistent with what we saw at the end of last year. There were also some specific actions we took to remove ad inventory and page views in order to improve the overall user experience and the redesign of both Yahoo.com and Yahoo! Mail. We expect to see some near-term impact on our Display business from these changes, but believe the higher quality and more personalized user experiences will result in increased user engagement and higher ad prices as the year progresses. Looking at display metrics once again, excluding Korea, ads sold fell 7% and price-per-ad fell 2%.

Supply has been the main driver for the decline in number of ads sold as it follows the overall user engagement trends. Price-per-ad is down slightly because we had a mix shift of ads sold between our various geographies. So now let me talk about other revenue ex-TAC, which includes our leads, listings and fees businesses which grew 10% year-year-over.

Types of fees included in this line are YJ royalty, Alibaba royalty, e-commerce, small business and others. Like last quarter, the growth was driven primarily by the amortization fee revenue of $34 million resulting from the Alibaba TIPLA payment and also a higher Alibaba royalty fees. This was partially offset by a decline in broadband amortization revenue and lower revenue in some of our leads businesses.

In terms of revenue detailed by region, please refer to Slide 10. And I’m just going to make a couple of very brief comments on the geographic slide. In the Americas frankly, total revenue ex-TAC was approximately flat. In EMEA, revenue ex-TAC fell about 6% in the quarter. Search revenue was impacted on a year-over-year basis by 12% given the revenue share with Microsoft.

In APAC excluding the impact of Korea, revenue ex-TAC was up about 4%. Search was up 2% year-year-over, ex-Korea. Display was up 8% and other revenue was up about 4%.

So now I’m going to turn to operating expenses and income. You can see this on Slide 12. Beginning with traffic acquisition costs, TAC for the quarter was down $78 million to $66 million for the quarter. As noted on the Q4 call, we completed transition in EMEA in 2012, which accounts for approximately half of decline in TAC for the period. It was also a meaningful amount of TAC coming from our operations in Korea, which accounts for the other half.

In terms of non-GAAP total operating expenses were $851 million at quarter, an increase of $5 million versus Q1 last year. We ended the quarter with approximately 11,300 employees, down 19% from last year. Offsetting this, were investments in new products, mobile, contact – content, workforce and productivity

Now in terms of profitability, the company once again performed well. We are exercising good cost control of expenses in capital expenditures. You can see this in our operating expense achievements. We are reinvesting some of our operating efficiencies into key growth areas such as mobile. And then on slide 13, you see adjusted EBITDA for the quarter was $286 million, up slightly over the prior year and representing a 36% margin on revenue, again, that’s revenue ex-TAC.

Non-GAAP income from operations, which again excludes stock-based comp and restructuring, fell a modest 3% over the last year to $224 million to a 21% margin in revenue ex-TAC. GAAP operating income increased 10% however to $186 million. Let me just call out a few other items on our income statement, and this was helpful for modeling; other income was $17 million in the quarter, which is $15 million higher than Q1 of last year, resulting from our interest on the Alibaba preferred shares.

Our non-GAAP tax rate was 16% in the quarter, this was lower than our structural rate due to several discrete items incurred during the period. We do expect our structural rate to be near 34% for 2013.

Earnings in equity interest grew 26% in Q1 to $218 million, driven by growth in our equity pickup of Alibaba and Yahoo! Japan, as those two businesses showed impressive growth in the quarter. However, as a reminder, we’ve recognized these amounts on a one quarter lag and due to seasonality and a declining yen, you should expect a significant reduction in our equity income next quarter.

Finally, as we have once again been very actively purchasing shares, please adjust your model for the latest diluted share count, which is just under 1.1 billion shares as of quarter end.

Let me now turn to a few balance sheet and cash flow items. Our company Yahoo! remains on a very strong footing from a balance sheet perspective. Cash and marketable debt securities was just under $5.4 billion at the end of the quarter, $4.8 billion of which is held domestically. Prepaid expenses and other assets was $644 million at the end of the period, an increase of roughly $184 million for the end of Q4. This increase in other assets is primarily due to increase in the value of our currency hedge associated with our Yahoo! Japan ownership stake.

The Alibaba Group preferred shares balance was $831 million at period end, an increase of approximately $15 million from prior quarter. And as a reminder, a portion of the dividend will accrue in value over time.

Accrued expenses also fell meaningfully in the quarter to $720 million. This was related to the annual performance bonus, annual performance bonus payments, which are typically accrued throughout the year and paid in Q1. And based on the closing price per share at the end of the period, our stake in Yahoo! Japan is worth approximately $9.3 billion on a pre-tax basis. As a reminder, we own approximately 24% of Alibaba Group.

Cash flow from operations was $219 million a quarter as changes in accounts payable and accrued expenses were both meaningful uses of cash in the quarter. Capital spending was $70 million, again, lower than normal primarily due to seasonality. We do expect this number to increase in coming quarters as we continue to invest our data center footprint in traffic serving efficiency. Free cash flow, as I mentioned, was $150 million.

So now let me turn to business outlook and guidance. As I discussed on our Q4 call, we intend to invest in the year or to lay the foundation for growth that we expect to occur in the second half of this year and in subsequent years. But we are mindful of controlling discretionary cost ever more tightly to achieve our desired earnings and EBITDA goals.

For Q2, we expect our revenue ex-TAC to be in the range of $1,060 million and $1,090 million. We tend historically to be flat Q1 to Q2 and we are assuming no RPS guarantee. Adjusted EBITDA to be between $350 million and $370 million and non-GAAP operating income, excluding stock-based comp, to be between $190 million and $210 million.

And for calendar 2013, our guidance is unchanged with that given in the Q4 2012 call. We do recognize that our product initiatives need to affect revenue growth in the second half for us to achieve these financial results. Thus revenue ex-TAC is expected to be between $4.5 billion and $4.6 billion, adjusted EBITDA expected to be between $1.6 billion and $1.7 billion and non-GAAP operating income excluding stock-based comp expected to be between $1,050 million to $1,100 million.

I would also add a full reconciliation of our guidance numbers from GAAP to pro forma as shown on chart number 29.

So, again, thank you for the call. Let me now turn it back to Marissa.

Marissa A. Mayer

Thank you, Ken. Yahoo! is a consumer Internet company. And the consumer Internet is a growth industry. I want to be very clear; we are committed to growing our core business, first in line with the industry and ultimately surpassing it.

Earlier on the call, I described our task as a series of sprints. The progression can also be characterized as I said in the past, as a chain reaction. We’re starting with great people, the foundation for building great products. These great products and increased ubiquity will drive user growth and higher engagement. And finally, higher adoption and engagement drives higher advertiser spend and ultimately more revenue. Our growth story will be driven by ability to build, buy, and partner.

For the last several months, we’ve been focused on revamping our biggest products and properties, building great new experiences optimized for smaller screens. And there is a simple reason for this. Mobile is not only at the center of our users’ daily habit. it is the center of a huge industry shift in Internet access. More than 1 billion people access the web on their mobile devices today. Tablet use is growing even faster than smartphones did.

By 2015, we expect more people to access the Internet on mobile devices than on PCs. This presents a tremendous opportunity for us, and we are working hard to take advantage of it. By improving the design and performance of some of our most popular mobile products, our mobile growth is accelerating. In our January call, I announced that Yahoo! saw 200 million monthly mobile users at the end of last year. In just the first three months of this year, we’ve already surpassed 300 million mobile monthly users.

Continuing into 2013 and beyond, we are methodically addressing the dozen or so core daily habits of our users, platform-by-platform and country-by-country. Our early results in mobile are promising. The product teams are executing incredibly well here, and we have a lot more in store for mobile in the coming months.

Personalization will be a key differentiator for us going forward, not only for content, but also for advertising. We fundamentally believe that ads can and should be a great part of the user experience. So for every improvement that we make to personalize our content, we’re also looking at how we can innovate in the ad experience as well.

And beyond building great user experiences on our own, we’re continuing to look at smart acquisition from both the talent and product differentiation perspective. We are going to continue to be very strategic and selective here, looking for acquisitions that we can integrate quickly and easily into our business.

Finally, Yahoo! is uniquely positioned as a partner of choice across the industry. The consumer Internet is a complicated ecosystem and one we played very well in. Few people realize that Yahoo! is one of the very few players with significant multiyear partnership with Apple, Facebook, Google, and Microsoft, and we’re delighted to work with all of them. We view partnerships as a key differentiator for Yahoo! and an engine for growth in users’ engagement and revenue in 2013 and beyond.

With great products and partnerships comes user engagement and with user engagement comes monetization. Last quarter, I outlined four big monetization opportunities for Yahoo!; search and display and over the long-term, mobile and video. The improvements we’re making in search are already yielding increased usage and revenue with paid clicks seeing double-digit growth.

Looking at display, we are working hard to monetize our on and off network opportunities. And while display was down for the quarter, declines in the number of ads sold are slowing. We made deliberate decisions across our properties to improve the user experience, which we expect will to lead to increased engagement, more impressions, and better monetization over the long-term.

In closing, I’m pleased with our pace of execution in Q1, we’re on course to do what we said we would do over the next few years. Stabilize, grow with the market and ultimately grow users and share disproportionately.

The 11,300 people who work at Yahoo! everyday are aligned behind the common goal; to put our users first and to make their daily routines truly delightful. I’m inspired everyday by their passion and dedication to our users, advertisers, partners, and shareholders and I’m confident in the impact they’re making to Yahoo!’s long-term success.

So with that, thank you and we’re happy to take your questions.

Question-and-Answer Session

Operator

Thank you, ma’am. (Operator Instructions). Our first question comes from the line of Heath Terry with Goldman Sachs. Please go ahead. Your line is now open.

Heath Terry – Goldman Sachs

Great, thanks. Marissa, related to the 7% decline in ads sold, what proportion of that would you say is related to the decline in user engagement versus the strategic decision that you talked about to reduce the number of ads per page? And if it’s reduction in ads per page, how much of that is sort of mixed shift to mobile versus that strategic decision just to reduce the ad load that users are seeing?

Marissa A. Mayer

Sure, thank you for the question, Heath. I think for this overall space it has several different factors that are operating on it. One we are seeing continued traffic trends that are declining. However, we are seeing slowing in that trend. Our sell through rate on ads have been holding steady and if anything, increasing to yield more ads sold. I think that overall the piece that probably merits the most explanation is around the pricing side of it, it was under 2% decline year-year-over and this is where the mobile question comes in, we think there are a few things happening there. One is that mobile as it becomes bigger and bigger, we ultimately aren’t seeing what we really think the price ultimately will be from mobile ads. We think that they are every bit as effective as they are on the PC and we anticipate that pricing will eventually get us to that point.

In terms of the user interface, changes we’ve made in terms of reducing the number of ads, we have seen that that’s actually increased user engagement. I think that’s why there has been this slowing in the decline. The other thing we’ve seen is that the ads we have are more desirable and there is greater demand for them. That said, after we make those changes, we generally have to wait at least a certain number of weeks, if not a few months, to see where the trend stabilize, so we can adjust pricing according to demand.

And so the fact that that pricing change sometimes lags, the user interface change that could be some of the softness in pricing. Thank you very much for the question.

Heath Terry – Goldman Sachs

Thanks, Marissa.

Operator

Thank you, sir. Our next question comes from the line of Anthony DiClemente with Barclays. Please go ahead. Your line is open.

Anthony DiClemente – Barclays Capital

Thank you very much. I have one question for Marissa and one for Ken. Marissa, I just wanted to follow-up on your commentary about partnerships. If you can help us just frame how you are thinking about partnerships, how in particular wondering about a potential partnership with Apple or with iPhone, and how that could possibly help Yahoo!? And just what a partnership like that needs to look like to really help you here at the core?

And then for Ken, I just looked at the next quarter guidance versus the prior year, and noticed that your guidance implied the year-year-over decline in EBITDA, and I’m just wondering if there is anything on the cost side for the 2Q that we should be aware of where that you’d like to call out? Thank you very much.

Marissa A. Mayer

I’ll take the question on partners first. We really like the way we’re positioned in the marketplace regarding partnerships. As I said, the four companies that we have multi-year significant partnerships with, Microsoft, Facebook, Google and Apple it’s a very unique blend in terms of being able to partner with all four of them. And I think it represents how well Yahoo! is able to partner.

For us, the way we think about this is how can our services and our content be brought to the many different platforms and places where our users use our products. And so this is why we’ve been very excited, especially in the mobile sphere, to partner with Apple as well as to be able to provide our services on the Android platform as we move forward.

So I think this is a great opportunity for us. It’s one that we continue to explore and think about as we release new products and as we think about where we might be able to add the most user value in the future.

Kenneth A. Goldman

Yeah, I would say on the expenses side, we are fortunate we did a pretty good job overall relative to Q1 expenses. I do think we’ll see some incremental expenses in Q2 come in as we do add some headcount per my earlier comments. And we’re also doing a number of content deals, which we also expect will impact our expenses. And it’s also lastly, some of the impact of some of the small acquisitions we’re doing; there is some expenses associated with those as well.

So I would say, in total, those are pretty modest. But they do add a little bit and that’s what caused some relatively flattish revenue to show a small decline in EBITDA year-over-year.

Anthony DiClemente – Barclays Capital

Okay, thanks a lot.

Operator

Thank you, sir. Our next question comes from the line of Doug Anmuth with JPMorgan. Please go ahead. Your line is now open.

Doug Anmuth – JPMorgan Securities, Inc.

Thanks for taking the question. I just want to ask few things about search. First, Marissa you talked about higher search click volume and a couple of things around optimizing the number of ads and then the format there. Can you provide a little bit more detail there in particular, you’ve talked in the past a lot about being able to control the UI and what you’ve done there in particular?

And then secondly, Ken, you mentioned on Microsoft that you are assuming no RPS guarantee, can you just provide us with an update on where the RPS guarantee stands now, are there any small chances that could continue going forward? Thanks.

Marissa A. Mayer

Sure, I’ll take the question on click volume. Overall, what we’ve been doing is we have been growing the amount of search we see on our own site. We’ve also been partnering to bring in some syndication partners. They’ve also increased click volume. And in terms of optimizations on the user interface, we have been playing with different ways to present the ads that ultimately have made those ads more attractive and more useful to our users. So we have seen some increased click volumes there.

Today, my view is that our progress has been somewhat incremental. We're making small changes. I'd like to see us grow our Search business even faster, especially in terms of click volume and for that I think we need to invest in making the search experience even more immersive, which we will be doing over the coming quarters.

Kenneth A. Goldman

Yeah, this is Ken. Relative to the – we work with Microsoft – as a matter of fact we talk to Microsoft daily on a whole variety of things. And so I don't want to suggest one way or the other that it will get renewed; from a – obviously from a conservative point of view, we have assumed no renewal, to the extent we do anything forward with Microsoft different than that then we would expect it would be positive to our numbers. But again, I don't have that in the assumptions at this point.

But we do talk with Microsoft everyday about how to basically optimize what we're doing together.

Doug Anmuth – JPMorgan Securities, Inc.

Okay. Thank you.

Operator

Thank you, sir. And our next question comes from the line of Carlos Kirjner with Sanford & Bernstein. Please go ahead, your line is open.

Carlos Kirjner – Sanford C. Bernstein & Co., LLC

Thank you. Two questions; can you help us understand how much of the growth in Search revenue was driven by affiliate versus O&O? Did O&O Search ex-TAC grow significantly? Secondly Marissa, you mentioned the long-term aspiration is to grow with the market and then in the future faster than the market. When should we expect the display business to actually be growing? Is it two quarters, two years, six quarters, what type of timeline should investors be thinking about to see positive year-on-year growth of display revenues ex-TAC? Thank you.

Marissa A. Mayer

So on the question around Search revenue for affiliate versus O&O, we don’t generally break that out and release that. Ken, if you would like to offer more perspective there

Kenneth A. Goldman

Yeah, I think the O&O was on a relative basis, did better than the affiliate side, and that’s – it held up all across the board better, if you will.

Marissa A. Mayer

And on the display question, I think that the timeline, as I said it is a series of sprints and it is a chain reaction. We need to get the products right and I’m confident that we have to the products that we’ve released. That’s how we are still cascading changes to overall have cleaner user interfaces, more modern paradigms throughout our product set and that will continue through the next few quarters. So I think that it’s – well I don’t want to put a precise timeline on it. You can see and it’s consistent with Ken’s guidance for the year that we do anticipate that we will see some growth already in the second half of this year.

Carlos Kirjner – Sanford C. Bernstein & Co., LLC

Thank you.

Kenneth A. Goldman

Yeah, I would just add, we are manically, if I can say the word right, focused on revenue. And so while many of us spend time thinking about cost and controlling those because that’s obviously extremely important the company is very, very focused and if anything would be even more focused on revenue growth and what things we need to do to drive and ensure we have accountability for our revenue growth.

Carlos Kirjner – Sanford C. Bernstein & Co., LLC

Thank you.

Operator

And thank you, sir. Our next question comes from the line of Mark Mahaney with RBC. Please go ahead. Your line is now open.

Mark Mahaney – RBC Capital Markets

Hey, thanks. Two questions please; first, how much further can you expand the relationship with Google or their regulatory limits and how much further that can be expanded? And secondly, Marissa, you talked about mobile a couple of times, and can you just update the answer to the question of how much of the mobile growth for Yahoo! in the future can be done via organic methods or efforts as opposed to having to acquire those talents and resources from outside the firm? Thank you.

Marissa A. Mayer

Sure. On the Google question, as you can see, we put a partnership in place with them this year – this quarter on AdSense and AdMob and that was obviously [allowed] [ph]. We do work with them on that partnership and we occasionally explore other possibilities. And there, we don't have anything to announce today, but we obviously work closely with all of our partners, especially to explore new opportunities.

In terms of the mobile growth, I think that the big piece here, I’m not sure if your question is around the talent or around the usage, can you clarify?

Mark Mahaney – RBC Capital Markets

Well, when you think about what Yahoo! wants to do in mobile and the importance of mobile over the next couple of years, do you think you have the assets in-house to do that now, or do you think it's going to, I guess, I'm asking, do you need to do acquisitions in order to take Yahoo! to where it should be in mobile over the next three years?

Marissa A. Mayer

I think that we will want to do some acquisitions, particularly on talent, and that’s both hiring as well as doing talent acquisitions. That said, I mean, I do think that Yahoo! has a really tremendous set of assets that lend itself very well to mobile. I didn’t exercise at one point where I pulled all of what people do on their phones ordered by frequency. And with the few key deletions largely what carriers provide in the form of voice and text, and possibly maps, we – the list goes like this. Check e-mail, check the weather, check news, get sports scores, play games, share photos, group messaging, get financial information. And when you listen to that lists, not only is that in order of frequency what people do on their phones, it also has almost an exact correlation to Yahoo!’s business and our product line.

So in many cases, it’s about taking our core strength and our core content that we’ve had online and extending it to the mobile platform. I think that’s why we’ve seen so much success on our mail, and our Flicker launches, and I hope that we will see continued success as we rollout more of the updated mobile applications.

Mark Mahaney – RBC Capital Markets

Thank you, Marissa.

Marissa A. Mayer

Thank you for your questions, Mark.

Operator

Thank you, sir. Our next question comes from the line of Ben Schachter with Macquarie. Please go ahead. Your line is now open.

Ben Schachter – Macquarie Capital

A few questions on search really more over the long-term. Do you think that the user interface improvements are enough to drive share, or do you need to have more default setting deals, do you need to have a standalone browser? And then just to quantify that if we think about comScore, I think it has you at about 12% search share now. where can that be by 2015? Thanks.

Marissa A. Mayer

I think that my experience certainly suggests that user interface improvements are enough to overall drive search share. I think that when you look at where the innovation in search have come in, say the past five, eight years, they’ve almost all been on the user interface. So I certainly think that that alone is enough. That said getting default search sets and/or having your own browser, certainly helps in terms of distribution. That’s why we have a healthy program here at Yahoo! to help our users set their default search engine on various devices, and in various browsers to Yahoo!. And I should also note that, we’ve partnered very well with Firefox over the years to distribute a Yahoo! enhanced Firefox browser that has both the homepage set to Yahoo! as well as having the search default set to Yahoo! and that’s actually worked really nicely for us in terms of maintaining and growing share.

In terms of some of the external metrics around search share, our desire is to overall grow share. I think I’ve been clear on that. We’d like to maintain share in the immediate future. So as the markets grow, basically grow at least the rate of the market and ultimately grow faster than the market, which means, winning share or so. I like to see those number go up from where they are in terms of the external parties today, but I wouldn't want to speculate as to where that could end up. Thanks

Ben Schachter – Macquarie Capital

Thank you.

Operator

Our next question will come from the line of Eric Sheridan with UBS. Please go ahead. Your line is open

Eric J. Sheridan – UBS Securities LLC

Great, thanks, guys. Two quick questions; one, on the sales force reorganization, wanted to understand these qualitative or quantitatively, if you could help us understand how that sales force reorganization might have impacted numbers in Q1 and might on a going forward basis at Q2? And then second thing, on the RPS guarantee going away, so how do you sense you can give us over the last couple of quarter of how the GAAP and monetization has moved around over the last couple of quarters, is it relatively stable, is it getting worse, is it getting better. So we get better understand sort of the possible trend going forward without the guarantee. Thanks.

Marissa A. Mayer

So I’ll take a crack at both questions and hand it over to Ken for some additional perspective. On the sales realignment, we ultimately think that the vertically organized sales force allows us for a lot better alignment in terms of how our products are structured as solutions. We think it allows us to offer more comprehensive packages in particular verticals. It also allows our sales professionals to really build up industry-specific expertise.

And typically when you look across industries, be it in the consumer Internet, around ad sales or other industries, be it enterprise software et cetera, generally when you see sales forces organized around verticals, you do see efficiencies and opportunities. It's hard for us to tell exactly what the impact was in Q1, but we do feel that in the long-term this is the right thing to do.

In terms of the Microsoft revenue per search guarantee, we do still see a gap. We are working with Microsoft to close that gap and it has narrowed somewhat in recent months. But that said, there is still a gap. And with that I’ll offer Ken the opportunity.

Kenneth A. Goldman

I think what I said in the past is that the cessation of the guarantee would affect our revenues from what it would have been otherwise. It’s best we hypothetically could figure out in the order of $50 million to $60 million for the year. And so I don't want to give an update to that, but that was sort of the level of magnitude that we were thinking about that it would affect our revenues without the guarantee vis-à-vis what they would be with the guarantee. And again, that was for the balance of the year.

Eric J. Sheridan – UBS Securities LLC

Great, thanks.

Operator

Thank you, sir. Our next question comes from Youssef Squali with Cantor Fitzgerald. Please go ahead. Your line is now open.

Youssef Squali – Cantor Fitzgerald

Great, thank you very much. Not to beat a dead horse, but can you just help us reconcile again, the growth in user engagement you, Marissa, referred to earlier that you’ve already seen this past quarter with the decline in the number of ads sold in lower price per ad. Is it a sales an efficiency issue, or is it just a pure timing? And then does Yahoo! have any interest in maybe creating a more holistic Yahoo! experience in mobile devices versus just individual apps, kind of what Facebook did with Home?

Marissa A. Mayer

Sure. Going back to display, on the user engagement piece, what I would basically point out is if you look over the past five quarters, we’ve generally had double digit declines in user engagement and this is the first quarter where we’ve actually seen a single digit decline of 7%. And I think that that is a testimony both to the efficiency of our sales force, how well they are selling the advertising as well as slowing in the overall traffic trend.

In terms of the pricing, again, I would go back to two main causes though there may be additional causes, one is that – and then they both have to do with ads that we see aren’t – we feel are not seeing their full value. So for example, on Mail, when we redesigned Mail in December, we changed pretty dramatically how many ads we showed and where they were. And as a result, the ads that remained got a lot more attention and a lot more clicks.

And basically there we needed some time to understand the overall trend, where it was going to equilibrate to and respond to that increase in demand and desirability. And because that pricing change ultimately happens later than the user interface change, there sometimes is a bit of a lag there. The same thing is happening with mobile. So while we’re really excited about the increase that we’ve seen with the 300 mobile monthly users, basically what it means is even if our ads are shown on mobile, they aren’t receiving the same type of pricing as they would receive on the PC.

And we think of that again as a short-term trend. We think those ads are every bit as impactful and as we experiment in mobile monetization and find the right format and structure, we’re confident that that pricing gap too will close. And as for the question around the more immersive experiences and all encompassing experiences on mobile devices, we don’t have anything to announce there at this time and we would like to offer our praise to Facebook. We think it was a very nice idea and a great product.

Youssef Squali – Cantor Fitzgerald

Okay, thanks.

Kenneth A. Goldman

Thank you.

Operator

Thank you, sir. And our next question comes from the line of Ken Sena with Evercore. Please go ahead. Your line is now open.

Ken Sena – Evercore Partners

Thank you. I just have questions on the effects of EMEA and programmatic buying on the ad declines. Can you say maybe what the impact was, of issues in EMEA on the 2% display pricing decline? And then second, is there a target rate for Yahoo!, on what percent will be programmatic going forward? And finally, how should we think maybe about partnerships to help maybe deliver better monetization on both of these fronts, like international and programmatic? Thank you.

Kenneth A. Goldman

I’m going to try and [assume][ph] the question on EMEA. In terms of the numbers we gave out, the revenue declined about 6%. But I'm not sure what in particular you’re asking about in terms of EMEA, because I didn’t really go into too much about EMEA.

Ken Sena – Evercore Partners

If you could just separate out maybe some of the macro factors that you might have experienced there versus other performance…?

Kenneth A. Goldman

Yeah, I don't know. I mean I think the – clearly the thing that I did point out is the fact that EMEA now has transitioned on Search. So that had effect, probably the biggest factor if you will. I would say actually overall EMEA had a pretty good quarter. So, I think, when we look at our overall results of EMEA and APAC as well, I think they pretty much did what we had expected those regions to do. So I don't think, it’s sort of on what we’ve planned if you will or expected overall. I mean the one thing I would tell that, in APAC we did lose a little bit of FX but otherwise I would say most of reduce in terms of Europe and APAC were okay.

Marissa A. Mayer

And on the programmatic buying question, I would say, we do have a healthy programmatic buying business. That said we believe, we should be doing more in the programmatic space. But getting the balance right is important, you want to have a healthy mix in terms of what is premium inventory and what is non-guaranteed inventory. And if you look at the user interface changes we’ve made on both our Homepage and on Mail, they’ve been about user experience, but that also plays to keeping the quality of our non-guaranteed advertising inventory high, because we think, they are having not only a healthy programmatic buying practice and a healthy (inaudible) practice. We actually want the quality of the inventory that’s offered in those marketplaces to be very high. And so that’s been an added benefit to some of the changes we've made on the user interfaces that were targeted at the user experience, but also have a nice effect on our marketplace. Thank you for your questions, Ken.

Ken Sena – Evercore Partners

Great. Thank you.

Operator

Thank you, sir. Our next question in queue comes from the line of Justin Post with Merrill Lynch. Please go ahead. Your line is now open.

Justin Post – Bank of America Merrill Lynch

Thank you. My question is more related to earnings and equity interest, very strong quarter for that. Ken, can you provide us any detail on the spilt between Japan and Alibaba and also maybe just…

Kenneth A. Goldman

I’m not, I could, but I’m not going to. We haven't disclosed that in the past and it would provide too much information relative to those two entities that we’re really not at liberty to disclose. So, I can't – as I said, I could, but I’m not.

Justin Post – Bank of America Merrill Lynch

Okay, fair enough. And one follow-up, can you give us percentages that you used in the quarter, what was Alibaba at 24% and Yahoo! Japan about 35% when that number was calculated?

Kenneth A. Goldman

That’s correct. But remember in terms of the equity side, it’s a one quarter lag, but that’s correct. Those are the percentages. It’s correct 24% and 35%.

Justin Post – Bank of America Merrill Lynch

Used in Q4. Okay and last one, I think I read your K and you had a 3 billion Japan hedge in place as of the 31. Assuming that was positive for you or – would that go to the income statement or is that just a balance sheet thing that happens?

Kenneth A. Goldman

I’m waiting. I was surprised no one asked that question. I’ve seen all the press on that. It goes into a CTA into the other comprehensive income as well as it goes in the prepaid assets, so it does not show – it shows in other comprehensive, but it does not show in – does not show in the income statement that you see.

Justin Post – Bank of America Merrill Lynch

Great, I appreciate it. Thank you.

Kenneth A. Goldman

Again, what we've done is, it's – we're applying net hedge accountings and again, it’s exactly consistent with the balance sheet asset we have for Yahoo! Japan on our balance sheet.

Justin Post – Bank of America Merrill Lynch

All right, thank you.

Operator

Thank you, sir. Our next question comes from the line of Brian Pitz with Jefferies. Please go ahead. You line is now open.

Brian J. Pitz – Jefferies LLC

Thank you. Marissa, a few more questions on programmatic in your ad stack, do you effectively think you have the assets to be competitive? And basically how would you stack [RAC] [ph] RMX and other ad tech assets versus the competition? Should we assume that this is going to be the biggest area potentially for acquisitions longer-term or should we assume maybe more content? That would be helpful, thanks.

Marissa A. Mayer

We are very committed to our ad technology and making sure that we have a product that is really competitive and best of breed. So this will be an area of continued focus and investment for us. We do think in terms of the exchanges, we have one of the largest exchanges. So I think that we’re clearly in the top two or three globally. Thank you for your question, Ryan.

Operator

Thank you, sir. Our next question comes from the line of Jordan Monahan with Morgan Stanley. Please go ahead. Your line is now open.

Jordan Monahan – Morgan Stanley

Great. Thank you for taking the question. Actually, I have two questions; one on mobile and then one again on search. The one on mobile, I think you’ve talked about your partnerships with Apple and others and how you maybe able to expand those partnerships. I think one of the most visible partnerships with Apple though is currently not monetized today, the weather functionality on iOS. What are the ways that you can actually extend monetization, not only just data partnerships or content partnerships, but actually monetize those?

And then the second question on search; a number of the third-party search agencies that talk about domestic trend suggested that CPCs are actually higher year-on-year on the combined Yahoo! Bing alliance and so not to kind of go back into CPC again. But I guess just to the extent that you are able to, is there some sort of road block that you’re encountering when Microsoft translates its search results to Yahoo! and therefore that’s suppressing pricing?

Marissa A. Mayer

Sure, thank you for the questions. They’re both great questions. On mobile in our partnership with Apple, we provide both stock quotes and weather quotes to their default applications. And while there is no direct monetization on those products, we do think it helps many people familiarize themselves with Yahoo!’s overall offerings.

So, for example today, if you tap on what we call the Ybing, the Y inside the oval with the exclamation point after it, I believe it’s in the lower left hand corner. You can see that it actually brings you to a search results page and offers to set your mobile search to Yahoo!, so this has been a great source of search traffic for us on mobile in terms of people really recognizing that they can set, for example, the default search in Safari to Yahoo!.

So while there’s no direct monetization, there is some indirect opportunity that’s provided in those cases. In terms of search and the cost-per-clicks increasing, they have increased. That said, when we discussed the gap in RPS and why we were benefiting from a revenue guarantee is because the CPCs that we currently see in the market and I believe this is true across the services, not only on Yahoo!, but on Yahoo! and Bing has still not closed the gap with the pre-existing benchmark of Yahoo!’s existing technology.

Jordan Monahan – Morgan Stanley

Okay, great. Thank you.

Marissa A. Mayer

Thank you. And next we, I think, have Stephen.

Operator

Correct. Our next question comes from the line of Stephen Ju of Credit Suisse. Please go ahead. Your line is now open.

Stephen Ju – Credit Suisse

Thank you. So, Marissa, curious about your next sprint and the timing of product rollouts and that you have sharpened the focus for your staff is already pretty well understood by investors. but is there anything you can share with us in terms of Yahoo!’s ability to accelerate the time to market for your new products and how quickly your engineers can iterate and refine once you have released a product on to the market?

And you talked earlier about the pricing gap between desktop and mobile. What do you think that gap is in the aggregate now for Yahoo! and in terms of proving the efficacy of the ads shown on mobile versus desktop, is that a matter that Yahoo! has already well established and it’s on the path of persuading advertisers to have effect, or is there a series of products that you still have to develop in order to close that gap? Thanks.

Marissa A. Mayer

In terms of the next sprint, this is really the fun part. This is where we get to really think about how can we inspire and provide our users and how can we provide them with amazing features. And I think that one of the things we’ve really focused on in this first part that was really focused around talent and getting the engine fit as I would call it is the – that we can really establish a cadence where we’re not just updating our products once a year or once every few years. So we’re really making continuous improvements and adjustments over time. So I really think what you’re going to see is that Yahoo!’s products will be releasing with small changes much more frequently and there’ll even be what I would call version updates, much more frequently, particularly on mobile and on the website. So I think we are in position to have a really nice cadence over the next few quarters of launches, ideally several launches a month if not at least a launch a week, if not more, across the product portfolio.

In terms of desktop and mobile and the pricing gap, I haven't looked to quantify it. It's just clear to me that there shouldn't be a gap, and so overall we’re looking at how we can make mobile ad work better for our advertisers and this really comes to a question of experimentation. Much like search ads in the early 2000 period, it really is a matter of getting the right format, the right pricing model and the right offering that benefits both advertisers and users. And when someone gets that mix correct in terms of pricing, quality, the user experience and the format to advertisers, it’s really clear to me that we’ll see mobile monetization at least and that’s what we see in terms of PC and so there is a matter of really monitoring the industry overall as well as experimenting ourselves.

And with that, we’re going to take one last question and then I have a few concluding remarks.

Operator

Yes, ma’am. Our final question will come from the line of Neil Doshi with Citigroup. Please go ahead. Your line is now open.

Neil A. Doshi – Citigroup Global Markets Inc.

Great. Thanks for taking my question. Marissa, can you talk about your strategy in Search in terms of getting broader distribution? it looks like a lot of companies in the Internet landscape have kind of moved towards a toolbar method for distribution. Is that something that Yahoo! would potentially pursue more aggressively? And then can you also remind us whether mobile search is run by Microsoft or is that something that Yahoo! has full control of and what could you possibly do to grow mobile search for Yahoo!? Thank you.

Marissa A. Mayer

Okay. Overall, on search in terms of distribution, we think there’s a bunch of opportunities that we can pursue to overall grow the Search business. we do have a toolbar and we do distribution deals with various partners to introduce more users to Yahoo! Search. That practice has been very successful for us and will continue. We’ve also been working with syndication partners who can put Yahoo! search boxes either co-branded or Yahoo! branded on their site, ultimately driving search to us and we partner with those partners through a revenue guarantee.

and further, we even think there’s some opportunities on our sites to drive more Web search. So as we for example experiment it with our Homepage, we’ve seen a lot of sensitivities around how much search we can drive from our Homepage, from various topics that exist on the Homepage, some things like trending now. And as we look across the millions and billions of page views are served on Yahoo! sites everyday, one of my goals would be to have a Web search box on every page.

So if there’s a user out there who has an idea about doing the Web search on our site, they do that Web search ultimately with Yahoo! In terms of mobile search what we offer today is our partnership where our algorithmic search results as well as our monetized search results come from Bing and that offering has been working well for us.

And with that, I’ll thank you for your question, Neil, and I’m going to offer a few summarizing thoughts. And luckily, as I mentioned earlier, we recently acquired some amazing summarization technology. So we took my earnings script and we gave it to Summly, we wanted to see ultimately what it would do, and it took my 2000 word script approximately and consolidated down to the following 140.

I’m pleased with the continued execution I see every day. Our teams have been working very hard especially in Q1. As a result of these initiatives and many others, the talent is undeniable. Today, more applicants want to work at Yahoo! and more employees are staying. These teams bring an incredible mix of engineering and technical talent, which will help us accelerate our efforts and mobile development and content personalization. The teams are already moving quickly to amplify the entrepreneurial spirit that’s so prevalent at Yahoo! right now. Designed to be more intuitive and personal, the new Yahoo! experience is all about users’ interest and preferences.

Yahoo! is a consumer Internet company and the consumer Internet is a growth industry. We are on course to do what we said we would do; stabilize and grow with the market. You can see easily the power of the technology we are acquiring and developing, and it’s coming soon to a product near you. Thanks for your time this afternoon. We’ll talk to you next quarter. Have a great week. Thanks.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may now all disconnect.

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