Yahoo! Inc. (NASDAQ:YHOO)
Q2 2013 Earnings Conference Call
July 16, 2013 17:00 ET
Joon Huh - Investor Relations
Marissa Mayer - President and Chief Executive Officer
Ken Goldman - Chief Financial Officer
Mark Mahaney - RBC Capital Markets
Anthony DiClemente - Barclays Capital
Heath Terry - Goldman Sachs
Carlos Kirjner - Sanford C. Bernstein
Bo Nam - JPMorgan
Eric Sheridan - UBS
Mark May - Citi
Youssef Squali - Cantor Fitzgerald
Ken Sena - Evercore Partners
Stephen Ju - Credit Suisse
Laura Martin - Needham & Company
Ron Josey - JMP Securities
Brian Pitz - Jefferies & Company
Good afternoon, ladies and gentlemen, and welcome to the Yahoo!’s Second 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 call is being recorded.
I would now like to turn the floor over to our host, Mr. Joon Huh. Please go ahead.
Good afternoon, and welcome to Yahoo!'s second quarter 2013 earnings video broadcast. Here with me today are Marissa Mayer, Chief Executive Officer and Ken Goldman, Chief Financial Officer.
Before getting started, I’d like to remind you that today’s presentation may contain forward-looking statements concerning matters such as our strategy, product plans, cost controls, and expected financial and operational performance as well as our investment priorities, stock repurchases and expectations for growth, user engagements and add sales.
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-Q filed with the SEC on March 7, 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 during the presentation is as of today, July 16, 2013, and Yahoo! does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances.
During today’s presentation, we’ll be referencing slides some of which are condensed versions of our earnings slides. We ask that you review our complete earnings slides that can be found on our Investor Relations website at investor.yahoo.com. Today, we will 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 Investor Relations website at investor.yahoo.com. We have some prepared remarks and then we’ll have a brief Q&A session.
And with that, let me turn the presentation over to Marissa and Ken.
Hi, everyone. Tomorrow marks my one year anniversary here at Yahoo! in this period of making every day count, and the spirit of innovation we are excited to try this live broadcast for our earnings call. We hope you find this format more interactive and that it gives you a deeper insight into our team’s progress. I also wanted to thank our team here at Yahoo! Finance, for helping us to use our own products to deliver our quarterly earnings.
Let’s get started with a look at our Q2 performance. We delivered solid revenue ex-TAC, roughly flat year-over-year and within the guidance range we provided. In Q2, we continued to invest in our core business, strengthening our team and launching new products in our quest towards long-term growth. The pace of our product launches has dramatically picked up. Q2 was one of the most productive in the history of Yahoo! We basically reached a pace of launching a new product every week and a significant new product at that. We have made real progress over the last year and we have positive momentum heading into Q3. On past earnings calls, I have talked about chain reaction that will lead to growth.
Hire and retain a great team, build inspiring products that will attract users and increase traffic, that traffic will increase advertiser interest and ultimately translate into revenue. People then products then traffic then revenue. On our last call I discussed the set of sprints that will get us there.
The first sprint was all about people and culture, the second and current sprint is all about execution, execution around improving products and increasing traffic. So let’s start with product and traffic and come back to people in a moment. As you likely know Yahoo’s traffic has been in decline, this slide shows Yahoo’s pageview traffic in 2012. Setting aside seasonal peaks and values there is a clear downward trend. Watching this chart develop it became clear that our first milestone would be to get traffic growing again, ideally reaching crossover with a previous year. I’m excited today to announce that we have done just that. This is our 2013 pageview traffic, it's clearly growing.
We achieved crossover in early June and are now experiencing year-over-year growth effectively erasing the declines of the last year. There is a few notable things about this graph. This is our PC and mobile traffic combined. Mobile has absolutely been a strong area of traffic growth for us, also this graph does not include Tumblr, IMAP email users. And for (inaudible) scrolling pages on Flickr, our homepage. We simply count one pageview despite the fact that the user may actually get multiple pages of information. In other words these measures are conservative. Renewed traffic growth in the face of multiple years of decline is to my knowledge unprecedented among industry players that operate with billions of pageviews and we’ve achieved just that.
I’m so proud of our team here at Yahoo! for reaching this milestone. There is still a long way to go and a lot to maintain in a chain reaction leading to revenue growth, but achieving this was one of the hardest parts because we didn’t know if it had ever been done before.
I regard this achievement as a very good sign and we’re just getting started. Reflecting on these milestone, products are what drives traffic. We have been steadily increasing quality and we have been speeding up the cadence of our releases, giving our users more inspiration, more delight, and more reasons to use our products all the time. Let’s take a look at some of the product releases and launches in Q2 that accelerated the traffic gain we have seen.
In April, we launched our beautiful weather app for iOS including stunning photos on Flickr. At the end of Q2, Yahoo! Weather was the number one ranked weather app in 23 countries, has held a strong 4.5 star rating in the app store and received the prestigious Apple Design Award. This product sets the standard for the visual beauty and ease of use that we’re now striving for in all of our products and since launch daily users have increased by 150%.
Yahoo! Mail is also an important driver of our business and was a focus in Q2. Following our December mail launches we optimized Yahoo! Mail for mobile. And in Q2 we launched the Yahoo! Mail app for tablets, this beautiful magazine like reading experience has contributed to daily active users being up 120% across our mobile mail applications and in Q2 we were excited to announce an initiative to make more desirable Yahoo! email addresses available by releasing accounts that have been inactive for 12 months. As of yesterday anyone can visit wishlist.yahoo.com to check to see if the username they have always wanted is available. We also launched our redesigned Yahoo! app for iOS and Android complete with some integration. As a result of this launch we saw a 55% increase in daily active users and a 60% increase in time spent using the application.
Most impressively our engineering team integrated the Summly technology into the app with unprecedented speed just four weeks following the acquisition. At the beginning of May, we launched two new monetization products, Yahoo! Stream Ads and our Homepage Billboard. In both cases it is still early but the reception from advisors has been warm. When I joined Yahoo! last year the Flickr community asked us to make Flickr awesome again. In May, we delivered the new Flickr puts photos front and center, bringing them to life in beautiful full resolution. We also pulled off an engineering marvel giving our Flickr users 1 terabyte of space each for free. That space for more than 0.5 million photos of original full resolution, pixel perfect quality. Since the launch, we’ve seen daily photo uploads increase by a factor of 3 and occasionally by a factor of 7 across Flickr desktop and mobile. In June, our Yahoo! Sports app was refreshed with more content, faster performance, and a more modern design. We have already seen 50% growth in daily users from Q1 to Q2 driven by this launch.
Turning to search, we’ve made many improvements over the past year and that effort continued in Q2. In June, we introduced a completely redesigned search result page. The new design combines beauty with utility. We have placed search results high on the page and we are delivering them faster, and we are doing essentially an experiment each day, more than 130 this past quarter to improve the user experience and deliver revenue, and that’s in addition to the work Microsoft is doing on their end. In Q2, we also redesigned Yahoo! News to be easier to use and feature a personalized news stream. This new design is the first step towards creating a more consistent and modern content experience across Yahoo! and in May, we acquired Tumblr as one of the fastest growing media networks in the world. Tumblr has an incredibly engaged community of younger users that complements our core audience. Since the deal, Tumblr’s growth has seen an acceleration with almost 0.25 million new blogs being setup each day. While Tumblr is now officially part of Yahoo! the Tumblr team will continue to operate independently. They will continue on their mission to empower creators and curators alike to do what they love, create. As part of Yahoo! Tumblr gains access to our sophisticated personalization technologies to improve Serendipity and Discovery. Meanwhile, the potential to integrate Tumblr content into Yahoo!’s products will create more compelling experiences for our users. I look forward to sharing more about Tumblr and our plans in the future as they develop.
Finally, turning to partnerships, over the past year we have strengthened partnerships with major TAC players, including Apple, Microsoft, Google, Facebook, and this quarter Twitter. In Q2, we integrated tweets into our homepage newsfeed. On the media side, we extended our partnerships with leading news entertainment brands like ABC News, CNBC, and Condi Nast adding breadth to our portfolio of partner content. And also on the content front, we are bringing the complete Saturday Night Live archives to Yahoo! all 38 years. Through a partnership with NBC Entertainment and Broadway Video, Yahoo! will be one of the most comprehensive digital homes for Saturday Night Live content. We are absolutely thrilled with this offering. As you can tell, we have been busy. Our efforts to build, buy, and partner are delivering more users, more engagement, and more overall traffic, and ultimately, they will fuel the long-term growth we have been talking about.
Now, I would like to return to people. Our employees are the most remarkable part of my year here at Yahoo! Yahoos are the most unbelievably inspiring and motivating people I have ever worked with. They made me excited to jump out of bed every day and get to work. I have been told that wasn’t always the case, the lack of focus, vision and direction, crowded ability and execution. Today, I don’t feel that. This huge testimony to the resilience of the people here at Yahoo! to look at what we have accomplished in the past year on the people front.
In the past 364 days, as a result in more than 800 employee-driven initiatives, including quarterly goals, new benefits, and a commitment to accountability, productivity, transparency, and reducing bureaucracy, we have created a new supercharged Yahoo! The energy and excitement on campus is incredible. In Q2, we saw 59% decrease in attrition year-over-year. We have not only inspired Yahoos internally, people are applying to work here in record numbers. In our peak week, we received nearly 10,000 resumes and former Yahoo’s are coming back, 10% of our hires in Q2 are what we call boomerangs, returning Yahoos. In fact year-to-date boomerangs are 12% of our hires. With aggressive hiring and strategic acquisitions we have grown our dedicated mobile team by a factor of six in the past 12 months. We’ve gone from having dozens of engineers to now having 100s of engineers dedicated to mobile. In Q2 alone we closed a number of key acquisitions including Summly, Astrid, Go Poll Go, Milewise, Loki Studios, Rondee, Ghostbird Software, PlayerScale, and of course Tumblr.
These companies bring sophisticated technology and intellectual property to strengthen our product portfolio and they bring great engineering and product talent to Yahoo! Our employees are the critical foundation to the next chapter of Yahoo’s growth story, delivering the products that drive users, increased traffic and ultimately entice advertisers and grow revenue over the long run. The people are here, the engine is now up and running, as I have hit my first year anniversary it's clear we’re now deep into our second sprint, the one around products and execution and we’re delivering significant product changes and engagement that will drive growth in the second half of the year. With that I’ll turn over to Ken to talk more about our financial results, afterwards I’ll talk about some of the opportunities ahead. Thank you. Ken?
Thank you Marissa. Good afternoon everyone. Thank you for joining us today for our first live streaming video broadcast of our quarterly earnings presentation. Now it's actually a lot of fun to be experimenting with a new format and we hope you will think as an improvement. First I will walk through the Q2 financial results and then provide forward guidance of the Q3 and update you in our full year view. Once again my discussion will focus on non-GAAP results. These numbers exclude stock based compensation expense of 68 million, restructuring charges of 4 million and the related tax impacts. Please see our earnings presentation on our Investor Relations website for our complete reconciliation between GAAP and non-GAAP results.
Before I get into the details, I want to quickly review the progress against our financial priorities. First, revenue growth, we are making progress on many corporate initiatives and pleased that our business remain stable. We are optimistic about our user engagement trend and confident direction we’re headed. Excluding the 11 million negative impact from currency fluctuations revenue ex-TAC for the quarter was roughly flat year-over-year and growth in search was once again a highlight, revenue from our display business fell, but we continue to upgrade our properties in advertising products, which we anticipate will increase user engagement and drive revenue in the future. Overall, we believe in the opportunity for the business that our initiatives will translate into revenue growth. Second let me talk about cost control, as you have heard me say repeatedly we are committed to controlling cost even as we invest in our strategic priorities. We’re making good progress in this area and excluding restructuring costs, cost were up modestly in 2Q and as we expected.
We anticipate seeing positive operating leverage in the future once we realize returns on investments we’re making. In terms of capital spending, capital spending was down significantly year-over-year to 82 million in the period. And for the first half was a 152 million was compared to 216 million in the first half of 2012. Third, capital efficiency and commitment to shareholders, we continue to have a very strong balance sheet we’re nearly 4.8 billion of cash and securities and as a remainder we ended Q1 with 5.4 billion.
We repurchased 45.3 million shares of stock in the quarter at an average price of $25.76 or 653 million and spent 1 billion in acquisitions that was net of cash. We received $846 million from the redemption of the Alibaba Group preference shares and approximately 80 million in dividends from Yahoo! Japan.
Finally, we've positive free cash flow of a 131 million, before I review the quarter I am pleased to provide an update for you in our capital allocation policy. We’re happy to announce that as of today we have essentially completed our commitment to return 3.65 billion from Alibaba Group proceeds to shareholders, repurchasing a total of a 190 million shares.
And as a part of our ongoing commitment to shareholders, we are extending our current buyback plans beyond the Alibaba Group proceeds commitment and we will continue to execute against a 5 billion share buyback program that was authorized last year, on which approximately 1.9 billion remains.
Now, let me cover the financial highlights for Q2 as seen on slide 5, in the earnings presentation and provide a high level business overview. Q2 reported revenue ex-TAC was roughly flat versus prior year at $1.07 billion. Search and other revenue showed growth, which was offset by decline in display. Adjusted EBITDA was $369 million in the quarter coming in at the high end of our guidance range. We are making meaningful investments in our business to drive revenue, but continue to be focused on maintaining a disciplined approach to minimize margin impact. Non-GAAP operating income was $209 million, a decrease of 13% year-over-year, resulting in non-GAAP operating margin of 19%. The non-GAAP net income was $386 million was up 6% from Q2 last year driven by the continued growth of the equity investments in Alibaba and Yahoo! Japan. Non-GAAP EPS was $0.35, up 19% year-over-year as our fully diluted share count for the period was down 10%. We continued to generate significant free cash flow of $131 million.
Now, let’s walk through the financial results for Q2 in more detail. So, starting with search, search revenue ex-TAC grew 5% to $403 million, representing a six quarter in a row, as Marissa said, of year-over-year growth for this group. This includes the impact of shutting down our Korea operations. Excluding Korea, search revenue ex-TAC would have grown 8%. We saw continued strength in our search business to monetization gains and the increase in clicks. We are encouraged as we see more opportunities to improve the search experience for our users and grow the business in the quarters ahead. As a reminder, the revenue per search guarantee was extended in the quarter for another year. And subsequent to renewal, we also amended agreement to provide for a fixed quarterly payments for ease of calculation and certainty for the remainder of extension. The fixed payments are not material to overall revenues.
Now, looking close to the search metrics, again I am excluding Korea, paid clicks were strong, accelerating to 21% year-over-year growth, while price-per-click fell 8%. Page click growth was driven by a number of factors. First, we continue to see benefits from improved ad formats such as site links and longer ad titles that were launched late last year. And finally, the redesign of the search user experience launched in early June help drive clicks further. Price-per-click was down due to a continued shift in regional mix as (inaudible) clicks, where PPCs are lower, grew faster than domestic. Overall, we are clearly attracting more advertisers to combine search marketplace. Our ad tracks are improving, the user experience is simply better, and we are developing more efficient pricing strategies. All of which are meaningfully driving click volume in revenue.
Now, turning to display, revenue excluding TAC fell 11% in the quarter versus prior year to $423 million. Our display business was challenged as a result of some unfavorable mix shift both from premium to non-guaranteed and from U.S. to international. We believe that our product investments in this area will be instrumental in reversing these trends as we look to improve our ad inventory and optimize pricing and sales mix in the future. Breaking down the components, price per ad fell as we sell the lower percentage of ads on a premium basis. Pricing and non-guarantee display also fell in the period.
Looking at volume, we saw improvements in the rate of decline for a number of ads sold for the third consecutive quarter. Excluding Korea ads sold fell just 2% in the period. Other revenue excluding TAC grew 10% year-over-year to $245 million. This growth was driven primarily by the amortization fee revenue of $34 million, resulting from the Alibaba TIPLA payment and also higher Alibaba royalty fees. This was slightly offset by decline in some of our leads driven businesses.
As note Q3 was a final quarter of a year-over-year benefit from the TIPLA. For revenue detail by regions please refer to slide 10. In the Americas region, total revenue excluding TAC was up 16 million. In EMEA, revenue ex-TAC fell 8 million in the quarter and finally turning to Asia-Pac excluding the impact of Korea again revenue ex-TAC was flat year-over-year. FX negatively impacted revenue in APAC by approximately 8 million in 2Q on a year-over-year basis. Let me now turn to expenses, beginning with traffic acquisition costs TAC was down 73 million to 64 million for the quarter, there was a meaningful amount of TAC paid by operations in Korea which accounts for the bulk of this decline. The remainder is due to a transition to Astrid to EMEA in 2012. So, we no long report any search TACs for the region in our financial statements.
Non-GAAP total operating expenses were 862 million in the quarter, an increase of 21 million versus Q2, 2012 and 11 million versus Q1, 2013. We ended the quarter with approximately 11,500 employees which is down 9% from Q2, 2012 but up slightly from Q1 and this now includes a 170 employees from Tumblr.
The increase expenses was in both our product development and sales and marketing functions. We’re making conscious decisions to invest in key areas such as mobile while diligently managing other areas of cost. In terms of profitability, EBITDA was in line with our expectations. Adjusted EBITDA for the quarter was 369 million which represents a 34% margin on revenue excluding TAC.
Non-GAAP income from operations fell 13% versus the prior year to 209 million with 19% margin on revenue ex-TAC. So, finishing up the income statement, there are few items I would like to call out for modeling purposes. First, other income was 24 million in the quarter which includes Alibaba preferred shares for approximately 2/3rds a quarter.
And as a reminder, these were redeemed by Alibaba Group in the second quarter so we will no longer recognize any interest income going forward. Our non-GAAP tax rate was 29% in the quarter. You know its earnings and equity interest grew 25% year-over-year to 225 million, to better explain the dynamics driving this number we have included additional detail of the performance of Yahoo! Japan and Alibaba on slide 16 rather delaying into the file of 10-Q.
These numbers are reported as a remainder on a one quarter lag, as you can see Alibaba once again showed impressive growth in the Q1 results and finally as we continue to actively repurchasing shares our diluted share count was approximately 1.08 billion shares as of quarter end.
Let me now turn to few balance sheet and cash flow items to call out, the company remains on very strong footing from balance sheet perspective. As mentioned earlier cash marketable securities was just under 4.8 billion at the end of the quarter. Prepaid expenses and other assets were 888 million at the end of the period, an increase of roughly 243 million from the end of the prior quarter. As in Q1 this increase is in the other assets portions line is primarily due to increase in value of our currency hedged associated with a Yahoo! Japan ownership stake. For cash flow items, cash flow from operations was 331 million in the quarter, capital spending as noted was 82 million and 152 million for first half.
This is again lower than normal due to the timing of some investments. We do expect this number will trend somewhat higher in the back half of the year although the annual run-rate is clearly lower than prior years. Free cash flow was 131 million as we continue to generate meaningful cash but it was affected negatively by seasonally high corporate tax payments. Now let me turn to our business outlook and guidance. We have a lot of confidence in our business but that is yet to translate into revenue growth, now that traffic improvement is taking shape we also need to increase our emphasis on monetization and take steps to optimize pricing and improve the sell-through rate.
For Q3 we expect revenue excluding TAC to be in the range of 1.06 and 1.1 billion. Adjusted EBITDA to be between $330 million and $350 million, and non-GAAP operating income to be between $165 million and $185 million.
Relative to annual guidance, we are adjusting our revenue expectation modestly to account for the results in the first half of the year. We are adjusting our EBITDA and our operating income expectations down to account for the lower revenue investments and expenses primarily related to Tumblr. Therefore, we expect for the full year revenue excluding TAC to be $4.45 billion to $4.55 billion, adjusted EBITDA to be $1.55 billion to $1.65 billion, and non-GAAP operating income to be $900 million to $1 billion. Thank you again for your time today. Now, let me turn it back to Marissa.
Thanks, Ken. Over the past year, we focused on talent aligning the organization for long-term efficiency and productivity removing friction and unnecessary processes and encouraging an internal renaissance here at Yahoo!. My second year as CEO begins tomorrow and our teams are now delivering a velocity of product launches that will fundamentally change our business. The early Q2 engagement metrics, I mentioned earlier, speak for themselves, increased traffic and users, which will be noticed by advertisers and can ultimately translate into revenue. As we look at the revenue opportunities in front of us, I want to talk about four key business areas: search, mobile, display, and video, and fundamentally, these four areas that can fuel our future growth.
Let’s start with search. As Ken noted, search revenue ex-TAC grew 5% year-over-year and 8% excluding the impact of Korea reaching $403 million and representing the sixth quarter in a row of year-over-year growth. Laurie Mann, who took over search at the beginning of 2013 has done a great job of leading the team, engaging with Microsoft, and working with key syndication partners. As our product sprint really kicks in the high gear, we are going to continue to invest in search and the user interface. The search experience we are iterating on will be more beautiful, more immersive and will grow usage. I am very pleased with our progress on search, but I would like to see us grow this area of our business even faster.
Moving to mobile, I grade our progress in mobile as an A over the past year. Back in October, I noted that our number one priority was a cohesive mobile strategy. At that time, the company was severely underinvested in mobile delivering fragmented and unfocused products. Given the growth of phones and tablets, we needed to have a winning strategy and great execution. We invested heavily and we are seeing incredible growth as a result. Ultimately, these are the results of our dedicated mobile team. I mentioned before that our investment in mobile enabled us to grow that team by a factor of 6. As an exciting external data point we recently surpassed 340 million monthly mobile users. Mobile is a strong growth driver. And with the right mobile ad units, we believe that mobile will be a large revenue driver. Yahoo!’s future is mobile and we are delivering our products mobile-first.
Now, let’s turn to display and video. In these areas, we have got a lot of work to do. You will see us begin to clearly address these areas of the business in the second half of 2013. Our display business has felt some negative impact, particularly due to the shifts around programmatic buying. We need to do a much better job here in order to reverse these trends. What we have done with our homepage and our news property is a good start. More modern paradigms, better content partnerships, new ad formats, these are all early efforts, but this is just the beginning. In addition to improving our user-facing products, we are also investing in our ad technology to enhance our advertiser offerings and increase our platform’s capabilities in the phase of a very competitive display marketplace. We can do better in display, and this is going to be a clear focus for the business.
Finally, video, as I have mentioned in the past, our video inventory sells out months in advance, which is not a good thing. We are working hard to drive traffic and video views and will make this a primary area of investment over the next year. As we aim to entertain our users with content like Saturday Night Live, expect to see us make investments in video over the next year. Looking across the four areas search, mobile, display and video, Tumblr represents significant opportunities across the board. David Karp and I firmly believe that native advertising can be every bit as good as the content itself and we intend to develop monetization that meets that standard.
In addition to investing in our core products I want to be very clear that our management team is committed to increasing our focus. Since last fall, we've shut down over 30 underutilized products and features. This has allowed us to put our best product builders and resources on the most important products essentially reinvesting. Looking back over the past year we've also seen quarters of record profit for Yahoo!. We have done a very good job controlling discretionary costs. However, our management team is relentlessly focused on delivering growth. So over the next 12 months we will still be smart about sending, it will be even more about investing in our core business to deliver revenue growth. With that thank you and we’re happy to take your questions.
(Operator Instructions). Our first question will come from Mark Mahaney with RBC. Please go ahead. Your line is now open.
Mark Mahaney - RBC Capital Markets
Great, thanks. I’m trying to get over the shock of SNL being around for 38 years. I had a question on the video commitment and being this being an area of investment over the next couple of years I know you have the SNL purchase, but how big of a push do you want to make into that space, Marissa, there is a couple of companies that are obviously spending hundreds of millions of dollars buying content. Is that the end goal maybe not necessarily of that amount but making a major push into acquiring content or can you decide the level of that investment that we should expect. Thank you.
Sure. We think that video is a huge opportunity, we think there is room for lots of players and video really comes down to the question of the content. That said we really need to have a perfect platform. We had the start of that with Yahoo! Screen today but this is really about the technology, the technology of serendipity and personalization, great streaming technology like we’re utilizing today here as part of the broadcast and that's really where our focus is going to be for the next year is really building out the technological platform, and one that really attracts users.
We need to have some content in that space, Saturday Night Live is a good example. We also want to have some content that of course comes from our own original programming and we’ve a nice lineup as we move into the fall season in online programming. We also think that we can have a fair amount of that content actually generated through user generated means. Today you can upload three-minute videos on Flickr and we also see good video presentation on Tumblr and so it will be a pyramid of content with some original programming and content acquisition of the premium form that you’re referring to but also having some curated forms from across the web and then also this basic UGC that will be provided by user sharing with their friends and the people that they are following.
And I do think the other thing that really makes us very excited about video is that advertisers really like it, it's something that translates really well from the format that they are used to, so an advertising can start on television, makes the jump to online and also ultimately be viewed on tablets and smartphones.
Thank you sir. Our next question will come from Anthony DiClemente with Barclays. Please go ahead. Your line is open.
Anthony DiClemente - Barclays Capital
I’ve two questions, my first question is for you, my second one is for Ken. First I think the expectations implied in the guidance show a little bit of a slower third quarter and a bit more of acceleration in revenue growth in the fourth quarter and so wondering what that informs us about your expectation, does that imply, does that acceleration - is that being driven by contribution from the new acquisitions that you talked about including Tumblr or should we think about it more as an inflection point in modernization of some of what you’re doing organically as you get to that fourth quarter.
And then my second question for Ken, I think investors are interested in whether it's possible for Yahoo! to monetize the remaining Alibaba stake in a tax efficient manner, is that possible? Do you think that the entire remaining 24% in Alibaba can be monetized back sufficiently or are we only talking about the final 12% you have retained following a potential IPO? So, if there is anything you say about that or the potential structure of a tax efficient monetization that would really be helpful. Thanks a lot.
Thanks, Anthony. I will go ahead and start on your question around Q3 and Q4 and how they are shaping up. I think that when we look at where the revenue acceleration comes from, it’s a little bit of both. That said we don’t believe that Tumblr, for example, will provide meaningful revenue this year. There will be some, but it won’t be very meaningful. That said we always have seen a very large Q4 on the web. It’s just a very commercial time of the year with the holidays, and so as a result, there is a big pickup in advertising opportunities in Q4, and so you are seeing some of that. You are also seeing the fact that as I mentioned in my earlier comments, the traffic is there. And so now that we are actually growing traffic across our network when you consider PC and mobile, we see the opportunity to run more ads. And so well, that hasn’t translated to revenue growth yet, we think that it ultimately will and that will happen more in Q4.
Anthony, now it’s Ken, you asked a multi-billion dollar question, and I can assure you we have the very, very, very best minds working it. There is nothing - we are exploring a number of different alternatives, I don’t have anything I can tell you about this discretely today that would say that we have found the nirvana there. We are continuing to look at it on all accounts, and we will continue to look at it on all accounts, because it is a tremendous amount of cash and proceeds that we would like to see otherwise. So, I can’t really give you anything more other than it is still up in the air and we continue to work on it.
Anthony DiClemente - Barclays Capital
Okay. Well, now we could try and read the expression on your face on the video stream, so we will try and do that. Thanks a lot.
Thank you, sir. Our next question will come from Heath Terry with Goldman Sachs. Please go ahead. Your line is open.
Heath Terry - Goldman Sachs
Great, thanks. Marissa, can you give us a sense from your talk about programmatic being an issue and being a headwind, how much of that is underperformance at Right Media versus pricing pressures from programmatic across the entire display environment at Yahoo! and to the extent that they are both components of the issue, how do you plan to deal with each of them?
Sure. As we mentioned, programmatic [buying] [ph] had some impact in Q2. We have a plan to fix this. The issues we are generally seeing are around premium sell-through rate as opposed to non-guaranteed and with pricing in the exchange. We actually think that our Right Media technology is strong. We are obviously going to continue to invest in it. We have made some big advances in the past quarter regarding cookie matching, and overall just improving the technology, we currently believe that Right Media is the number one or number two exchange when you include our inventory. And so on the whole where you have a lot of confidence in the technology, I think the premium sell-through rates and the pricing in the exchange is something that we have a plan overall to get a handle on and something that we are going to be focused on in Q3 and Q4.
Heath Terry - Goldman Sachs
Great. Thanks Marissa.
Thank you, sir. Our next question will come from Carlos Kirjner with Sanford Bernstein. Please go ahead. Your line is open.
Carlos Kirjner - Sanford C. Bernstein
Thank you. Is there a turnaround in traffic trends that you have shown us below your expectations, how do you square the positive trend and the good trend in Search with the reduction in revenue guidance for the year? Thank you.
I’ll just start. I mean, the revenue guidance that we changed is primarily what we saw in the first half, and by the way, we didn’t change it by much, but it’s primarily what we have already experienced in the first half. So, you saw that. We are also mindful of seasonality that we do experienced in Q3, and some of the data that we have shown is accelerating trends, which we do expect that will help our revenue as the year goes on, but again, much of what we have experienced in terms of guidance changing, if you will, is from what we have already seen in the first half versus what we had assumed in our guidance.
Carlos Kirjner - Sanford C. Bernstein
Thank you, sir. Our next question will come from Doug Anmuth with JPMorgan. Please go ahead. Your line is now open.
Bo Nam - JPMorgan
Hi, thanks. This is Bo on behalf of Doug. Thanks for taking our questions. Can you give us a little bit more color on the renewal of the – Microsoft RPS guarantee and how that impacts your full year guidance? And then also secondly for your display business are you seeing any benefits thus far from your vertical salesforce re-org, if you can provide any details there that’d also be very helpful.
Yeah, this is Ken. We’re not going to give any direct numbers in terms of guidance because it's actually a hard number to compare because you’ve to go through what our own performance was going to be and how that compares to what the guarantee would be and so forth. So it's actually pretty complicated to figure out and again I’m going to stay with what we said in our remarks that is overall not a material to our revenues for Q2 and we don’t expect it to be material to our revenues for the year.
And also the issue around the verticalization of the salesforce, we really do think that this yields much better alignment with the particular areas where we see advertising. It allows us to offer much more comprehensive packages and we do think there was a short term impact on the first half of the year but our belief is that’s behind us. And I also should note that this particular arrangement by vertical of the salesforce is something that’s not only typical in internet advertising but it's something that’s typical across industries.
Our next question will come from Eric Sheridan with UBS. Please go ahead. Your line is open.
Eric Sheridan - UBS
Sure. I wanted to ask about a couple of questions around M&A activity that’s going on since [inaudible] on Marissa sort of going forward can we get a better understanding of what sort of revenue potential rest of this year and then on a going forward basis do you think about as you monetize those properties and then also the drag thus far this year as you invest in those properties. If we could get a better understanding of the strategy coupled with sort of how it places the guidance.
Sure. I will go ahead and talk first about the broader M&A strategy and then I will turn it over to Ken in regard to the guidance questions around Tumblr in particular. The acquisitions we have made to-date have all been smaller what we might call tuck-in, talent acquisition that’s really been about making an investment particularly in mobile, in fact most of our acquisitions have been mobile but they have been small teams that have been able to come on and immediately take on as a team that already knows how to work together well, some of the applications that you’re seeing is driving a lot of growth and we’re going to continue on a pace of doing these smaller deals, there are a few acquisitions that we have made that are strategic, the largest is obviously and notably Tumblr where there - obviously the site going to continue to operate independently. A lot of the talent acquisitions that I have talked about we actually have shut down their products and favored having them work on some of Yahoo’s core products but in some of these cases you will see us find something that really dovetails well with our product offering like Tumblr did or we also recently have announced the acquisition of a company called Xobni, inbox backwards, which we think can really help our overall mail offering on particular actually providing much better context to our users and analysis around those contacts.
So we’re going to continue on this cadence of the smaller talent acquisitions, Tumblr is a notable exception and something that we don’t intend to have happen on a regular cadence.
Yeah, let me just add a little bit to that, I think that’s actually in terms of the way we think about it is we have, we’re trying to basically accelerate our development progress. Most of the acquisitions have been related to in the mobile area and in most cases it's really in lieu of our own hiring that we’ve acquired these companies not necessarily for revenue but really for talent and expertise, and so that is really part of our plan and so it's inclusive of our guidance that’s how we think about it; Tumblr is obviously an exception but as many of you have seen the numbers earlier that revenue is more material and expect to be much more material in 2014 and 2013 and therefore will be included in our guidance as we think about 2014.
From a balance sheet point of view, it does affect us in goodwill and somewhat on intangible, so you’ve seen a balance sheet point of view but from an expense point of view it's really inclusive of the numbers we’ve included in our guidance and in many of these cases instead of how we thought about the year going forward that we need to hire externally we would accelerate some of the hiring and if we couldn’t hire fast enough through these relatively small “tuck-in” acquisitions.
And I also note on EBITDA, the EBITDA guidance, what you’re seeing is essentially we have worked really hard to improve the performance of core Yahoo! in terms of expenditures. So you’re seeing us incorporate Tumblr with very minimal expense impact.
Eric Sheridan - UBS
Great, thanks guys.
Thank you. Our next question will come from Mark May with Citi. Your questions please.
Mark May - Citi
Thank you. In the prepared remarks in your discussion about the display business, I believe Ken mentioned that part of the expected driver of an improvement there is more improvement on engagement, but I just wanted to ask how some of the new ad products like newsfeed ads and video might impact monetization in over the near to mid-term? And then just a follow-on on your comments about the change in the EBITDA guidance, which relative to the revenue guidance, does imply you have made some decisions in the interim to invest more heavily in a few areas? I don’t know if there is any that you would call out in particular if you would rank Tumblr at the top of that list, just anything else that you could add there?
Sure. I will go ahead and take the first part in terms of the increase in engagement and how that is likely to affect our display business. We are experimenting with some new formats. Video was something that was new for us last year performed very well, very early on. Stream advertisements are also something that’s really new. We would think of these as incremental revenue opportunities. And as a result, they are very hard for us to size beforehand. So, we will have more to report as we get a little bit further along in our development of those two products, but we do view them as possible upsides.
Yes, let me take your question on guidance, and let me sort of back up a little bit. We have not taken our eye off the original goals of the year. So, as a team, we are still very, very committed to our original goals and frankly the original guidance. Having said that, I think it was only prudent for us to bring the numbers down modestly to really reflect what we have already experienced in the first half. But I don’t want anyone to think on this call that we have taken our eyes off our original goals, and we are still working very hard as a team to do that. Some of the change or the increased change you did see are shown on EBITDA, and then frankly, operating profit really does reflect, primarily Tumblr. There are costs that we will experience in the second half. So, that is in our – those are in our numbers. But again, I just don’t want people to think that we are still not as a team very, very focused on our original expectations for this year.
Okay. Thank you, sir. Our next question will come from Youssef Squali with Cantor Fitzgerald. Please go ahead. Your line is now open.
Youssef Squali - Cantor Fitzgerald
Thank you very much. Marissa, I want to go back to the programmatic ad buying topic that you mentioned earlier, you’ve discussed earlier as programmatic ad buying moves from [remnant] [ph] to premium inventory, doesn’t that make it just a lot harder for you guys to have any price leverage and therefore to grow revenues, and I guess as a corollary to that, just what pieces of the ad tech staff do you guys have if you were to exclude Right Media deal and if you don’t have the right component you need to buy an SSP or DSP or what have you? Thanks a lot.
Sure. Thank you for the question. I think overall we are very excited and heartened by the trend around the move to programmatic. It certainly comes with some short-term challenges, but longer term what we see is the opportunity to do a much better job to match our users to the right advertisements, and conversely the right advertisers to the right users. We think when you get that kind of matching, which is what an exchange allows you actually can get a lot more of a pricing premium. So, there actually might be even more pricing leverage to sell potentially fewer ads at higher cost to just the right user and we are seeing some activity that already shows us that that’s possible and likely as we move to more programmatic trends. In terms of the ad stack, yes, we do have Right Media. We also do our own ad surveying and we have our own technology around DSPs. In fact, we are essentially our own DSP and we are now looking at can we partner with other providers to be their DSP.
Yeah I would add one thing to that, I think more recently we have done a better job of really disaggregating the key drivers of our revenue and other components of revenue and I think we all collectively feel better that we have our hands on those drivers and know the levers and can execute better against those levers as we go forward. So we’re taking a lot of work, we’ve executed a lot of work in the first half of the year to get the key metrics that we really need to have as a business or management team so we can drive them and manage them and execute.
Thank you sir. Our next question will come from Ken Sena with Evercore Partners. Please go ahead. Your line is open.
Ken Sena - Evercore Partners
So I had a question just on the pageview milestone you provided, I was wondering if you can provide an equivalent to that in terms of time spent and then maybe break that up for us maybe as far as mobile, PC, and tablet. Thank you. And I actually have one follow-up.
Sure. I’m not going to provide a breakdown of the [PC] [ph] versus mobile piece, other than the mobile piece is still early it's growing quickly and it's certainly is part of the driving of growth there. But I think that when you look at time spent what we generally tend to see the time spent measures aren’t quite as good because it's harder to know how long they usually dwell on this page versus moving to a new tab in their browser. But the time spent metrics that we look at internally tend to map very closely to the pageview traffic that you’re seeing essentially because some of what I mentioned in terms of the caveats, the fact that for [inaudible] scrolling pages, we actually count that just as just one page view metric but that actually often can result in many minutes of user time spent.
So I would think as the same, we have seen the same trend in our time spent, it’s just that that metric is not as reliable as the pageview count.
Yeah I would add that we’re seeing great increase in the pageviews and we now put together a very detailed plan as to how to improve monetization of that as we go forward this year and that is some of our thinking in terms of our revenues, in terms of our guidance as well as how we think about ’14. So I think over time that will become a much more material part of our revenue and we’re really working at a very detailed plan as we speak.
Ken Sena - Evercore Partners
And I just had one follow-up just on Mark’s question, just in terms of meeting with the content providers can you just maybe give some sense of the spirit of the conversations that you’re having maybe in terms of either the resistance that they are showing or the openness to the ideas as far as what Yahoo! can bring to them in terms of additional video distribution?
Sure, I think that for most of the video publishers, we ourselves are a video publisher, what you are essentially are looking for is distribution and there is really in many cases no reason to be exclusive, you should try every channel you can because every video view counts; it’s an opportunity for us to monetize if you’re making a name for yourself and/or trying to promote a particular program is something that video publishers are really interested in and so we have overall seen a lot of enthusiasm in terms of being able to participate across multiple platforms.
Thank you sir. Our next question will come from Stephen Ju from Credit Suisse. Please go ahead. Your line is open.
Stephen Ju - Credit Suisse
Marissa, I’m wondering if there is an opportunity to become more deeply embedded with either the OEMs or the OS owners as the default services provider for certain types of content and in such an event what part of the economic and the ad dollars do you think you will have to share with them? Thanks.
Sure, it's hard to speculate about terms on partnership that we haven't yet struck. I do think that what we’re seeing is a terrific opportunity for Yahoo! around mobile, all the statistics I shared around weather, Yahoo! Mail for mobile, around sports, and many of the other mobile applications that we’re working on I think at least they can really enhance a user experience on the phone and we wanted to enhance the user experience right out of the box. So certainly being bundled in as a default application on new handsets is something that we’re very interested in, that said we don't have any partnerships to announce today.
Thank you sir. Our next question will come from Laura Martin with Needham & Company. Please go ahead with your questions please.
Laura Martin - Needham & Company
Marissa, I’m interested on the content side, you guys have news and sports which tend to be time sensitive and then you have done deals for deep library with both SNL and WWE, when you think about content going forward, the mix between what I will call other people’s premium content and your own new content, how do you think about what maximizes the value of Yahoo! going forward?
I think that we need to do a little bit of both. That said, I imagine that we can’t have all the video in the world as much as we would like to, and we are not going to produce that all. That said we are going to produce some great video Burning Love as a notable example. And I think that we are going to do some of that, we are probably going to do more with content partnerships, revenue share arrangements with different video providers in terms of bringing their content on to our platform. So, my guess is that the minority of the content will be our own original programming, the majority will be through partnerships.
Thank you. Our next question will come from Ron Josey with JMP Securities. Please go ahead. Your line is now open.
Ron Josey - JMP Securities
Great, thanks for taking my questions. So, two, the first is just real quick and kind of the follow-up on a prior question on the RPS guarantee, I know it’s more complicated, but in the past, I believe it was said that full year renewal impact would be about $100 million that was not renewed. I am wondering if that’s an apples-to-apples comparison to today.
Then the second question is just on the new front that you all had at the end of April, we were certainly impressed with the quality and depth of the video offerings and programs, just wondering if there is any update on video sales post the presentation, have you seen any uptick in agency demand overall? Thank you.
Yes, I would add this. I mean, I think if you looked at what we experienced in ‘12 that was in the range of the number. In terms of ‘13, I think I used the number somewhat less than that, that we would lose if it wasn’t renewed. The reality is again there, because as our performance changes the calculation of the delta is harder to evaluate. So, we are going to really stick to what I have said up till now is again is the overall numbers are not material to our revenues. We are happy frankly to create frankly certainty with the relationship and really work on which both markets offering us want to do. And a major way is keep on improving search so we do well for our users.
Ron Josey - JMP Securities
And I will take the video half of your question and thank you for the compliment on our new front. We are obviously very excited about some of the new original programming that we are doing and we did in fact see a lot of different interests from advertisers around the particular programs and sponsorships. And so it was a very successful event for us and one that really accomplished what it showed, which is ultimately to match advertisers to possible programs they might want to advertise or sponsor within.
Ron Josey - JMP Securities
Great, thank you very much.
Thank you. Our next question comes from Brian Pitz with Jefferies. Please go ahead. Your line is now open.
Brian Pitz - Jefferies & Company
Great, thanks. Marissa, last quarter you talked about making the search experience on Yahoo! even more immersive, and of course, Tumblr was clearly a part of doing that longer term. Can you talk about how those efforts are going to date and contributions you really expect from them? Thanks.
Sure. And on this note that this needs to be our last question, as we have reached the one hour mark, I am really excited overall about Search, also have a lot of enthusiasm around Tumblr. For us, it’s really an opportunity as in the future, it’s likely that really material impacts from a revenue standpoint will be in 2014. That said, when we look at the amount of content that’s being generated, it’s staggering. We see 250,000 blogs being created new each day on Tumblr. Those are largely being driven by new user sing-ups. We also are seeing more than 75 million posts every day on Tumblr. So, right now, what we want to do is as we said in our press release, we just don’t want to screw it up. We basically want to understand what’s great about this community, support David and his team, and then ultimately work to really produce advertising and embedded advertising opportunities that ultimately really enhance the experience. And so that’s the goal there. We will have more to report as we come up with particular products and launch them.
Brian Pitz - Jefferies & Company
And finally, I would like to recap today’s earnings call with the Summly version of today’s script. In April, we launched our beautiful weather app for iOS, including stunning photos from Flickr. We launched the Yahoo! Mail app for tablets. This magazine-like reading experience has contributed to daily active users being up 120% across mobile mail apps. We also launched our redesigned Yahoo! app for iOS and Android, complete with Summly integration and we saw a 55% increase in daily users, and a 60% increase in time spent using the app. In June, we surpassed 340 million monthly mobile users.
In addition to investing in our core products, our management team is committed to focusing and reinvesting. Since last fall, we have shut down over 30 underutilized products and features. This has allowed us to put our best product builders and resources on the most important products. In June we acquired Tumblr. Tumblr’s growth has seen acceleration with almost a 0.25 million new blogs being setup each day. The potential to integrate Tumblr content into the Yahoo!’s core products will create richer, more engaging, and interesting experiences for our users.
Over the past year, we have seen quarters of record profits for Yahoo!. We have done a very good job of controlling discretionary cost and our management team is focused on delivering growth. Our teams are now delivering a velocity of product launches that will fundamentally change our business. The early Q2 engagement metrics mentioned earlier speak for themselves. Increased traffic and users should be noticed by advertisers and translate into revenue.
We hope you all enjoyed today’s new video format. While we have been live streaming, our users have shared more than 3 million Tumblr posts and uploaded nearly [0.5] [ph] million photos to Flickr, we will let you and them get back to it, while we get back to work. We’ll see you next quarter
And thank you all for using Yahoo!, Yahoo! Finance and glad to take any input on how we can continue to make this approach more informative, and again, thank you very much for listening.
Thank you for presenting. Thank you, ladies and gentlemen. This does conclude today’s conference. You may now disconnect and have a wonderful day.
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