Good afternoon, ladies and gentlemen, and welcome to the Yahoo! third quarter 2009 earnings conference call. (Operator Instructions) I will now turn the call over to Mr. Matt [Rowe], Director of Investor Relations. Mr. Rowe, you may begin.
Thank you. Good afternoon, everyone and welcome to Yahoo!'s third quarter 2009 earnings conference call.
Before we begin, I would like to remind you that today’s call will contain forward-looking statements concerning matters such as our expected financial performance, our marketing and product plans, our cost initiatives, planned investments, corporate strategy, and our expectations for the economy in general and online advertising in particular. Actual results may differ materially from the results predicted in our statements and reported results should not be considered indicative of future performance.
The 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 10K filed with the SEC on February 27, 2009, our form 10Q filed with the SEC August 7, 2009 as well as in the earnings release included as Exhibit 99.1 to the form 8K we furnished today to the SEC. All information discussed on this call is as of today, October 20, 2009 and Yahoo! does not intend and undertakes no duty to update this information to reflect future events or circumstances.
On today’s call we will also discuss some non-GAAP financial measures as we talk about the company's performance. These will include operating income before depreciation, amortization and stock-based compensation expense, which will be referred to as operating cash flow; revenue excluding traffic acquisition costs, which we will refer to as revenue ex-TAC; non-GAAP net income and non-GAAP net income per share. 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 15 minutes. Then we'll have a brief Q&A session with Tim Morse, Chief Financial Officer.
And now I’d like to turn the call over to Matt.
Timothy R. Morse
Thanks, Matt. Good afternoon and thanks for joining us today. Carol came down with something earlier this morning. It’s nothing serious but she has asked that I lead the call today on her behalf. And since we will see many of you at our analyst day next week, we decided to keep this call focused on our third quarter. We will talk more about our long-term plans in a week’s time.
Before diving into the financials, I would like to share a few operational highlights from 3Q. We rolled out our new homepage in eight of our largest countries. We introduced fantastic new updates to mail, messenger, and mobile. We launched the first global brand campaign in our history and we announced acquisitions like Maktoob and Xoopit that will expand our leadership positions in communities and content and help us to enter important new markets. And last but not least, we also announced our search deal with Microsoft.
With that brief operational overview, I will now turn to the financials.
I am happy to report that our 3Q revenue came in above our guidance range. Overall, the theme for third quarter was stabilization as we saw strength in key areas of our business after two straight quarters of deceleration. Given the changes in the economic climate since 2008, I am going to refer to sequential trends on this call much more than we have in the past, since they tell us more about what is currently happening in our markets.
Revenue was $1.575 billion, which was down 12% from last year, but more importantly flat compared to second quarter. Excluding the impact of currency rate fluctuations in divested business lines, revenue declined 7% versus last year. Revenue performance exceeded the midpoint of our guidance range by $75 million. That favorability was driven by two dynamics.
First, the ad quality initiatives announced on the July earnings call had the intended beneficial impact on users but a lesser downward impact on 3Q revenue than originally anticipated.
Second, our affiliate business was stronger than we expected. My narrative today will address both these dynamics in more detail but let’s begin with the underlying trends in O&O, display, and search.
First up is display, where we registered our second straight quarter of sequential growth and our year over year performance moderated to minus 8%. The quarter over quarter improvement was led by the U.S. at 2% growth and we experienced gains in key industry segments, such as consumer products, entertainment, and finance.
Most importantly, however, we saw good news in terms of the mix of display revenue with guaranteed placements outpacing non-guaranteed. Revenue from guaranteed placements grew sequentially in the mid-single-digit range as a result of better overall yield. The non-guaranteed side of our business declined sequentially due to our ad quality initiatives but still grew 37% year over year.
We originally estimated that the revenue impact of the ad quality initiatives would be $75 million on a full quarter basis and roughly $50 million unfavorable in third quarter. Instead, the unfavorable 3Q impact was $15 million as a result of slower implementation and better backfill of the low quality ads at higher than expected rates.
Panning out to the bigger picture, we expect the impact of this initiative to grow to $25 million in fourth quarter and level out at $60 million quarterly by the beginning of 2010. That would put the annual unfavorable impact at roughly $240 million instead of our original $300 million estimate.
Turning now to O&O search, on a year-over-year basis revenue was down 19% as expected with strength in queries more than offset by declines in RPS. However, we also experienced encouraging signs of stabilization in this business. After sharper sequential declines in the first half, third quarter results declined just 1% compared to 2Q. Query growth was slightly up and RPS was only slightly down. In geographic terms, U.S. search declined 4% sequentially and international grew in the low double-digits.
With respect to industry segments, in 3Q there was far less variation than in 2Q with no segment up or down materially.
Rounding out the 3Q revenue drivers, our affiliate business which is still principally search was down 6% year-over-year and up 1% sequentially. Strength in overseas affiliates was a positive development compared to expectations, but our longer term outlook for this business remains fairly neutral as our focus continues to be on growing our owned and operated properties.
Moving down the income statement, traffic acquisition cost was 28% of GAAP revenue. This was two points higher than we expected primarily as a result of stronger affiliate mix.
Turning to profitability, second quarter OCF was $384 million on a reported basis. Excluding cash restructuring charges OCF was $400 million. By either measure we exceeded the midpoint of guidance substantially by a combination of revenue and cost performance. With regard to the latter, excluding restructuring costs in both the second and third quarters we had guided to a $75 million increase sequentially. Instead, our investments in repositioning the company totaled a little less than $50 million in 3Q. We didn’t hire as quickly as we had planned and that contributed about 1/3 of the under run.
While we would have preferred to ramp headcount at the originally forecasted pace we are taking time to ensure that we are hiring the right people in the right places. The remainder of the $25 million cost under run is more operational in nature. Our infrastructure team did a nice job lowering bandwidth costs and the whole company contributed to efficiencies in other indirect spending such as equipment, T&E and outside services. There is still a long way to go in these areas but we are beginning to make positive strides.
On a final note relating to 3Q cost performance, we invested roughly $18 million on our branding campaign which launched on schedule and on estimate during the last week of the quarter.
Before turning to the balance sheet I would like to call out two additional items from the P&L. First, we recorded a $17 million charge as a result of previously announced restructuring programs, primarily related to facilities costs.
Second, we reported a $98 million pre-tax gain from the sale of our 1% stake in Alibaba.com. That number is embedded in the $105 million other income line of our P&L. As a reminder, in 2008 we wrote down the book value of this stake by $50 million pre-tax during the market downturn. Ignoring the ins and outs of accounting for a moment, our original investment for the 1% direct stake was $100 million and we received $145 million for the stake in 3Q.
Moving now to the balance sheet, we ended the quarter with $4.5 billion of cash and marketable debt securities. We repurchased $91 million of stock at an average price of just under $15 per share and we have approximately $1 billion remaining on our repurchase authorization.
With regard to longer term investments, we spent $99 million in CapEx during the quarter. Through the first three quarters of the year we have spent less on CapEx than we expected as we have digested some of last year’s Data Center spending and focused on better utilization of our equipment. We expect to spend roughly $200 million on CapEx in 4Q.
At the end of the quarter the pre-tax value of our 35% stake in Yahoo! Japan and our 29% indirect stake in Alibaba.com was $10.3 billion or $7.27 per share. These figures are based upon public market quotes. They do not include the estimate of the value of Alibaba Group’s privately held businesses. We don’t have plans to liquidate, spin off or otherwise dispose of either of these holdings. They represent a significant source of long-term value to the company and our plan is to participate in the growth of China and Japan via these two market leaders.
Turning to our fourth quarter guidance, we expect GAAP revenue to be in a range of $1.600 billion to $1.700 billion. 4Q OCF should be in a range of $400-450 million. Factoring in tax of 26-27% of GAAP revenue, this implies cash costs of $780-800 million. This guidance excludes pre-closing transaction costs related to our search agreement with Microsoft and any lingering restructuring charges.
The midpoint of our 4Q cash cost guidance is roughly $60 million more than third quarter. Continued hiring in key areas such as products and sales contribute to the sequential ramp but the biggest driver is an increase in brand campaign expense of roughly $45 million. While 4Q ’09 will leave a high watermark for brand campaign spending, you can expect a similar level of brand investment to be part of our cost structure going forward as well. It’s important to provide visibility to the numbers in these early quarters given the impact they have on sequential swings but we will not plan on breaking them out once we settle in to a stable run rate.
Before opening it up to questions, let me give you a quick update on Microsoft. By now, you all know the basics of the deal. Many people thought the announcement meant that we were exiting search all together which isn’t the case at all. Not only will our agreement not only allow us to continue to generate search revenue but more importantly we’ll continue to innovate in the search experience. The next revolution isn’t with the algorithms that provide results, it’s in creating a better, more personally relevant search experience. This is where we’ll differentiate ourselves and compete vigorously without the billions required to keep up in the arms race that generating search results has become.
Let me give you an analogy that Carol has been using to explain this point. Consider basic search to be an Intel chip. An Intel chip is used in Dells, HPs and Macs to provide the computation needed to operate them but the differentiation between these products isn’t at the chip level, it’s in the different user experiences that are provided on top of them. It’s the same for us in search. We’ll innovate on top of the results that are provided to us by Microsoft.
I also know that everyone is curious about the regulatory review process. We still believe that the transaction can be closed in early 2010 especially given strong support from the advertising industry including a letter issued yesterday in favor of the deal from the American Association of Advertising Agencies and the heads of the four major advertising holding companies. Yet until the deal closes and we migrate every last advertiser, we’re focused on important enhancements to our algo and paid search platforms to ensure they are the best they can be for our users, our advertisers and publishers.
When we do begin with implementation, we plan for our algo platform to migrate to Microsoft first. Our paid platform is more challenging since we have hundreds of thousands of advertisers to move over. We have to ensure the integrity of each of their keyword marketplaces in addition to the back office account systems that support them. The good news is that we have experience with this kind of migration from our Panama transition and ironically Microsoft does too with several former Yahoos who worked on Panama and now are on their team. The key to this transition is to do it with speed and quality. Timing for the transition will all depend on when we receive regulatory clearance. If we close in early 2010, we hope to make significant progress in the transition of one or two major markets next year with the rest to follow the year after.
Next week we’ll gather with many of you for our analyst day. It’s the first chance for us to connect with investors since we’ve reset the company after all of the events of the last couple of years. It’s a great opportunity for us to update you on our business and to introduce you to our new management team, many of whom like me, are new to the company. We look forward to seeing you and for those of you who can’t make it in person we urge you to participate through the live webcast on our investor site. With that, I’d like to open up the call to questions.
(Operator Instructions) Your first question comes from Ross Sandler - RBC Capital Markets/
Ross Sandler - RBC Capital Markets
Can you guys talk about the display run rate exiting the quarter and heading into the fourth quarter and was there anything that you saw in the third quarter on the display side that could have created an any one time benefit whether it be cash for clunkers or otherwise, or was it pretty much broad based across all the verticals. And then second, I’m trying to reconcile the difference in growth rates on the search side between Yahoo! and your biggest competitor in the domestic market, what do you think is driving that, that divergence, is it more on the query side or the RPS side. That’s it thanks.
Timothy R. Morse
Sure, thanks Ross. I would say we’re not going to break down any of our results until it’s a monthly trend, but overall I’m on display in the third quarter I think there were a couple of encouraging things. First, it grew in total for the second quarter in a row and that was despite a $15 million impact from the ad quality initiatives.
So I think that was good news, and then within the guaranteed side of the business, guaranteed placement side, that grew again reasonably strongly for two quarters in a row. So I think that kind of says that things are starting to loosen up, that the ad dollars are starting to flow a little bit better and we think that’s good news.
I honestly, I didn’t see anything in 3Q in total that I’d call out as one timish in nature. I think there were three particularly strong industry segments that I called out in my script. The other ones were kind of clustered around the same kind of lower number, but nothing too big there.
In terms of the results in search, tough to compare to Google. I have to focus on Yahoo! and what’s going on with us and I’d say we were down I think it was something like 8% 4Q to 1Q and something like 10% down 1Q to 2Q. This quarter is only down 1% and that feels to us like stabilization and when you look at it sequentially like that, with queries being up sequentially and the RPS only being down slightly, again, it feels like stabilization.
Overall, year over year, queries grew double-digits so that felt pretty good. I think the market perhaps grew a little bit more then that. So that’s one difference I can point to I think quantitatively but that’s probably all that’s reasonable to say on that subject. Next question please.
Your next question comes from the line of James Mitchell – Goldman Sachs
James Mitchell – Goldman Sachs
Great thank you very much for taking my question and thank you also for getting the results released out at about 4:00 which I think is faster then in the past. Could you quantify the impact of discontinuing search submit and also your change relationship with eBay. Thank you.
Timothy R. Morse
The change relationship with eBay, actually on the, its just on the search side and it was actually relatively small even on a GAAP basis and extremely small, immaterial in fact on revenue ex-TAC basis. Next question please.
Your next question comes from the line of Spencer Wang – Credit Suisse
Spencer Wang – Credit Suisse
Thanks and good afternoon, Tim I think you mentioned that the guarantee placement perhaps performed a little bit better then the non-guaranteed. I was just curious is that be design on Yahoo’s part strategically and then the second question is just on the buy back, can you just give us a sense, is this the start of a consistent buyback or will it be relatively lumpy, any clarity on that would be helpful. Thanks.
Timothy R. Morse
Sure, on the guaranteed side, its only strategic in the sense that that’s where we feel we have tremendous strengths and that we can win in a very big way in the future. So we focus a lot on the guaranteed side. There was nothing unnatural certainly we did in the third quarter that made the results what they were, but again ad spending is starting to free up and we are a great value proposition for big advertisers.
On the buy backside, what we are interested in is offsetting the dilution of our equity programs so that is what you can kind of look for from us. We will do that certainly with a view to where the best value is of our stock price. We saw a tremendous opportunity in 3Q by doing some programmatic buys, what’s known as a 10D-51 program where you buy on a formula depending on where the share price is.
So we saw some great opportunities and we took advantage of those opportunities. You can look for us to do two things in the future. Be opportunistic that way certainly be smart about the buybacks but we do like countering dilution.
Your next question comes from Christa Quarles – Thomas Weisel Partners
Christa Quarles – Thomas Weisel Partners
I was wondering if you could just address your Affiliate business more broadly, in particular just how much of it you think is at risk. I know you have some, I think, make whole provisions with Microsoft should you lose affiliates.
And then we are also seeing the tax rates continuing to climb up. We're guessing you are having to guarantee more to kind of keep that business intact. As you think kind of think two or three years down the road, how do you perceive the Affiliate business and as the importance of Yahoo! and its overall contribution?
Timothy R. Morse
As I look at it, it's kind of like I said in my script. We view it fairly neutrally. I think there are some pluses and there are some minuses out there and our focus is definitely on owned-and-operated. There is a make whole provision for affiliates that would leave us that would go to Microsoft, under the search agreement. There is no make whole if we are to lose them to another competitor.
But frankly, we know that Google monetizes better than we do; that's well chronicled. So we know that we have to pay a little bit heavier tax rates to affiliates. But the ones that remain with us now, that haven't moved over, and we are still trying to win some back as well, and those conversations are ongoing and hopefully fruitful.
The ones that have moved have moved for a reason. The ones that have stayed have stayed for a reason. So I think in a sense it's kind of tough to gauge. In another sense it's—if they feel like we're a good value proposition and we're a good brand to be associated with now, then it's only going to get better in the future.
Certainly the search agreement, as I explained in the script, we feel is a terrific way to do a wonderful job with Microsoft on the back end of search, delivering the search results, while we get to do what we're really good at, which is differentiate the individualized search experience, the user experience, on the front end.
So that's—I mean, those are kind of just my kind of high-level thoughts on affiliates. It is a couple of pluses and couple of minuses, but looking out I think it's probably at a pretty good level and hopefully our affiliates grow and we all participate in that.
Your next question comes from Neil Gupta for Jason Helfstein - Oppenheimer & Co.
Neil Gupta for Jason Helfstein - Oppenheimer & Co.
This is Neil Gupta in for Jason. A quick question on display. It was up 2% sequentially in the third quarter and the year-over-year trends are obviously getting better. Just broad thoughts on what needs to happen in terms of whether it's pricing or improvements in sales methodologies, just for the display business, to really get back on its feet and see some strong year-over-year growth trends.
Timothy R. Morse
I think we are in a good position. As I said earlier, we provide a great value proposition. Our product roll outs, our reach in engagement, are all terrific attributes for us to win this display business. We saw better yields this quarter. I think that's a sign of, again, our effectiveness and it's a sign, again, of the economy starting to loosen up a little bit and brand spending starting to happen a bit more.
I think that's probably the biggest driver, certainly in these early days as we go forward. Again, it was a good, good sign, that guaranteed was strong both in the second and in the third quarter so hopefully we are coming out of that and that will be a big contributor going forward.
Your next question comes from Mark Mahaney - Citigroup Smith Barney.
Mark Mahaney - Citigroup Smith Barney
I just wanted to focus on margins. Tim, I think the gross margins on a net revenue basis were flat year-over-year, the first time we've seen that in two years. In your script you talk about some improvements in band width, band width purchasing. Do you feel like that's a sustainable level now? Do you think gross margins, on a net revenue basis, can be essentially flattish now? Are there some new learnings you've got there that give you confidence in that?
Timothy R. Morse
Sure, Mark. You know, I won't look out and predict where the rates are going to go. We will talk more about that kind of stuff a little bit more next week. What I would say is there's a change occurring in Yahoo! that will value that kind of work, that good old-fashioned, get-your-hands-dirty kind of find ways to take costs down or make sure that they don't go up as much as they otherwise would have type work.
I think David Dibble and his team, on our infrastructure side, are doing a terrific job of taking a really pragmatic view of all of our different costs, the cost to serve, or whether they be energy costs, data center efficiency, et cetera, and in negotiating prices related to all of our infrastructure -- so they are on a nice roll, I think. I think their influence is going to be increasingly felt and again, tough to talk about the overall trends in some of those line items within cost of revenue but I am confident that we are getting the right team in place and the team is gaining momentum to do some great things there.
Next question, please.
Your next question comes from Doug Anmuth with Barclays Capital.
Doug Anmuth - Barclays Capital
Tim, my question is on the display business and in particular, it looks like the quality of advertising on the homepage appears to be improving here into 4Q. Are there any changes that you’ve made in terms of enabling more rich media ads on the homepage? And can you comment on the sell-out rate here in the fourth quarter and perhaps how it compares to this point in other quarters, in other fourth quarters?
Timothy R. Morse
Sure, Doug. You know, have we done anything on the -- for the quality of the front page? No, nothing out of the ordinary. Again, we relaunched the home page. That has gotten some great acceptance. We’ve gotten some great reviews on that. I think it’s becoming a better and better value proposition.
We always expect strong seasonality in Q4 over the holiday period. Aside from that, I don’t know. I mean, we’ll continue to experiment with new formats and creative and that kind of thing but that’s an ongoing thing as opposed to just something we’ve done in 3Q or doing for fourth quarter. I think that’s what we will increasingly get good at and better at.
Next question, please.
Your next question comes from the line of Youssef Squali with Jefferies & Company.
Youssef Squali - Jefferies & Company
Thank you very much. So Tim, if I look at your Q4 guidance, at the midpoint it doesn’t look like you are assuming much improvement, frankly, in any line, maybe with the exception of O&O. If you look at the -- I know you don’t guide to particular line items but even if you basically just draw a straight line on the year-on-year growth you’ve had in O&O search, O&O affiliates and just assume some still low double-digit, low single-digit negative growth in O&O, you still come out at the higher end of your guidance. Can you talk about that and is it just a lack of visibility or is just conservatism or second quarter on the job as new CFO?
Timothy R. Morse
No, well, it’s -- thanks for the question. It’s not the latter. What I would say is you’ve got $15 million impact going to $25 million impact for some of the revenue initiatives I talked about in my script, so there’s a little bit of a $10 million drag in there. We don’t break our guidance out into the various products but again, we would anticipate seeing good strength in our display business because of seasonality. Usually search has some benefits to it in 4Q as well, probably have a couple of other drags in the business in terms of some of the fantasy sports, since we’ve cut off the fees for fantasy sports to improve the user experience and get the user growth, which seems to be working. I think there’s a little bit of a drag there in terms of what would normally happen in seasonality.
But overall, I think you do see O&O growing. I think that will drive the ex-TAC number to be better, the TAC rate down, in other words. And it’s a seasonal thing and frankly, a 5% increase quarter over quarter in this environment I feel pretty good about.
Next question, please.
Your next question comes from the line of Imran Khan with JP Morgan.
Imran Khan - JP Morgan
Thank you for taking my questions. So Tim, questions about page views -- I think at slide 13 you talked about your page views grew 5% year over year. That’s down from 15% Q4 of 2008. Could you please help us understand how much it is because of AJAX or how much you are seeing a slow down in the page views growth?
And secondly, I’ll just sneak in a second question, with regard to the -- there have been a lot of reports that you are looking to sell some of your businesses, small businesses in the U.S. Could you give us some color, what is your plan with -- in terms of reducing some of the -- and focus on the core business?
Timothy R. Morse
Sure, Imran. First on the page views, yeah, they grew about 5% year over year. Mail was a couple points, a few points better than that. Homepage was actually very strong, up in the double-digits, up in the upper teens. We had some tough comps in News in terms of the Olympics and in Finance in terms of the financial crisis that hit in September of last year. We closed some properties, 360, Geocities, etc. and Europe seemed a little bit slower than the overall growth. So that is probably, I think last quarter it was 7% up. This quarter it is 5% up year-over-year so again as you look at it sequentially not a big difference but I do think the year-over-year comps are a little bit tougher. I hate to use that as an explanation but if you do look at Mail, Homepage and a few other of our key properties like Sports, they are really, really improving quite nicely in the 10-20% range.
In terms of divestitures, it will continue to not make sense to talk about stuff like that publically. When we have something to talk about you all will certainly be among the first to know about it. We continue to look at the landscape and figure out what the best fit is for Yahoo! with the existing assets and other assets. That work is ongoing and will continue to be ongoing. Again, when we have something to make sense to announce on it we certainly, certainly will.
The next question comes from the line of Sameet Simha – JMP Securities.
Sameet Simha – JMP Securities
So if you hired about 200 people during the quarter where was that hiring exactly? Was it sales, marketing, product development? How much more to go? The second question, could you quantify the impact of shutting down search submit or bid inclusion?
Timothy R. Morse
The hiring, you can see it a little bit in our income statement, the hiring was predominately on the product side. That is where the cost has gone up and that is where we are committed to making sure we are every bit the technology company that we know we are. On the science side of display, on the science side of personalizing the search experience. We are committed to these areas. We are rolling out new products and it is a nice rejuvenation for the company.
So that is the majority of where it was. It was some of it in sales as well. We are putting some more feet on the street. Those are the big areas that we will continue to focus on. As I said in my script the big jump from 3Q to 4Q was certainly the brand spending but the next biggest jump that closes that gap in the total ramp from quarter-to-quarter is in relation to headcount. To add 200 people in the quarter we thought was pretty good. There are a lot of people who want to work at Yahoo! right now who see the turn coming and want to be part of it. So we are pleased about that.
In terms of the second question which I am afraid on the very first questioner I neglected to answer this one so I am happy someone came back to it, the paid inclusion program is I would say when you look at it certainly was in the $300 million we originally talked about for revenue initiatives and it is in this new, revised $240 million that I talked about in my script. That will be about $50 million per quarter on an ongoing basis. Coming off of the $25 million here in the fourth quarter it is not all of any one thing at all. Paid inclusion is a reasonably big part of that. We are not going to break out the sales or profitability from our various smaller programs here. We think this is a change that helps us improve the overall health of our marketplace on an ongoing basis so it makes sense for us to do it.
The next question comes from the line of Heath Terry – FBR Capital Markets.
Heath Terry – FBR Capital Markets
You addressed this a little bit when you talked about some of the performance in verticals like Mail and Finance but I was wondering you have talked in the past about the broader performance of your premium inventory or the premium end of the market versus the non-premium end. I was hoping you could kind of give us an update of what you are seeing there and what Yahoo!’s exposure at this point is to each end of that spectrum?
Timothy R. Morse
The premium and the non-premium are not completely synonymous but we talk about them as guaranteed placements and non-guaranteed placements so that is kind of what I talked about in my script. Guaranteed was stronger than non-guaranteed for the second straight quarter.
We feel it is loosening up, we feel that we are extremely well-positioned to catch that leave as we go forward and again, a lot of the work that we do on where we place things, how we match up the science behind that, matching up the right eyeballs to the right ads, improving creative, all of that kind of stuff is going to be terrific for our long-term prospects.
Your next question comes from the line of Mr. Ben Schachter with Broadpoint Amtech.
Ben Schachter - Broadpoint Amtech
You mentioned a couple of times some positive metrics about the home page. I was wondering if you could talk about what percentage of users are on the new home page, what the difference is between the new home page and the old home page in terms of metrics and how that is ramping?
And then also, if you could just give any expectations on what you are going to be talking about at the analyst day, are we going to get long-term margins, are we going to get 2010 guidance? Any kind of detail on that would be great, thanks.
Timothy R. Morse
Sure, well I will take the latter part of the question first. I am not going to steal my own thunder for next week. I will say we will provide more clarity. I wouldn’t expect – in other words, we are not going to give 2010 specific guidance. I think it just doesn’t make sense still in this environment. We will continue to take it quarter by quarter.
In terms of the home page, I would say that again, we are up strong teens in terms of page views. Still not all the users in the U.S. have switched over to it, so it is an opt-in for now. It is certainly, if I am not mistaken, it is rolled out completely in seven of the other countries, because it is eight countries in total.
I think there are an awful lot of operational metrics here that we are still sorting through to make sure that within this last six to eight week period that we have the right data. A lot like on the brand, it just takes a little bit of time to get enough data in to reach some viable conclusions.
So if we’ve got the data in the right way for analyst day, I’m sure we’ll be presenting at that point, but again it’s just early on in both of these to be sharing too much of it to make sure that we don’t make too much of something that shouldn’t be.
And let me give you an example of why. Because it’s opt in, you’d expect for all the feedback to be really positive. I mean these are people who want to be on the new home page that opted into the home page. So while certainly all of the metrics that I’ve seen have really been quite favorable, you’ve still got to take them with a grain of salt because you’re dealing with people who are kind of predisposed to like what you’ve done in the first place.
So that’s why we just want to be careful and make sure we see all the data in its full richness and then draw the conclusions.
As a reminder, please limit yourself to one question. The next question comes from the line of Brian Pitz - UBS.
Brian Pitz – UBS
A question on mobile, would you give us any color on your mobile monetization efforts since it appears that it may be becoming somewhat meaningful to some of your competitors. And then a quick follow up to Kristen’s question, are you factoring in any affiliate losses into your Q4 guidance?
Timothy R. Morse
First on mobile, that’s unquestionably you hit on as we said before, a focus for our future growth. We’ve got some new I-phone apps, Finance, Flicker, Fantasy Football that are doing terrific. Our reach is really improving. We’re on something like 1,900 devices right now which is five times more than just back in April of this year. So that’s terrific.
We’re a huge leader in mobile as a matter of fact in the U.S. We’ve got 35 million users. So it is getting better as that begins to become more established in the market place. It becomes better because monetization will improve. That certainly is something that we’re focused on and see ourselves as being able to take great advantage of.
In terms of factoring affiliate losses for 4Q; no I am not factoring 4Q losses of affiliates. We’ll see whether, how they perform and whether their revenue goes up or down. Again, I’m kind assuming rather neutral, but actually losing affiliates, no. I’m not factoring in anything like that in.
The next question comes from Jeffrey Lindsay – Sanford Bernstein.
Jeffrey Lindsay – Sanford Bernstein
I just want to ask Tim about head count. On the Microsoft deal which is coming up, will you anticipate a $500 million improvement in operating income? Are you assuming that we’re going to get that more from revenue improvements or from cost reductions on both?
Timothy R. Morse
We’ve talked about this a few times, there is $650 million of GAAP improvement in our operating expenses. About $225 of that is deprecation amortization and stock-based comp so that leaves $425 million of cash costs the majority of which would be related to headcount efficiencies and that kind of thing.
Your next question comes from Jeetil Patel – Deutsche Bank.
Jeetil Patel – Deutsche Bank
Tim, two questions one, can you just talk about percentage of Q4 that is booked on display ads already since from what we gathered commitments seem to be pretty significant right now industry wide? Second, do you think your past - maybe what we’ve been hearing out there that is small to medium sized advertisers opting for paid search platform over the last couple of quarters do you think that transition on the small to medium business category is past us at this point?
Timothy R. Morse
I’ll handle the first question very quickly because we’re not going to break that out. We don’t typically break that out. I’d just say that it’s a seasonally good quarter. I don’t see anything and I haven’t heard anything that is different in our bookings in any past quarters. I didn’t really understand your second question Jeetil if you could repeat that? It was something about small to medium businesses and the impact – we’ll put you back in the queue and we’ll make sure we get to you. I just didn’t understand the question.
Your next question comes from Justin Post – Bank of America Merrill Lynch.
Justin Post – Bank of America Merrill Lynch
I’d like to revisit the search monetization, it looks like your query growth accelerated to double digits which is a good thing and I’m just wondering why the search growth on a year-over-year basis on revenues declined further? Have you started getting ready for maybe the Microsoft transition or are there other things going on on your search platform that might be affecting your revenue growth?
Timothy R. Morse
No, there’s certainly nothing that has anything to do with the Microsoft agreement. Again, look at this thing sequentially. What happens sequentially is the queries are up a little bit, the RPS was only down a very little bit so the results we got – and as a consequence all of search was just almost flat, it was down 1% quarter-over-quarter. The year-over-year thing is obviously a lot tougher to do because you’ve had four intervening quarters here and third quarter ’08 from what I’ve seen was certainly the peak of our RPS, it was the peak of our monetization, it was the peak of revenue for last year so it’s a little bit of a tough comp. Being down 19% quarter-over-quarter is tough. We’re essentially the same as we were last quarter but it’s comparing to a tougher 3Q. I really don’t see anything that certainly has anything to do with Microsoft.
We’re running the business, as I said in my script, there’s an awful lot that we’re still doing to invest in these businesses and make them better. Part of the product roll out was a whole bunch of stuff in search, search assist and more personalized or scientific way to get the filtering, the better results to predict what your intent is, all that stuff. We continue to do an awful lot on that side of the equation so we’re not slowing down, we’re not slowing down at all. I would just say that sequentially we are pretty stable and that was a tough comp to last year.
Your next question comes from Mark May – Needham & Company.
Mark May – Needham & Company
My question had to do with the branding campaign. I just wanted to get a better sense of what the thinking was behind this, was it a sense that you were losing audience to other competitors? And, what sort of reaction have you seen or impact have you seen on user and usage metrics in the quarter? And, have you been able to keep some of the new users that you’ve attracted from the branding efforts?
Timothy R. Morse
Again, I’d answer the same way I did earlier which is it is very, very early. I think again, just like on the homepage roll out some very encouraging input, some very encouraging early stats but I’m going to leave it to the people who really know what they’re doing with that kind of thing and how you value a brand in a larger sense. We definitely expect this to translate in to more users over time. I think this is a pretty comprehensive thing that we’re trying to do, not just in terms of global reach and all kinds of different media, but it really is about revitalizing the company. Carol and Alisa call it a revitalization campaign. Its more about getting us back to where we were, refreshing how people think about Yahoo!, externally and internally.
About what our corporate identity is after we’ve perhaps had a little bit of fuzziness around that for the last couple of years and returning to a normal level of brand spending. We had certainly over the last few years under spent on the brand and there’s a very high correlation between brand value and the rank of brands and how much you spend on them.
And I think we’re just getting back to where we ought to be in this regard. But it really is, its something we’re using not only as an external catalyst, but as an internal catalyst too. It really does kind of define our identity and where we’re going to go and in the early phases certainly this is about us and our corporate identity but as we roll through and go into the future, it will become more product focused and it will evolve with the company.
So this is something, again as I said in my script, you can look for us to be doing for a while here, it will become more or less a permanent part of our cost structure. As for any consumer related company, it should be. Next question please.
Your next question comes from the line of Sandeep Aggarwal - Collins Stewart
Sandeep Aggarwal - Collins Stewart
Thanks for taking my question, Tim how much was the contribution from your new deal with AT&T to sell display advertising to local merchants? Secondly how’s the ramp up going in terms of at what stage you are in terms of deploying mental behavior targetting to various properties at Yahoo!
Timothy R. Morse
Say that last part of the question, I got the AT&T sales relationship part—
Sandeep Aggarwal - Collins Stewart
Second was to do with behavioral targeting, where are you in terms of deploying your behavioral targeting capabilities to various properties at Yahoo!
Timothy R. Morse
Okay so the AT&T sales relationship, its certainly not material yet. I would say we’re very encouraged by that. The more feet on the street the more exposure, the more people selling is great. So I think it’s a great deal. I think it’s a very strategically smart deal. I think it will be a great partnership.
The second question with regard to behavioral targeting, this is what I was talking about earlier about getting better and better about the science of display advertising, about putting the eyeballs in front of the right ads at the right time on the right pages, having the right ads follow you from property to property.
There’s a ton of value in that for advertisers. There’s a strong demand for that. That will increasingly become a bigger and bigger part of our value proposition and I think we’re uniquely positioned as a company to take advantage of that kind of thing.
We, if 580 million people or more at the last gauge come, that’s wonderful reach. More and more as we roll out these great new additions to mail and messenger and the search ones I just talked about. I think the value proposition just gets stronger and stronger.
So I wouldn’t view it as necessarily as where are we in this initiative, I think that is absolutely kind of the lifeblood of anyone who is going to be really great at online advertising. So its an evolution. We’re getting better at it everyday. We’ve got some incredibly, incredibly smart people here at Yahoo! who are working on this.
And there is a really terrific scientific underpinning to it that’s tough to figure out, but when you’ve got the best in the industry doing it, I’m very confident that this is a place where we can, we can really, really draw the competitive advantage. Next question please.
Your next question comes from the line of William Morrison – ThinkEquity
William Morrison – ThinkEquity
Hi thanks, quick question about the right media exchange, we’ve heard that you had made the decision to stop selling class two or non-guaranteed Yahoo! inventory through the exchange which I believe you’ve been doing for the last year or so, and I’m just curious what impact that may have on your business and if its in the $240 million in impacts on the ad quality initiatives. Thanks.
Timothy R. Morse
Sure Bill, no I don’t, honestly I don’t know anything about that decision. Not to my knowledge have we made that decision. Its certainly not part of the $240 million. You know, the exchange is, its an open exchange. It has about 120,000 buyers and sellers, 9.0 billion daily transactions and it's—I believe it's the leading exchange, as well, by far. So it's a great very viable exchange. So what you're hearing about Class 2, or any meaningful change at all, with regard to how we handle Class 2, is incorrect. Is incorrect.
Your next question comes from Gene Munster - Piper Jaffray
Gene Munster - Piper Jaffray
Can you talk a little bit about any updates to divesting or outsourcing your non-core businesses like HotJobs or maybe even any areas, just big picture of acquisitions you might be a good fit in?
Timothy R. Morse
I'll just go back to again, if I heard your question right, you were echoing a little bit for us in the room here. We're not going to comment on acquisitions or divestitures that are in process. I think you look to Q3 and you look at Xoopit and you look at Maktoob, as I highlighted at the very beginning of my script, and you see good examples of the kinds of things we want to do. We want to get some great technology, we want to get some great people that are behind that technology and that end up being accretive to the whole Yahoo! value proposition.
So that's important. Getting into new markets is important. Strengthening our position in big markets is important. So if we focus on that kind of stuff, I think we win. So that's what our acquisition and divesture group is doing, they're constantly working with the business and constantly evaluating the external opportunities, both in the plus and the negative and we are going to continue to drive Yahoo! in the direction that makes most sense for future growth and profitability and value to shareholders.
Okay, so we're going to wrap up there, but again, look forward to seeing you, or again, please tune into the webcast version of our analyst day next week. We will be happy to follow up with questions, as we usually do, after the call as well with some of you. I wish you a good day. Thank you very much.
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