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Yahoo! Inc. (NASDAQ:YHOO)

JMP Securities' Technology Research Conference Call

March 3, 2014 14:30 ET

Executives

Ken Goldman - Chief Financial Officer

Analysts

Ron Josey - JMP Securities

Ron Josey - JMP Securities

Great. So I think we will get started here. I am Ron Josey, the internet analyst here at JMP and I am thrilled to have Ken Goldman with us from Yahoo!. Ken is the CFO of Yahoo!, joined about a year and a half ago, I believe. And a lot has happened this past year at Yahoo! as everybody knows. So hopefully we will dig into the details of what’s going on and we will open it up to audience Q&A as well. So welcome, thanks.

Ken Goldman

Yes, thank you. Yes, it’s always actually good to also hear questions from the audience. Let me just quickly say before I start, I’d like to remind you that today’s discussion may contain forward-looking statements. I suggest that you refer to our various risk factors described in our 10-Q and recently filed 10-K with the SEC. It has all our forward-looking statements and risk factors.

Ron Josey - JMP Securities

Alright. So we will just jump right in.

Ken Goldman

We get that done. Yes, thank you.

Ron Josey - JMP Securities

Paperwork out of the way. So 2013, incredibly busy year for Yahoo!

Ken Goldman

Right.

Ron Josey - JMP Securities

User engagement trend reversed starting to grow again, mobile users now than 400 million, multiple new product launches around weather, mail, technology vertical, food vertical, stream ads, got you in the native ads, Ad Manager was launched. So just higher level like how is the mood at Yahoo!, right? How are things going over there in terms of the multi-year sort of turnaround, if you will, in the business?

Ken Goldman

Yes, I think you used the turnaround, but I was thinking about this question as I was traveling a little bit yesterday. If you go back really a couple of years ago and even before that, we really had number of CEO transitions, changes in the board, activists involved, reduction – significant reductions in executive staff. And so when Marissa came in, honestly, there was, I would say morale was relatively low. She has done a number of things with the management team to change it from things that make the environment a hell of a lot better in the company in terms of just the general facilities and various things you can do, in terms of communication that we have much more transparent communication, different ways that we review folks. So there has been a lot we have done relative to the environment.

Second of all, you may think about it, many of the products that we have recently introduced have changed, hadn’t been updated for a number of years, five, six, seven years. And so whether you look at mail, finance, sports, the Flickr, screen, just a number of products had not been at all updated. So when people asked how do we spend, how does Marissa spend her time? I would say 7% to 8% of our time has been spent wisely relative to the people side of the equation and the product side of the equation. And you will see a number of those projects that we have introduced. For all intensive purposes, we hardly had a mobile strategy a year and a half ago. So we had to do that. When you talk about 400 million monthly average users, they did not exist a year and a half ago, because we really didn’t have a strategy in mobile. Same thing we are doing a lot now in video. So there is a lot of things that we are doing today that clearly weren’t the case when we are there, because it always takes some time? Yes, there is no questions as much as you try to rush and get things done, it does take some time.

We have made a lot of progress. The engagements are up. Mobile users as I noted are up. We are seeing some stability in the revenues. We really haven’t grown revenues obviously like we would have liked. We are very, very focused on that. So that’s how I sort of color it if you look at, it what occurred a year and a half ago when Marissa joined the company. And again, at heart, she is a product oriented person. She is very focused obviously in display, but even – I would say even maybe more so on search, which is an area of her expertise and we are very focused on that. We are very pleased with some of our search stats we have had for the last several quarters, in which we have shown good growth, obviously have some work to still do on display and we are working on that.

Ron Josey - JMP Securities

So when you think about, I feel as if the focus on people than product and traffic and now revenue, would you say now the company is more focused on that last component, now that people, product and maybe traffic are there and you feel better?

Ken Goldman

Yes. I mean, I think there has been a transition. I mean, clearly, you never in any technology-based business, you never finish on products. It’s constantly evolving. You have to keep on working it. The world is changing. It’s interesting as we have introduced a number of products we are very, very focused on seeing the impact in our users. We get a lot of our communication from our users, suggestions and so forth. And the thing actually, I have sort of thought through as I see these measures is we are really mission-critical. When I look at how people use our mail, how the people view news and screen, My Yahoo, there is a number of ways that we really have become mission-critical in a number of our products. And so it is very important that we do have to keep on updating those products and it’s great actually testament to Yahoo! that those users stayed on while again the products had not been updated. So much focus on updating products, we will continue to focus on that, but yes, I think as we look through ‘014, ‘015 in the future, we are very, very focused on growth. We are focusing that from the point of view of what are the growth drivers. Clearly, that’s things like mobile, video, social, the focus on native advertising, monetizing Tumblr as Tumblr continues to show great opportunity for us.

The other thing is that we will – we have focused historically certain the last year or so other than things like Tumblr on acquisitions, which were more people focused, talent focused. I think you will see us also looking at acquisitions that could be revenue accretive for us. I think I have discussed that in some of our calls earlier. So we are looking, I have nothing to, obviously announce today, but we are clearly looking at what we call revenue growth accretive acquisitions that are clearly consistent with the core strategy we have as a company, not varying from that.

Ron Josey - JMP Securities

So what do you mean by revenue growth, I am just going to get off my script and sort of…

Ken Goldman

Good, I will try to get you.

Ron Josey - JMP Securities

Revenue growth accretive, what do you mean?

Ken Goldman

Well, again that we are looking at acquisitions that we think can grow our top line. And so when I think of revenue growth accretive, just to add revenue that’s flat revenue won’t help our growth going forward. So we have to add acquisitions that will clearly show in and of itself the ad revenue, but there has to be growth inherent in that revenue if we were to add it. So we are looking obviously when you have sort to flattish, there is many acquisitions can do that, but we have a high hurdle. And so, again as we look at acquisitions, we want those that we think can given the four areas I just mentioned can be consistent with those that could really allow us to accelerate our top line growth. So not just add revenue, but growth in and of itself in terms of that acquisition.

Ron Josey - JMP Securities

So you mentioned videos in one of those four things that you were talking about, certainly growth driver of the web overall and as TV budgets come online, but I think you said video is still sort of nascent within Yahoo! overall. So it is something that you need to add more content, is it the back end systems that really drive more usage for more advertising to sort of come on, on a pre-roll or mid-roll basis or what’s needed from video to get underneath that?

Ken Goldman

Well, I think again we are still working that a little bit. Part of it is continued partnerships. We have done a number of those where we acquired content. We acquired SNL content. We have partnerships with NBC Sports, CNBC, ABC News, you would have seen on screen the streaming of the Oscars last night, for example. So there is a number of things we can continue to do to increase our focus there. Screen is just one example of that. And again, I think we will continue to grow that business. We will – part of it is content, part of it is how you get the content to use this. So all of that is very important in terms of how we think about growing that. I would say we are little ahead of mobile vis-à-vis where we need to be in comparison to video. But again, I think you will see us very, very focused on that certainly in ‘14 and ‘15.

Ron Josey - JMP Securities

So you talked about getting over the high hurdle of like flat line growth, I wanted to sort of drill in a little bit more about the display business, if you will? So one of the things that’s sort of was interesting coming out of the quarter is despite pricing is still down overall, but there was growth in the core sort of premium and remnant business and then I feel as if display was down…

Ken Goldman

You used the word remnant business.

Ron Josey - JMP Securities

Sorry, and the core business if you will. So what’s driving sort of the core business growth here? And the next question if we remember it would be the importance of stream ads, native advertising and recently Yahoo! went out and launched something called Gemini and what that could mean?

Ken Goldman

Well, I think let me just sort of handle that. I mean, clearly as you look at mobile, the traditional banner ads really don’t work very effectively. So we created native stream ads, they are really quite good. The key there is to have ads that are very useful relative to the content people are viewing. I think if you go to your phone, maybe not right now, but if you go to your phone and look at mobile, you will see a number of stream ads there. It’s very easy to pick them out. So we think that’s clearly – again, that’s one of the formats that we developed last year. We think it’s frankly somewhat revolutionary in terms of how people think about that. So clearly that is one of the areas that we see driving display. I think one of the ways you increase display is you make it much more useful for the user. When I think about mobile I would say is I would remind people it’s great for personalization and localization. So the more you take advantage of that the more you can make the ads more selective and useful for the user.

In terms of the desktop if you will I mean our focus there was frankly as I would say holding around because again the desktop market hasn’t been growing over, if we get us for a second but desktop market itself hasn’t been growing. So we can hold our own there again continue to increase engagement, make – improve our products. As I’ve said our properties were focused on that. So we hold our own there great – gain in mobile, gain in video that’s really how we think about that. And again the formats that all of us are looking at on the mobile is different than the formats that may – ad formats that may have worked on a desktop just because of the form factor.

Ron Josey - JMP Securities

So these stream ads are actually driving action oftentimes whether to download an app or could be a brand focus. What needs to happen to really drive sort of pricing there or bring advertising demand up I think it’s sold on an auction model?

Ken Goldman

Yes, it is, but it’s both. Our auction model we have sales, direct sales, but I think again the way I look at it and we’re very focused by the way on pricing on the mobile side. We think some of that’s under our control as well. Again I think the product that I like again whether you are on your iPad or the fact you are on the phone, generally you’d – we know where you are, so to speak in terms of localization people opt in or opt out in terms of localization. So we know – so the ability to know who you are and where you are and therefore makes the ad much more actionable and time-sensitive is much better on the mobile category than it is on a desktop. So, we do think over time that the pricing will increase and frankly we have seen that from others where pricing by various other peer companies has actually stayed – has been relatively consistent with the desktop experience.

Ron Josey - JMP Securities

And real quickly I do want to open it up for questions in the audience with Gemini just launched last week I believe sort of a unified platform for mobile search and native streaming ads. Any addition in like what do you hope to accomplish with that or what hold of that plug, so to speak from a product perspective?

Ken Goldman

Well, I am not going to say too much there, but it is an area that we have spent a lot of development time on and investment on. I always remind people that our top management is very, very focused on search certainly has the expertise in search. We think in particular in mobile we could add a lot of value on search and uniqueness and differentiation on mobile vis-à-vis the desktop. So that’s an area that we’re putting extra energy on. So I think that’s part of it making the ads in some respects like stream ads relative to display. So yes that is an area of focus. You’ll see I mean search, search on mobile is very, very important just like display on mobile is very important.

Ron Josey - JMP Securities

Okay. And one last one before opening up for questions and I have of course tons more, but you talked about investments right and I think going long search. But specifically given the guidance here for 2014 I think EBITDA to decline as you continue to invest in the company. I’m curious about your investment discipline and maybe the investments you made as the CFO to sort of see the more visibility in the business. So maybe you can talk a little bit more of the investment discipline at Yahoo overall and the tools you have?

Ken Goldman

Yes. Let me couch that a little bit. First of all we gave – be specific we gave guidance for Q1 not for the year. Obviously analysts have their estimates for the year. If I look back to 2013 I would say from my own self in the company we didn’t do as well as we would have liked vis-à-vis our guidance so that’s clearly made us thoughtful relative to guiding in 2014. So we did guide for Q1 only at this point in time. The investments have been very targeted. The way I like to think about is sometimes people look too much year-over-year and you have to look at spending more on a sequential basis and the way I sort of think about is if you look at our Q3 and Q4 last year normalized total operating spend.

So you could see year-over-year at about $60 million higher than the corresponding quarter. So if you just normalize after the rest of the year that’s really a new base for 2014 versus 2013. So I do think we will slow and I think I suggest it is that we will slow our growth on spending, but we’re somewhat of a higher level than we were earlier in 2013. So some of the reductions you see in Q1 at least relative to EBITDA and then perhaps may also then forecast and forward on that is really based on the highest spending levels that we’re at currently vis-à-vis earlier in 2013.

I think in many cases that we’re going to really be careful on expenses; we’re going to continue to look for efficiencies that can help offset some of the increases. The other thing that increased our expenses in late last year, second half last year and going forward is obviously the acquisition on Tumblr which is still negative if you will on an EBITDA perspective. As we mentioned we expect that term by the end of the year. So there are some things and so been headwinds if you will relative to EBITDA. I’m very cognizant that we do have to grow EBITDA going forward, grow our operating profit going forward. And the way to do that is going to be very clearly from top-line growth. At the same time I do believe over time we can become more efficient in our expenses and in our headcount.

Ron Josey - JMP Securities

Great. Any questions in the audience?

Question-and-Answer Session

Ken Goldman

Jeez, I am surprised. We have a quiet group here. Why don’t you point on someone so we can get a question, it is their way.

Ron Josey - JMP Securities

Not bad, yes.

Ken Goldman

So I’ll give (indiscernible).

Ron Josey - JMP Securities

Yes, right. So I’ll keep on going here. So search, long search right, I would say it’s a bright spot on the quarter, pay clicks are up 17% or so and you continue to see the growth there. A lot of that’s due to what ad format changes, UI changes, etcetera, how iterative is Yahoo Search?

Ken Goldman

Yes, it is for the reasons you mentioned. I think the other thing is we’re making search easier to access from our sites. So I think before you had to go work to find sometimes Yahoo Search and so whether you’re on any of our properties, you’re on any of our apps, you’re on mail it’s much easier to – Tumblr is going to be – it’s much easier to find search inside of our properties and then keep the use if you will inside the Yahoo ecosystem as opposed to moving the amount size. So part of it is making the accessibility easier and part of it is just increasing them for users and so forth. So it’s all of the above in terms of how we’re going search. So the metric we’ll use is what we call click search revenue, click search revenue driven revenue because we try to take out the fact that we discontinued our Korean operation, we try to – taken the fact that the Microsoft search guaranty does have different amounts of revenues quarter-to-quarter. And so you take some of the anomalies out, some of the FX issues we’ve had in Asia. So we take that out and that the 13% growth that we showed last quarter that we think is more representative of the growth that we have in the search business. Obviously clicks are up about 70% quarter-over-quarter.

And by the way our search revenue is quite good if you look compared to eight quarters ago we were declining and actually I think last quarter was the highest in sometime in 2009. So we have seen some better improvement in search. I’ve used the word. We want to be long in search. We’re looking that’s what we talked about Gemini and other things, we’re looking for different ways that we can expand search, it is part of the core of Yahoo. It’s actually interesting we had a 19th birthday last Friday for the company so the company has been around 19 years. We had our all-hands meeting on Friday and Joe Yang actually came and participated in that event. So there is a lot of heritage at Yahoo we’re very proud of Yahoo to heritage and that we want to expand upon that.

Ron Josey - JMP Securities

19 years, it’s hard to imagine it seems like it’s yesterday.

Ken Goldman

Any questions in the audience yet?

Ron Josey - JMP Securities

There is one in the back.

Ken Goldman

Yes.

Unidentified Analyst

Can you just talk a little bit about (Question Inaudible)

Ken Goldman

Yes. But inventory impact I’m sorry I can’t get the first part, sorry…

Ron Josey - JMP Securities

I think it was about real-time inventory and how that’s impacted the networks..

Ken Goldman

I think both our inventory, as well as we go more outside of a network that does affect our business clearly increasing the available inventory is very, very important and very important for our ability to sell, very important for pricing. And so a lot of the technology advancements we’re making really does take advantage of having much more real-time inventory.

Ron Josey - JMP Securities

Follow-up, yes.

Unidentified Analyst

(Question Inaudible)

Ken Goldman

I would say again I never want to preclude an acquisition in terms of my discussion here, but we believe actually that those skills that do exist internally as part of the experience that we have had now. Having that said, we may from time to time what I would say acquire talent acquisitions that we may acquire 5, 6, 10 people to help buttress, but I don’t – generally I would say that’s not an area of focus from an acquisition point of view other than talent folks.

Ron Josey - JMP Securities

You mentioned Tumblr earlier, I think when you acquired the company it was looked to be accretive maybe this year, in the first year, can you talk about the opportunity for the overall monetization here at the…

Ken Goldman

Yes. I can’t say too much relative to this particular situation, but over the weekend, it was already reported that you saw an ad by Apple, where they put forth I think 15-second video ads on Tumblr. So I think that’s just an example where you can see the benefit of Tumblr. So, yes, Tumblr, the thing you have to be careful, we don’t to track what makes Tumblr very, very good and strong. So we are supportive of that. We are very supportive of David Karp and his team. And so we are as we think about ‘14 that we are very focused on how we can add ads that really add to the experience. So we are doing that. And our focus is to grow – is one of our growth drivers if you will for ‘14.

We are very pleased with where we are on that. So display advertising first we think search can also be an opportunity for Tumblr, but again, I think just you see some ads that are now starting to work on Tumblr. We are very excited about that as a really great platform for us. And clearly, one of the attributes of Tumblr, which was the case when we acquired the company was the demographics. So it is a younger demographic, it’s a much more actionable demographic and so we are very excited about that and we are very excited about the team we have there and the ability to keep them independent on the other hand, work very closely with the team.

Ron Josey - JMP Securities

Great. Any other questions from the audience or should I keep on going? Alright, I will keep on going.

Ken Goldman

Now, almost 27 minutes, 23 minutes and no question on Alibaba, I am very impressed.

Ron Josey - JMP Securities

Well, let’s bring it up. How is Alibaba going?

Ken Goldman

Good, great.

Ron Josey - JMP Securities

Maybe you can talk about…

Ken Goldman

I was amazed that I can go almost a whole conference and not even talk about Alibaba, not talk about Yahoo! Japan, not talk about taxes, that’s great.

Ron Josey - JMP Securities

So let’s talk about Alibaba, let’s talk about any update there from…

Ken Goldman

Alright, great.

Ron Josey - JMP Securities

Maybe that’s why we don’t bring it up. So that said CapEx was down materially last year, right, going back to the core of business and not the Asian assets, which – so is this the new normal around $300 million some…

Ken Goldman

Yes. Now, I think CapEx is about $330 million. We had previously been at $500 million to $600 million to $700 million annual range. No, I don’t think it’s a new normal. I think when honestly one of the areas that I did get very involved in the company is changing our approval metrics. So we have a much more formalized approach for all spending whether it’s generic spending or capital in particular. There is guy that Founder in the company, David Filo, that’s actually cheaper than I am which is hard to believe. So we actually have a committee and we review it, we scrutinize it. And so I think we did get the benefit in ‘13 of investments we have made in prior years and we were able to get returns on, but as I think we go forward and I suggest this, I think the number will be up, I don’t know it’s $500 million or so, but clearly capital spending will be up somewhat from what we experienced in ‘13.

We are doing a number of datacenter refreshes as well. So that will be up. There is a number of technology upgrades we are going to do. So I think capital spending will be up somewhat from what it was in ‘13 which is big reduction. Having said that, again, I feel much better that we have a much more formalized process internally to really ensure that we are spending those dollars actually quite wisely. The other thing we did is we focused more on free cash flow and I think the company historically had done. So that’s another area that we think about very hard is not only EBITDA, but free cash flow and how to sort of drive that.

Ron Josey - JMP Securities

And then you have talked in the past early, I believe is a $5 billion buyback approval that you have or authorization in the latest K, I think you did. Yahoo was active in that. The question is and I also think you have said $3 billion is sort of where you likely have comfort zone in the cash balance, still the case? And I think you had….

Ken Goldman

Yes. The thing I just say is $3 billion is the case, it’s not a hard line to stand, where I can’t – we can’t go a little bit below that so to speak. It is a number that we think we are in a space where you need to have a balance sheet and show strength. I could not be more pleased with our ability to raise $1.4 billion last year. And I have had a very good convert, convertible debt that we put together. So yes, I think – and again, I think I am not going to project, but whenever Alibaba just go out, we are clearly planning on selling some shares in that offering. So that would give us more access to cash.

So yes, I think capital buybacks is – stock buybacks is clearly a means for us in terms of thinking about how we manage our balance sheet, how we manage shares outstanding. I do want to reduce our shares outstanding. We think it’s good for the company. We think it’s good for investors. So yes, I have also said we are thoughtful about the price as I have looked at a lot of companies and that’s why I sort of react the way I do sometimes. I have looked at a lot of companies that have done stock buybacks in the past and they tend to do a great job of buying it high and selling low. So we do think about very clearly how the price sensitivity, what we think is fair value of our stock in terms of different measures. And so our buyback does have different approaches. And we think about our buyback in different approaches relative to stock price sensitivity.

Ron Josey - JMP Securities

Great. And so with that, I think we are in over time here. So thank you very much, Ken.

Ken Goldman

Thank you. I appreciate it. I enjoyed it.

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