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Yahoo! Inc. (NASDAQ:YHOO)

Q3 2013 Results Earnings Call

October 15, 2013 5:00 PM ET

Executives

Lauren Lyster - Business Reporter, Yahoo! Finance

Marissa Mayer - Chief Executive Officer

Ken Goldman - Chief Financial Officer

Analysts

Eric Sheridan - UBS

Ken Sena - Evercore

Heath Terry - Goldman Sachs

Mark May - Citi

Ron Josey - JMP Securities

Mark Mahaney - RBC Capital

Carlos Kirjner - Sanford Bernstein

Jordan Rohan - Stifel Nicolaus

Douglas Anmuth - J.P. Morgan

Justin Post - Merrill Lynch

Ben Schachter - Macquarie

Brian Nowak - Susquehanna

Operator

Good afternoon. And welcome to Yahoo!’s Third Quarter 2013 Earnings Video Webcast. 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. As a reminder, this conference call is being recorded. The webcast today will be moderated by our business reporter from Yahoo! Finance, Lauren Lyster.

Before getting started, I’d like to remind you that today’s presentation will contain forward-looking statements about our expected financial and operational performance, as well as our strategy, products, cost control and related matters. Actual results might differ materially from our projections.

Potential risks factors that could cause these differences are described in our Form 10-Q filed with the SEC on August 8, 2013. All information in this video is as of today, October 15, 2013 and we undertake no duty to update this for subsequent events.

Today’s discussion will include non-GAAP financial measures. Reconciliations of our non-GAAP results to the GAAP results we consider most comparable can be founded on earnings slides, which also contains full version of the financial charts and graphs you will see in today’s video. We encourage you to review the complete earnings slides in our Investor Relations website at investor.yahoo.com under the Earnings tab.

And with that, let me turn the program over to Lauren Lyster.

Lauren Lyster

Welcome to Yahoo!’s third quarter 2013 earnings video live webcast. I am Lauren Lyster. I’ll be moderating today’s earnings event. Here with us are Marissa Mayer, Yahoo!’s Chief Executive Officer; and Ken Goldman, Yahoo!’s Chief Financial Officer.

Today, we bring you prepared remarks from both Marissa and Ken around Yahoo!’s third quarter performance and outlook, later they will also be answering your questions and this time around, Marissa and Ken will also be taking questions submitted earlier via Twitter and email.

Now without further ado, I’d like to turn it over to Marissa to discuss Yahoo!’s third quarter performance. Marissa?

Marissa Mayer

Hi, everyone. Welcome to our Q3 earnings live stream. We are excited to once again be streaming live from Yahoo! Finance. Overall, I am pleased with our execution in Q3. We delivered solid revenue ex-TAC, roughly flat year-over-year and at the midpoint of our guidance range. We’ve continued to invest in and strengthen our core business, while being disciplined on expenses.

As discussed previously, we are executing a series of sprints in order to achieve growth. Our current sprint is deeply focused on product quality and growing traffic and we’ve demonstrated great momentum on both this quarter.

People, products, traffic, revenue, that is the chain reaction we are working to trigger. Great teams build beautiful engaging products, those products drive increased traffic. The increased traffic generates greater advertiser interest, which ultimately results in revenue growth.

With the right people in place, Yahoo!s are rallying to build the best products for our users, partners and advertisers. This quarter we released more than 15 significant new product updates, modernizing and increasing user engagement across our digital daily habits. These updates make it easier and more delightful for our users to get the information and the content they care most about.

In Q3, we completely rebuild seven of our user’s key daily habits, including Yahoo! Sport, Weather and our entertainment properties, including Yahoo! Movie, Music, TV and omg! From the latest sport scores to upcoming movie times, weather forecast and celebrity updates. These more modern product experiences are now about personalize streams of information.

In late September, we launched Yahoo! Screen our new video destination for mobile, tablet and desktop. Yahoo! Screen is home to Yahoo! original programming as well as the Saturday Night Live Archives, NBC Sports, South Park, the Daily Show, the Paul Bearer Report and ARF. Yahoo Screen has quickly emerged as a preferred pastime, our constant partner to drive traffic, and some of their best work. It is a fun, serendipitous way to experience thousands of hours of video content. We built the new Yahoo Screen experience especially, for mobile and tablets with a new easy to use player and some substantial under the hood improvement in their performance.

Q3 is always an exciting time for our sports fanatics, because start of the NFL and college football season. We made some great strides forward with our refreshed Yahoo sports and fantasy products. The new Yahoo sports apps offers users a completely immersive experience, integrating tweets from well-regarded sport experts, the freshest content and the latest scores. All in a beautiful experience. We have seen a 100% growth in daily active users over the last quarter and a 50% increase over last season. And with our leadership position in fantasy sports, our users have a voracious appetite for our products, spending more than 23 billion minutes playing every year. We’ve been hard at work making significant product updates. In late July, we launched fantasy mobile apps for Android and iOS complete with native live draft capabilities. For the more engaging experience on mobile, we’ve already seen a 50% increase in daily active users for this app over last season.

We’re committed to constantly integrating our products. We don’t always get them right the first time. In Q3, we released major updates to our flagship Yahoo apps for both iOS and Android, introducing enhanced features and an even more beautiful photo- rich content consumption experience. And the result of our improvement, our apps have gone from a rating of 2.5 stars to 4.5 stars. For millions of our users, their days start with My Yahoo. In Q3, for the first time in eight years, we launched a massive upgrade, making it more beautiful, colourful and easier to organize and discover your favourite parts of the web, all in one place. We’ve teamed up with some of the most talented celebrities, artists and musicians, who’ve lent us their backdrop imagery for the product team. We sample the colors in your selected theme to match the whole page to your taste. The look and feel of My Yahoo today is simply stunning.

Across our communication products, we continue to focus on creating the absolute best mail products on desktop and across mobile. This quarter we have seen strong growth particularly on mobile mail, which has grown 20% in terms of users since Q2. Train to search, we continue to improve our user experience and I’m very pleased with our progresses here. In Q3 alone, our search teams delivered more than 100 search experiments to refine and enhance experience for our users and our advertisers. I’ll talk a bit more about the future of search later. For a seventh consecutive quarter of year-over-year revenue growth ex-TAC. We are gaining strength here.

In Q3, we refreshed our search experience on iPhones and iPads, across web, images, video, news, sports, finance and movie search. We also launched several new ad formats on search in Q3, helping to further optimize and monetize our queries. We made positive progress on partnerships, with two recent search distribution deals, ISG mobile and AVG International. These partnerships attest the opportunities in our search business and mobile and international as well as on our partner network. Also in search, we launched the all new Yahoo answers, experienced on both desktop and mobile web, delivering personalized content streams, social sharing, video and photo uploads. Yahoo Answers is a great product that has been under invested in for years and we’re committed to continuing with excellence and we’ve seen a nice rise in engagement in response to the launch. Overall, I’m truly impressed with all the hard work from our products, engineering and design teams. These are just a few examples of what was launched in Q3.

Q3 was an unprecedented quarter for the company in terms of product launches across the board and this energy and focus has been a strong driver of some of the positive traffic trends we’ve seen. In terms of traffic, last quarter I announced some exciting news. After years of global traffic decline in Yahoo, we managed to reverse this negative trend and in June of 2013, we achieved year-over-year growth, effectively erasing the decline from the prior year. I regarded this as a very good sign.

In large part, this is a clear testament to our incredible progress and today I’m excited to announce in September, we achieved crossover with our 2011 global traffic levels, meaning that our product spreads and the resulting increased engagements has effectively erased two years of traffic declines.

I want to reiterate that these numbers come from PC and mobile traffic, but they do not include Tumblr, iMap, e-mail usage and simply count infinite scoring pages as a single page view. In other words, these numbers are essentially in measure of the core Yahoo! network and they are conservative.

As I mentioned in Q2, this type of reversal in traffic declines on the size of our scale is unprecedented to my knowledge. And we are very proud of it. Our products are improving especially on mobile and our users are noticing and using them more.

Given the most of our revenue comes from United States. It’s also worth noting the much of our focus on improving products has been on our U.S. products. When you look at the traffic story in the U.S. it is even more impressive.

This Chart shows just the U.S. network for Yahoo! for desktop and mobile. It’s a true testimony to our product investments, beginning to pay off. And just four months into the Tumblr acquisition, the team is also seeing steady growth especially on mobile, outpacing even their own traffic projections set earlier in the year.

For core Yahoo!, the page view milestones were another only accomplishment this quarter. In September, we announced that we have more than 800 million monthly unique users. This represents a 20% increase in monthly unique users over the past 15 months. It means that we have attracted more than 100 million new monthly users to Yahoo! And while with the page views, we talk about surpassing 2011 or 2012, Yahoo! has never before in its history had 800 million monthly unique users on its core network.

Today, we have a beautiful strategy around our mobile product experiences. Last quarter, we recorded a 340 million mobile user number. And today, I’m pleased to announce that we now see more than 390 million monthly mobile users. This represents nearly 15% growth in the past quarter. We are particularly proud of these milestones. Yahoo! is now reaching more users than ever before.

While, we are in the midst of our products brand, we remain focused on being the absolute best place to work. Being the absolute best place to work with all those people, attracting and retaining the world’s best talent here at Yahoo! and we are seeing record volumes of interest enter into Yahoo!

In Q3, we received more than 17,000 resumes in a single week. This is up from 12,000 in August, 10,000 in May and 2,000 in January, a more than 8x increase year-to-date.

Looking at our revenue leadership, Henrique de Castro and I have bought in several key executives around our sales leadership teams. In Q3, Ned Brody joined as our Senior Vice President and Head-Americas and Dawn Airey joined as our Senior Vice President and Head of Europe, the Middle East and Africa.

Both Ned and Dawn bring extensive leadership accomplishments, as well as fresh thinking to our extraordinary global sales team. They both joined Rose Tsou, a 14-year Yahoo! and our Senior Vice President, Head of Asia. She continues to lead our strong team in Asia where Yahoo! is a leader in several key markets.

In terms of total engineering talent, we’ve hired just under a 1,000 engineers year-to-date. Since I joined the company last year, we’ve been committed to building the world’s best engineering team. Our progress has been both exciting and validating for Yahoo!

To summaries of our building of our product and engineering teams, we made eight critical acquisitions in Q3, including Bignoggins, Qwiki, Admovate, Ztelic, Lexity, Rockmelt, IQ Engines and Xobni. But these acquisitions were primarily both bringing an entrepreneurial and technical skill in house.

They also allowed us to bring valuable technology to report our current product offering. For example, we integrated Bignoggins technology into our widely successful Yahoo! Fantasy App just 24 days after the acquisition.

Entrepreneurial skill permeates our campus as a result of these acquisitions and it also brought new innovative thinking to our executive team as well. In Q3, Jeff Bonforte, the CEO of Xobni became our Senior Vice President of Communications product, leading the roadmap behind Yahoo! Mail, Groups and Messenger.

Jeff is also a great example of a Boomerang, a former Yahoo! who returned to the company because he was so inspired by the new vision and opportunity. He has bought tremendous energy to the executive staff and we are thrilled to have him back.

Also in Q3, Mike Kerns became our Senior Vice President of Homepages and Verticals. Someone has asked Mike embodies true entrepreneurial spirit. Having joined Yahoo as part of the 2010 acquisition of Citizen’s Sports. Mike has played a key leadership role in many of our recent product launches including our homepage redesign and many of the new designs across Yahoo using sports. Finally, we have also brought aboard former New York Times journalist and editor Megan Liberman, as editor-in-chief for Yahoo News. Megan’s hire reinforces our commitment to delivering the best hospital news and content experience to our users, and we will continue to invest in our talent here. With that, thank you. After Ken caritas his remarks on our financial performance, I’ll talk about some of the future opportunities.

Ken Goldman - Chief Financial Officer

Thank you, Marissa. Good afternoon everyone. Thank you for joining us for our quarterly earnings presentation. I am especially excited speaking to you today, that I have now been at Yahoo for nearly a year and as I look back, I’m very encouraged by the progress we have made in the business. We in the company have put an enormous amount of energy and effort to reposition for growth, to instill financial discipline and accountability throughout our organization.

We have made required investment in our teams, products and properties to position Yahoo for sustainable long-term growth. The main positive takeaways from last year are, we have refreshed nearly all of our existing product lines, built an impressive mobile team almost from scratch while demonstrating real mobile capabilities and when measured across both desktop and mobile, reversed an extended period of declining user engagement trends. Additionally, a significantly engaged improvements regarding our financials include direct investment just limited dramatically lowered our capital spending run rate and aggressive prioritization of operating costs to enable new investments for growth while limiting the impact of long-term margins.

Before I get into reporting detail of 3Q, let me elaborate on the progress we made in the quarter against our financial priorities.

First, revenue growth. We are pleased to be making progress in our user engagement and believe this will be a key driver of revenue growth in the future. Improvements we are making to product of being well received by our users and we are just getting started.

Revenue ex-TAC for the quarter is roughly flat year over year. Growth in search and other revenue ex-TAC were once again highlights. Ex-TAC revenue from our display business was lower. However, the trajectory appears to be heading in the right direction, as we continue to refresh our properties in advertising products.

Second, on costs. We continue to be committed to controlling costs even as we make significant investment in our strategic priorities. The capital spending was once again down significantly year-over-year to $78 million a period and $229 million on a year-to-date basis. The nine month spend is down 36% from the same period in 2012. Operating expenses were higher than 3Q as we forecasted in a prior call. In addition to some meaningful increases of spending on building the right teams and developing a mobile business, the increase includes a full impact of incorporating costs associated with Tumblr and other acquisitions.

Third, capital efficiency and commitment to shareholders. We continue to have a very strong balance with nearly $3.2 billion of cash and securities. In this quarter, we returned an additional $1.7 billion to shareholders through share buybacks. This brings our total buyback to January 2012 to nearly $5.3 billion with which we repurchased just nearly 250 million shares at an average price of $21.25. We generated free-cash flow up $449 million in the third quarter and $530 million year-to-date and have ample liquidity to fund our investment needs.

Moving now, discussion of the quarter. First, let me walk through the Q3 financial results then update you on our guidance for Q4. And as a reminder, my discussion will focus on our core non-GAAP results. These numbers exclude stock based compensation expense of $81 million, a small restructuring benefit of $1 million and the related tax impacts on there. Please see our earnings slides on our investor relations website for a complete reconciliation between our GAAP and non-GAAP results.

So now, starting with the financial highlights for Q3, as you see at Slide 5. I will provide a high level highlight business overview, Q3 report revenue ex-TAC was $1.081 billion at the midpoint of our guidance range and roughly flat with the prior year’s levels. As has been a trend for a few quarters, sports and other revenue showed growth but this was offset by the decline in display.

Revenue growth was negatively impacted by reduced Microsoft guarantee payments, the Korea closure and ForEx change in Asia Pacific. This was offset to some degree by the typical amortization results.

Adjusted EBITDA was $331 million in the third quarter coming at the lower end of our guidance range. We are making meaningful investments in our business to drive revenue in the future while continue to be focused on a disciplined approach to minimize margin impact. We do expect to see operating leverage drive earnings growth in margin expansion in the future as these investments begin to share returns.

Non-GAAP operating income was $173 million at the midpoint of guidance resulting in non-GAAP operating margins of 16% of revenue -- that’s 16% of ex-TAC revenue.

Non-GAAP net income was $358 million. Strong performance from equity performance once again provided boost in net income. Our non-GAAP earnings per share was $0.34 and our forward diluted share count for the period is down 153 million shares or 13% from the prior year quarter. Finally, we continue to generate significant free cash flow of $249 million.

Now, let’s walk through the financial results of Q3 in more detail. Starting with Search, Search revenue ex-TAC grew 6%, excluding impact of shutting down our operations in Korea. Excluding Korea, our lower guarantee payment versus prior year from Microsoft and a negative impact of product change, Search revenue ex-TAC grew approximately 16% year-over-year.

We continue to see improvements in monetization in a number of clicks, which have been the primary drivers of the performance. Please note we have refined our Search metrics calculation to better mirror what is happening inside the Search auction.

Looking close to Search metric excluding Korea, paid clicks were again strong, growing 21% on a year-over-year basis. And price-per-click fell 4%. These metrics result in Search click revenue growth of 16% year-over-year in the third quarter.

This calculation is a new metric, we have added on Slide 9. It is based on growth Search revenue. It excludes China, Japan, Korea in a Microsoft guarantee. This is more represented with the improvements in the monetization we’re seeing on a product. As we adjust for items that are not indicative of our sustaining Search business.

Paid click growth was driven by a number of factors. First, we continue to see benefits from improved ad formats. Additionally, a redesign of the Search user experience, launched in early June, helped drive clicks further Price per click was down due to a continued shift in regional mix as international clicks, where PPCs are lower, grew faster than domestic.

Overall, we are clearly attracting more advertisers and budget to the combined Search marketplace. Our ad tracks are improving. User experience is simply better and we are developing more efficient pricing strategies, all of which are meaningfully driving click volume in revenue.

Now, looking regionally, for the fourth consecutive quarter, the Americas region perform well with Search revenue ex-TAC up 8%. In EMEA, Search revenue ex-TAC was very strong, up 16% year-over-year as we saw strong growth in Yahoo! Properties particularly in the U.K.

And turning to Asia Pacific, excluding the impact of Korea once again, Search revenue ex-TAC felt 7% due primarily to the FX impact.

Turning now to display, revenue ex-TAC was $421 million in Q3. While revenue was down 7% versus prior year, we are encouraged that the rate of decline has slowed since prior two quarters.

And the efforts to stabilize display business are beginning to show results. We were once again challenged as a result of some mix shift from premium to non-guaranteed. However, the decline in PPA was more muted than in Q2 and the number of ads sold has turned modestly into positive territory.

Breaking down the components, price per ad fell 7% as we sold a lower percentage of ads on a premium basis. Pricing and non-guarantee display also felt modest pressure in the period. However, premium ad pricing was up in the quarter.

Now, looking at volume, the number of ads sold grew 1% in 3Q. As our engagement continues to grow, we expect this metric to show an improving trend. Other revenue ex-TAC grew 4% year-over-year to $233 million. Growth was driven primarily by the amortization of fee revenue from the Alibaba TIPLA payment and also higher Alibaba royalty fees.

This was slightly offset by declines from our leads and listing driven businesses. Q3, I would add, would be the final quarter of a year-over-year benefit from the TIPLA. For revenue detail by region, please refer to Slide 10.

In the Americas’ region, total revenue ex-TAC was up $12 million on a year-over-year basis. In EMEA ex-TAC was flat with the prior year and finally turning to APAC, excluding the impact of revenue ex-TAC was down 3% year-over-year. Foreign exchange negatively impacted revenue by approximately $12 million in 3Q on a year over year basis and that’s a comparable FX rate. Revenue ex-TAC excluding Korea would’ve grown 3%.

Turning now to expenses. Beginning with traffic acquisition costs, TAC was down $54 million to $58 million for the quarter. The bulk of this decline is encountered for by Korea. Non-GAAP total operating expenses were $900 million in the quarter, an increase of $57 million or 7% versus Q3 2012. This increase is primarily reflected in product development although sales and marketing GAA were also up.

And as a reminder, numbers for Q3 now include the addition of process with Tumblr and other acquisitions for full quarter. And as we have discussed previously, we are pushing investments in key areas, such as mobile and sales to drive future revenue growth in the business. We ended the quarter at approximately 12,300 employees, which is up 2% from Q3 2012 and up 7% for second quarter. The increase from 2Q includes approximately 100 employees from acquisitions, 170 new college grads and 235 as we can divert contractors to full-time employees. This reflects the aggressive recruiting efforts particularly with engineering product and reduced employee attrition.

In terms of profitability, adjust the EBITDA of $231 million and equal a 31% margin of revenue ex-TAC. Non-GAAP operating income was $173 million, was 15% margin on revenue ex-TAC.

Thirdly, after the income statement, there are a few items I would like to call out for modeling purposes. First, other income was $5 million in the quarter, down $18 million from Q2, in prior quarter this included interest in the Alibaba preferred shares. As a reminder, these shares were redeemed by Alibaba Group in the second quarter. So, we will no longer recognize any interest income on this. A non-GAAP tax rate was 48% in the quarter. And the earnings and equity interest grew 33% year-over-year to $233 million. Alibaba once again showed impressive growth in its calendar Q2 results. Contributions from Yahoo Japan also grew year-over-year.

Now let me turn quickly to a few balance sheet and cash flow items to call out. Summary range on very strong footing from a balance sheet perspective. Even after accounting for aggressive share repurchase we have conducted. As mentioned earlier cash and marketable securities were just over $3.2 billion at the end of the quarter. And walking through the change in cash of the quarter, we ended Q2 with $4.8 billion. We repurchased $59 million shares of stock in the quarter, at an average price of $28.53 for nearly $1.7 billion. We spent $163 million on acquisitions net of cash and we had positive free-cash flow of $249 million.

Finally, we spent a $1.2 billion notional amount of a net investment hedge contracts on our Yahoo Japan investment in late December, which will result in a $158 million cash benefit early in Q4. Before I turn now to guidance for Q4, I want to mention that we announced an amendment to our share repurchase with Alibaba earlier today, which reduces the maximum number of shares that we are required to sell to qualified IPO to 208 million shares from 261.5 million. We are extremely happy that we can maintain a large position of the company as they continue to grow their business. We’ve built a very strong partnership with Alibaba and we believe strongly in the long term vision of the company and its growth prospects.

At this time, I would now want to comment further on this transaction. Now turning to our business outlook and guidance. We remain ever more confident in our business over the long-term and we recognize the importance of that translating to revenue growth. We have reduced our guidance expectation (inaudible) of our performance to date this year, our expectations for 4Q seasonality and continuation of our investment priority. While we are not giving guidance beyond this quarter, we expect overall a leveling of our expense growth. As a Marissa and I have previously mentioned, we remain committed to achieving revenue growth.

I will now provide guidance for our fourth quarter and by definition, for the full year. For the fourth quarter, we expect revenue ex-TAC to be in the range of $1.18 billion to $1.22 billion, adjusted EBITDA to be between $400 million and $420 million, and non-GAAP operating income to be between $240 million and $260 million.

Our full year ranges are, revenue ex-TAC to be in the range of $4.4 billion to $4.45 billion, adjusted EBITDA to be between $1.48 billion and $1.5 billion and non-GAAP operating income to be between $840 million to $860 million.

So thank you again for your time today. Now, I’ll turn it back to Marissa.

Marissa Mayer

Thanks Ken. We made a tremendous amount of progress in our series of sprints. Our focus on people and products has led to promising traffic growth. While our revenue has remained relatively stable year-over-year, I’m encouraged by the early trends we’re seeing. We’ve got work to do on delivering revenue growth, and translating the increased engagement to revenue. We are focusing Q4 and next year.

Yahoo! is part of the daily habits of more than 800 million users across the globe. And our goal is to become a daily habit for our advertisers with the brand platform that is equally inspiring.

Today, Yahoo! is the only place where advertisers can execute Display, Search, mobile, video and native campaigns, both through direct and programmatic means. This gives us a strong position in the market and we are investing so we can bring even more value to our clients and partners.

Let’s take a closer look at where we see the opportunity across mobile, Display, video and Search. Yahoo!’s future is mobile and we’re committed to delivering great mobile ad formats. The consumer internet is going through a massive platform shift to mobile right now and it’s really only just beginning.

With 10s of millions of new devices in the hands of consumers every month, there are more screens in our lives and more users coming online every day. By some estimates, there will be more than 2 billion mobile devices connecting to the Internet this year alone. And this number is expected to nearly double by 2017.

With every great shift in computing over the past 20 years, many new opportunities have presented themselves. And what we are seeing today is no different. We believe there are some advertisements that will monetize better on mobile than on desktop. For example, we believe very strongly that mobile ads designed for the mobile experience may outperform what we’ve seen in traditional display.

Some early experiments have indicated that, while simply porting traditional display to mobile reduces revenue per page view, showing native ads on mobile can actually increase revenue per page view. There is a big opportunity ahead to monetize mobile.

When we have the right ads in the right place, they are accretive to the user experience. It makes our users tune-in and not tune-out. As many of our advertisers know, we made recent investments to make our display offerings more competitive and we’ve just begun to bring those to market.

Some of our most promising are those that are native forms of advertising like our new Yahoo! Stream Ads was just launched in May of this year. While stream ads are not yet significant contributors to our overall revenue, users and advertisers like this new format. And there are significant potential here, especially in mobile. And the market has been responding with repeat campaigns.

Turning to video, the launch of Yahoo! Screen was a strong step forward in video. But we still have a lot of work to do as we create more value for our users and our advertisers. As I have talked during the past, we’ve been constrained on video inventory. The new Yahoo! Screen experience is one of our early steps forward in video to gain users and views. Over the coming quarters, Yahoo! Screen will remain area of investment as we focus on bringing the best video content to our users.

Finally, I would like to reiterate a point that Ken made around our progress on Search. This is our seventh consecutive quarter of year-over-year Search revenue growth, ex-TAC. I have been pleased with the optimizations our team have executed. And this is absolutely an area of investment for Yahoo! going forward.

We are excited and encouraged by the health of our core Search click revenue, which is up 12%, 14% and 16% year-over-year in the first three quarters of the year respectively. We are going to continue to experiment with opportunities to drive additional revenue optimization here as well as to increase Search volume overall.

Today, I am more encouraged than ever in Yahoo!’s potential for growth in both the near and the long term. It will take some time for our increased engagement to translate into revenue but I am confident we are on the right track.

Moving forward, we will continue to invest in our core products for both users and advertisers and we will continue to spend towards the growth and success but we will continue to sprint towards the growth and success that our teams are passionately working towards. We are in this to win and to win big.

With that I want to thank our teams at Yahoo! Finance and Yahoo! Studios for once again helping us leverage our own products to deliver today’s livestream.

Thank you, and we are happy to take your questions.

Question-and-Answer Session

Lauren Lyster

(Operator Instructions) Our first question now comes from Eric Sheridan of UBS.

Eric Sheridan - UBS

One question really around native advertising. Wanted to understand better Marissa, the conversation you guys are having with advertisers about the way in which native advertisers booked and adopted some of the optimist around it and also some of the hurdles to native advertising, the bigger part of the advertising generalized Yahoo! and probably across the industry?.

Marissa Mayer

Well, the way we define native advertising is advertisements that match the content. They feel like they are part of the experience, they add to the overall experience. Search advertisement has been like this from the very beginning. And what we’re seeing is when you have native advertisements you can get much better performance. The challenges here is that these are our new formats so, we’ve been working with advertisers haven’t adopt these new formats like Yahoo! Stream ads, and over time we think that there is an opportunity to do more here. Ultimately we think that advertisers will have an easier time placing campaigns because, for example, they can give us assets that overall match the content, match the messages they want to bring to market. But this is a learning stage for both of us both Yahoo! and the advertiser.

Lauren Lyster

Thank you. And our next question comes from Ken Sena of Evercore. Please proceed.

Ken Sena - Evercore

First to your comment on 2004 leveling in expense growth are there any caveats to that comments to the assumptions that revenue declines reverse? And second was there any consideration required in exchange for the renegotiation of your sales terms with Alibaba this year?

Ken Goldman

Yes I am not going to talk anything further relative to Alibaba than I already said. Relative to, that was funny I always hesitate to give too much about ‘14 we are still in ‘13. But I just wanted to point out that we do expect, we knew this year would be a year that we had to invest, it was really important. We look at, we thought back where we started the year in mobile and the number of people and investment we had make there, some of the other products and properties you saw bring out. So we knew we had to ramp up expenses this year but we do intend this relative to have those expenses level up.

So, no, there is no suggestion at all indirect side relative to what the revenue might be for ‘14. So, it is not really as much that comment as much as the fact that we knew we had a ramp up this year and investments and then we felt we had to a do that and that we felt over time that would actually level up.

Lauren Lyster

Our next question comes from Twitter asking is there any update as to when Tumblr will become an accretive

Marissa Mayer

We said when we first acquired Tumblr that we would have it be accretive to EBITDA probably in 2014. Right now, their focus is really on gaining users in particular mobile users and they overall have been outperforming their projections.

Ken Goldman

We are quite happy. I mean, the metrics there have been quite good. We worked with them, David Karp and team in terms of how they think about revenue and monetization and make sure they do it right. So we’re working very well together on that and again we remain every bit as confident about that merger acquisition today as when we did it back in June.

Lauren Lyster

Next we have Heath Terry of Goldman Sachs.

Heath Terry - Goldman Sachs

Marissa, you’ve talked about the crossover and usage that’s happened in Q2 and Q3. Is there expectation for when you see that kind of crossover in revenue and then if you or Ken could kind of quantify for us as best as possible of the 7% decline in display pricing how much of that you would attribute to mix shift versus the price compression within the individual verticals?

Marissa Mayer

Sure. I think that, as I said, I am really excited about the cost we have experienced around passing even our 2011 traffic numbers. Our belief is that when we attract more pages, we attract more users this will ultimately attract more advertisers. We are starting to feel that attraction in the market already.

That said, our revenue has been reasonably stable. I will anticipate that sometime within the next year we will begin to grow in line with the -- with the traffic, the advertising revenue will start to follow that traffic trend.

It’s difficult to say exactly when and I’ve always said that it will take a several years for us to get the company growing the way that I’d like to see it growing but I do believe revenue growth will begin to follow traffic.

Ken Goldman

I think on the point I’d just add, I think, there are number of trends that are going to go on, one is the overall desktop, I think we will be adding a lot of growth in this company is going to come from mobile, is going to come from video. We are going to put more emphasis on international as we go forward.

So, we are going to have a number of factors that will play into the pricing. But I think the key is, as you said or asked the question is to get the turnover and Display revenue growth, it will come both from ad sold and we are hopeful overtime, as well as price per ad.

Lauren Lyster

Thank you for the question. Next we have Mark May of Citi. Go ahead with your question.

Mark May - Citi

Thank you. Search volume growth has been impressive. I am wondering if you could help us think about where the volume growth is coming from an owned and operated versus an affiliate standpoint? And then some of the other internet media companies are beginning to make some real strides in terms of closing the gap between mobile monetization and desktop? I wonder if you could talk to us about where you are in that process and would you see being the real catalyst to start to close that monetization gap?

Marissa Mayer

Sure. In terms of the Search volume growth, we do see a lot of growth in our affiliate network. We also see some growth in our mobile Search, which is up nicely year-over-year. It is worth noting that RTAC on mobile is somewhat higher than it is on desktop and in terms of the, I am sorry, can you repeat the second part of the question?

Mark May - Citi

Some of the your peers and are starting to see, I guess some quick strides in closing the gap between mobile and desktop monetization. I just wonder if you could fill us on where you are in that process and would you see being some of the key ad, mobile ad products that are really healthy over the next year or two to start to close that gap yourselves?

Marissa Mayer

Sure. We done some early test with native advertising on mobile, Yahoo! Stream ad, we’ve also done some text ads, something like Yahoo! Answers. And with those early test indicator is really promising, because it’s often been thought if you take traditional display squeeze it down on to the smaller screen, you ultimately get a worst revenue performance release on a per page view basis.

What these native tests have showed us is that we can actually not only make more money that we would make with traditional Display on mobile we could actually, make potentially even more money than we use to make on upon new page view basis on desktop. It’s not a guarantee but the early experiments had been particularly promising and you have seen results varying the industry. So we are working to you ultimately look at what the format should be and how best suite both the phone screen, as well as the tablet screen, because tablet also is a very rich opportunity.

Ken Goldman

I would add to that that we have a range, a concluded certain agreements with some of our partners which actually the pricing is actually higher on mobile than it is on desktop. So, yes, you are right. We think overtime there are opportunities that we will see actually even improve pricing in mobile versus desktop.

Lauren Lyster

Great. Thank you. Next question comes from Ron Josey of JMP Securities. Go ahead.

Ron Josey - JMP Securities

Great. Thanks for taking my questions. I want to follow up just on the Display question particularly and Marissa you can talk a little bit about, how Yahoo! is doing just in the march over to programmatic? I think we said, I think, Ken, maybe you had suggested that the pricing in the mix shift were little bit impacted. So just the progress you made in programmatic over the past quarter would be great? Thank you.

Marissa Mayer

Sure. We have been doing a lot around programmatic advertising both optimizing our systems, as well as meeting the needs of our advertisers. There is a real movement inside of Display to programmatic. And so we have seen some pricing pressure, we have been able to ultimately be able to stabilize revenue by overall improving the yield, through this programmatic means we can do a much better job overall on our self-through rate and ultimately achieving the best possible price given the inventory.

And we think that programmatic especially if you pair it with native and things like stream ads, just as programmatic was paired in Search advertisements it can ultimately be in area of investment and the area of real benefit.

Lauren Lyster

And the next one comes via email from Kenneth Brookes asking what is your vision for Yahoo! 12 months in the future? Go ahead whoever wants to take a stab at that.

Marissa Mayer

So I think that things are very exciting. We are really happy overall with our products and how they’re progressing on mobile. 12 months from now is all about mobile. Are we part of people’s everyday lives? Is our 390 million users a month number significantly higher, is it matching the growth of the overall mobile market? There is a huge number of opportunities there. And I remain -- a lot of us always have been at our core. I am excited about search, of our mail and communications as well as our media products. And so we’ll continue to advance in all of those fronts and hopefully bring some new twist in terms of content and content innovation.

Lauren Lyster

Next we have Mark Mahaney of RBC Capital.

Mark Mahaney - RBC Capital

I just want to ask about the sustainability of the search revenue that you’re reporting especially on this kind of gross basis. The trends look really positive. If you look at the IAB data that actually shows the deceleration pretty noticeable in desktop search year-to-date and there have been moves by Google to reduce, ongoing moves to reduce low quality arbitrage search advertisers. So I guess can you just address the question of these kind of growth rates, they look impressive, are they sustainable?

Marissa Mayer

Sure. I think that overall when you look at the rate of click growth, we actually have room to run, there’s more searches being done everyday. Search is still a growing market globally especially when you put mobile into play. So, on the click volume, I feel like there really is still room to move.

On the pricing, there has been industry pressure across-the-board on price per click advertising. Part of this is because of the increased volume and part of this has to do with management of affiliate networks, the overall quality of traffic. And so, we have been working really hard to make sure that our affiliate network is incredibly high quality that’s come at the expenses some volume but overall we think it’s better for users. And so we’re very excited about the future.

Lauren Lyster

And moving on the next question comes from Carlos Kirjner of Sanford Bernstein.

Carlos Kirjner - Sanford Bernstein

Ken, you now have a bit more than $3 billion in cash and securities on the balance sheet, is there where you think the company should be operating a year or two from now? In other words, does this give you enough flexibility to run the business and make any acquisitions you may want to make? Secondly, Marissa, you seem to have now more employees at Yahoo! than you had a year ago. If you like to assume that you think you are in the ballpark of the right number of employees and the business is organized in the way it should be to run going forward?

Ken Goldman

Hi, Carlos. Thank you for the question. We have said I think quite a bit that we like having $3 billion in cash roughly as basically a sentiment to show the balance or the strength of the company, if you will. So that’s a number we like. Yes, we have as I noted before remained cash flow positive, we have bought a lot of our shares back. We do expect at some point that Alibaba will have the IPO and that will provide more cash for us.

We haven’t made any, just in case so it’s a part of your question, we haven’t made any decision at this time as to how we might utilize those funds but at this point we do believe we certainly have adequate funds to run the business, we do expect, fully expect to be cash positive as we go forward as we run this company. And we do believe we have flexibility as well to continue to buy -- acquire the types of companies that we have been acquiring this past year.

Marissa Mayer

And on the employee’s question, we have just over 12,000 employees, maybe last time when I started at this time last year. Overall, my goal has been to find the best possible people to work at Yahoo! If we find a great person, we hire them. We size the investments, and our guidance actually reflects the size of those investments as our guidance around the leveling of expenses. So, I think we are getting to around the right place. That said, I do want to make sure that we are making the investments and we are retaining the freedom of flexibility to really respond to all of the great talent that is coming to Yahoo! and wants to work here.

Ken Goldman

No. I think if you think about this past year, we have hired a number of folks at all levels of the company. I think the most I have talked about before, I mean, the fact that we have so many folks, 8x the number of resumes, unsolicited resumes are coming into the company just shows how in demand we now have for employees to come back. And just the excitement that people see at the campus today. So that’s just a testament to progress we have made. I think we have done a lot of work to acquire some key teams, some of that’s just normal organic hiring. Some of that has been through acquiring companies and that goes again, some very senior folks all the way to a number, number of engineers.

Carlos Kirjner - Sanford Bernstein

Great. Thank you.

Lauren Lyster

Great. Thank you. Next question comes from Jordan Rohan of Stifel Nicolaus. Go ahead with your question.

Jordan Rohan - Stifel Nicolaus

Hi. Can you please quantify the mobile revenue percentage today and just how fast that’s growing compared to the quarter-over-quarter last year and then I have a follow-up?

Ken Goldman

Yes. We haven’t -- just to comment on that question, we haven’t actually exclusively laid the number out as to mobile revenue. We do expect -- I would expect us to, as ‘14 comes on to be more quantitative there. I would say it is growing quite rapidly. So it is one of the growth drivers of the company. We do expect to grow faster as we go forward.

If I go back and think about it, this year was much more, getting the teams in place, get the new products in place. You see the applications coming out. So we’ve done a lot of that and now we are sort of turning our eyes as well to focus on how to best monetize app. But also at the same time make sure the user experience stays quite attractive. So we are not quite ready to quantify that but we do expect that we will be in some near future.

Jordan Rohan - Stifel Nicolaus

Thank you. And then, do you have any updates on any potential for tax efficiency on the Alibaba stake?

Ken Goldman

I was waiting for that question. Geez, I were. It was into it and I hadn’t got that question. No, as I say -- by the way we are working with a lot of -- as I said before, we are working with a lot of outside advisors. We also get -- fortunately get unsolicited help too that comes via different -- from folks, email whatever. So a lot of input there, we have some ideas. We are working on both as well -- both at the time of the IPO went down the road, but there is nothing more I can really add at this point in time.

Lauren Lyster

All right. Thanks for the question. (Operator Instructions) And our next one comes from Twitter. [Bennett Solton] asks, in regards to video content, what direction is Yahoo! taking to deliver its own premium content specifically for Yahoo! Finance. Marissa, Ken, whoever would like to take a stab at that?

Marissa Mayer

We’re very committed to our original programming. We have some tremendous shows on Yahoo! and we also have a lot of great short-form programming that happens on things like Yahoo! Finance. We’re committed to keeping the shows that have been very successful to-date in place. And just broadening the question slightly overall to video more broadly, we’ve had a lot of success. When we look at things like Burning Love, which is our series that ultimately just received an Emmy nomination in September, we’re really excited about it.

In terms of the longer tail for video content, we think there’s an opportunity not only in the original programming, and our professional content and partner content, but also to reach into the long tail and Flickr has recently added the ability to upload 3-minute video clips. So this we think will be a way for our users ultimately to participate and upload video clips.

Lauren Lyster

Thanks. Moving on, our next question comes from Douglas Anmuth of J.P. Morgan. Go ahead with your question.

Douglas Anmuth - J.P. Morgan

Great. Thanks for taking my question. Just hoping you could talk a little bit more about the 4Q guide and just what you’re contemplating there that’s bringing it down a little bit in the quarter. And then, perhaps just as part of that, you talked a lot about native advertising and we’re seeing, obviously, good effects in mobile. How much competition is that creating for your display business right now? Thanks.

Ken Goldman

Yes. Let me -- this is Ken. Let me take the first part relative to 4Q. I mean, we thought long and hard of it we are. There’s a lot of things that go into developing guidance, both looking at our -- where we are seeing things internally, the momentum of the business, we looked at how we came out of Q3. We look at where our plans are and thinking as to investing for ‘14 as well.

So we came up with a series of numbers, if you will, that we felt comfortable with frankly. So that’s how we create the guidance. Frankly, as many of you know, historically, I do like to see numbers that we beat and raise over time. So we are hoping that over time, we do get into that and so we’ll see.

But I think it’s obviously one quarter. We no longer have any other quarters for this current year to guide, and we, frankly, we -- every bit is focused on growing the topline because that’s the way, as Marissa said before, we want to win, we want to win big, the way we do that is through topline growth.

Marissa Mayer

And regarding the mobile advertising question, when you see our traffic growth, what’s really happening there is mobile is growing and it’s growing at a huge rate. So we have a lot of mobile users already on our network and from my viewpoint that’s under monetized.

And so when we look at mobile monetization, doesn’t really feel like a competition even against desktop within our business or across peer companies, there’s just so much of an opportunity to put great advertisements and great content in front of users given all that mobile usage.

So for us it really feels a lot more like an opportunity than a competition. That said, we think that we’re putting in place and in the market very attractive products with a great opportunity to reach users as part of their daily habits.

Lauren Lyster

Thanks for the question. Moving on to the next one it comes from Justin Post of Merrill Lynch. Go ahead with your question.

Justin Post - Merrill Lynch

Thank you. First could you talk a little bit about the queries that you’re seeing relative to your paid clicks? And then secondly, maybe help us a little bit with the acquisition impact on both revenues and also EBITDA in the quarter? Thank you.

Marissa Mayer

On queries versus paid clicks, we basically offer the standard industry metrics of paid clicks and PPC, so we haven’t broken out queries. Overall, we feel that our Search experience is good. We are seeing good traction there, particularly in our affiliate network. We have overall been improving the quality of the traffic. We have not broken out queries to date.

Ken Goldman

Yes. So let me, we haven’t quantified specifically the impact of, I think, you are thinking of Tumblr and maybe some of the other acquisitions. I would say in terms of operating expense and not talking about intangibles amortization.

I would just say something less than half of the increase Q2 to Q3 was related to the acquisitions we made, Tumblr being the largest of course and then we had some additional amortization.

So, if you look at the D&A line, the interesting part of that is depreciation is going down, that’s going down because we are spending quite a bit less in terms of capital expenditures there we are depreciating. Yet almost offsetting that was the increase in intangible amortization primarily again on Tumblr.

Lauren Lyster

And moving on the next question comes from Ben Schachter of Macquarie. You can go ahead with your question.

Ben Schachter - Macquarie

Just want to go at that query question one more time. Can you at least tell us if queries themselves are actually positive or negative? Then also we get some fairly negative data points on Search’s share from third-party sources like comScore. Based on your own internal estimates, what do you think your Search share is separately on mobile and desktop and what do you think that can be a year from now? Thanks.

Marissa Mayer

I want to be respectful of the metrics that we have released in the past. So I am not going to breakout queries. I will say what we have shared in the past though is inside of the Search -- Search alliance we have basically been trading share with Microsoft. So we are breaking this on a quarter-by-quarter basis. It is true that over the past several years, our Search share has declined.

Overall it is a growing market and we think there’s a big opportunity on mobile Search. We also are continuing to invest in and build core parts our desktop Search experience, including rolling out new enhanced browsers, new toolbars et cetera. So overall, I feel solid about our click volume and I think there’s an opportunity inside of the queries, but I’d really like to decline to break them out further.

Ken Goldman

The only thing I might add if I could is clearly what’s driving our mobile business today is Search. We do think that will drive our mobile business quite dramatically in ‘14, but we’re also going to add display to that as well. But Search in mobile is a very large opportunity and that is one of the things, we will be counting on as we really have mobile first kind of company here as we think about ‘14 -- 2014.

Marissa Mayer

I should add that we’re endeavoring to gain share. We’ve worked the 100 experiments we did over the course of the quarter. We’re all along providing new functionality, differentiating functionality. And so we’ve been, for example, introducing into our Search results, what we call direct display units, that actually bring the answer and the content right to the user upfront.

And so, we’re excited about these because they differentiated us broadly in the Search market. And we will continue to innovate and Search and differentiate ourselves in Search.

Lauren Lyster

And moving on our next question, came in via e-mail asking there have been a number of design and content changes to key areas of Yahoo! in recent months. This includes Yahoo! Sports, Weather and more. What is the data showing about the impact of these updates, Marissa and Ken?

Marissa Mayer

I think this is one of the best stories we’ve had over the quarter, which is that we’ve been very thoughtful about our designs. We’ve tested them. We’ve really worked to understand them. We’ve worked to understand what our users want and how to provide the best possible experience. And we’ve really refreshed the majority of the core product line.

There’s a few more things to do in Q4 and then in 2014, by and large the refreshes we’ve laid out that we would do last year on our earnings call in Q3, we’ve actually achieved by this point in time. And all of them have been accomplished with gains, gains and time spent, gains in number of users, gains in page views, both on the PC and on the mobile platform. So we’re really pleased overall with how these refreshes have resulted in increased user engagement, because that’s what they were designed to do.

Ken Goldman

Yes. I think you’ll see much more of that frankly, as we get into ‘14, because many of these products have just been refreshed very recently or over the last few months. So they are still relatively new for our users to see and to work with.

Lauren Lyster

Great. And our last question comes from Brian Nowak of Susquehanna. You can go ahead with your questions.

Brian Nowak - Susquehanna

Thanks. Great. On premium display, can you talk at all to any specific verticals you’re seeing, strengths or weakness on the advertising side and how are overall trends and premium sell through in 3Q versus 2Q? Thanks.

Marissa Mayer

The largest of our premium display opportunities is clearly our homepage. Those are our biggest ticket items and we’ve actually been doing a tremendous job this year with our sell through rate on the homepage as well as with our pricing. So we’ve been lining up great advertisers. We have new advertisers who haven’t advertised on the Yahoo! homepage before coming to place advertisements. And overall, we’ve rolled out a series of new formats, including our billboard unit, which allows for a 15 second animation and is the largest unit that we make available on the homepage and those have been selling tremendously well.

So overall in premium display, we have seen a lot of opportunity. There have been some challenges, particularly within our audience buying. And we’ve been working on systems and efforts to ultimately improve our audience sell-through rate, the same way we’ve done for our homepage sell-through rate.

Ken Goldman

If I could just add to that, I think the -- I think we’re adding lots of it. We’ve had a number of meetings with ad agencies. They really like when we can go directly to them and they see what we’re doing. They really like what they hear. So we just need to get our story out more.

The other thing -- the other initiative is really to increase the number of advertisers. I mean, we have a set number today but it’s not as many as it could and should be. And so we’re trying to really expand the number of advertisers we have worked with us. And so that will be another -- one of our focus items as we think through the end of this year and into 2014.

Lauren Lyster

Okay. Thank you for all of your questions. That concludes the Q&A portion of the call. Before we go though, I’ll hand it back over to Marissa for her final remarks.

Marissa Mayer

In closing, our current sprint is deeply focused on product quality and growing traffic. And we’ve demonstrated great momentum on both this quarter. We’ve had 15 major product launches and major milestones around user growth to match. Our network traffic has grown steadily, surpassing even our 2011 numbers.

And we have 800 million monthly users on the core Yahoo! network, which is a first, with 390 million of those users, almost half accessing Yahoo! through mobile devices. We’re excited for Q4. And we’ll see you again in January with our year-end results. Thank you.

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