Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Yahoo! Inc. (NASDAQ:YHOO)

Q1 2014 Results Earnings Conference Call

April 15, 2014 5:00 PM ET

Executives

Lauren Lyster - Business Reporter, Yahoo! Finance

Marissa Mayer - Chief Executive Officer

Ken Goldman - Chief Financial Officer

Analysts

Anthony DiClemente - Nomura Securities

Eric Sheridan - UBS

Robert Peck - SunTrust Robinson Humphrey

Carlos Kirjner - Sanford Bernstein

Neil Doshi - CRT

Ron Josey - JMP Securities

Youssef Squali - Cantor Fitzgerald

Operator

Good afternoon. And welcome to Yahoo!’s First Quarter 2014 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 including revenue growth, as well as our strategies, products, cost controls 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-K filed with the SEC on February 28, 2014. All information in this video is as of today, April 15, 2014 and we undertake no duty to update it for subsequent events.

Today’s discussion will also include non-GAAP financial measures. Reconciliations of our non-GAAP results to the GAAP results we consider most comparable can be found on our earnings slides, which also contains full versions 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.

Lauren Lyster

Welcome to Yahoo!’s first quarter 2014 earnings video webcast. I’m Lauren Lyster and I’ll be moderating today’s earnings event. Here with me 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 first quarter performance. Later they’ll also be answering your questions including some submitted earlier via email.

Institutional investors were encouraged to submit questions and a few have been selected that were representative of the group. I’d like to now turn it over to Marissa to discuss Yahoo!’s first quarter business update. Marissa?

Marissa Mayer

Thanks Lauren. Hi everyone. Thank you for joining us for our earnings live stream hosted on Yahoo! Finance. Today I am looking forward to discussing our Q1 performance as well as updating you on our products, investments and our business overall. In terms of revenue, I’m very pleased that we delivered $1,087 million of revenue ex-TAC in Q1 above the mid point of our guidance. In fact, the first quarter of 2014 was Yahoo!’s best Q1 for revenue ex TAC since 2010.

We’re encouraged by the stability and early signs of growth in our core business. This strength is driven by a number of key factors that I want to outline today. First, our search revenue grew 9% year-over-year marking the ninth consecutive quarter of growth.

Second and rather significantly we saw our first quarter of Q1 growth in display revenue ex-TAC since 2011. This modest 2% growth ends the previously declining trend. And if you look at the revenue trends in our core business which we define as search and display, you will see an important shift. In 2013, with the exception of search revenue increasing on an ex-TAC basis, we saw declines across the board.

However this quarter, we saw growth across search and display ex-TAC and search GAAP. Meanwhile, display GAAP revenue remained stable after quarters of decline. I regard this as an important indicator of early success in our core business. Fundamentally we think about growth in terms of five phases.

There is negative growth essentially decline, stability, modest growth, market growth and share gaining growth. We believe we’ve moved from our core business being in decline to a point of stable to modest growth. Well, we believe we still -- we believe that this hyper growth we like to see will take multiple years.

Our modest success this quarter is an important start. I should also note that the number of ads sold in Q1 grew, reinforcing a year long trend and increasing to 7% year-over-year. Part of this growth of course has been driven by our mobile business. It’s a key area of investment for us and we’re seeing nice returns on those investments in terms of users, traffic and revenue. Mobile is the future of our business. A little less than a year ago, we acquired Summly and immediately integrated that technology into the Yahoo! app.

Now we are leveraging the Summly technology for the next generation of summarization experiences with Yahoo! News Digest. We launched News Digest at the beginning of January on iOS in the United States. Six weeks later we launched in the U.K.

In a world of infinite information, we wanted to create a finite encapsulation of the day’s news and the product has gotten a tremendous response with 40% of downloads becoming daily active users. With such extraordinary numbers, this is the type of product that defines daily habits. Our growth in mobile has also been driven by our commitment to iteration and innovation.

Over the past year, we’ve increased the frequency with which we update our apps by 35%. We are now releasing more updates per app than any major player in the industry and the results speak for themselves. Mobile mail has seen a 15% quarter-over-quarter growth in daily active users.

Meanwhile the Yahoo! app continues to lead the news app category, ranked number one on Apple’s App Store and number two on Google Play. Since launch last April, we’ve seen daily active users triple. Our gorgeous weather app remains the point of strength with 5x growth in daily active users since launch and nearly 50% growth in the last quarter alone.

Finally, with regard to mobile traffic, I’m excited today to announce that Yahoo! has more than 430 million monthly mobile users, a 30% growth year-over-year. Now more than half of Yahoo!’s total monthly audience joins us on a mobile device.

While we’re focused on being a -- on being mobile first, we think about our entire business including our mobile products in terms of four key areas: Search, Communications, Digital Magazines and Video, all powered by Flickr and Tumblr. First, I’d like to turn to Search. As I mentioned at the beginning of the call, Q1 marked our ninth consecutive quarter of Search revenue growth ex-TAC.

Our growth in mobile search is an important part of our long-term strategy. This quarter we saw nearly 100% growth across almost every measure of our mobile search business.

We’re investing in the future of mobile search. Last quarter we announced the acquisition of Aviate whose technology will play a central role in the future of contextual, personalized mobile search at Yahoo!. In February, we announced the partnership with Yelp. Now when users search for a local business in the United States, they will immediately see user reviews, business information and star ratings from Yelp.

To enhance this, we added a new photo viewing experience with high-quality photos from our partners, the business themselves and Yelp. Being extremely partner friendly is one of our inherent strengths at Yahoo! and this partnership attests to that.

Now let’s turn to communications, an incredibly important daily habit for many of our users. Over the past couple of quarters, we’ve really focused on improving the user experience and this continued in Q1. First we added smart auto suggest and enhanced contact details to make it simpler to find and communicate with friends and family.

Second we strengthened the search experience to make it faster and easier to find all mails. In Q2, we will focus on investing and in strengthening the performance and efficiency of the mail platform. Our mail offering is just over 16 years old. As a company, we need to invest in modernizing and fortifying the infrastructure underlying mail to the same degree that we’ve invested in features. We have a vision that makes our communications the absolute best in the industry. There’s plenty of room for continuing innovation here and we’re just getting started.

On our last call, we discussed digital magazines. Yahoo!’s effort to re-imagine the way users experience digital content with visually driven storytelling and distinct editorial voices. We continue to see success with our food and tech magazines. The immersive visual experience has captured readers and really driven engagement. In fact, when you look at content sharing like when users share articles with family and friends via Tumblr or email, the rate is 2x to 4x higher on digital magazine than it is on our other verticals.

We continue to invest in top editorial talent to lead our digital magazines. In the last few weeks, we’ve made a few key hires. Bobbi Brown, the New York Times best-selling author and industry maven will lead our beauty magazine. Paula Froelich who joins from the New York Post will lead our travel magazine. The Vulture’s Josh Wolk will lead our entertainment magazine and yesterday, we announced that Joe Zee, formerly the creative director at Elle will lead our fashion magazine.

Across Q1, our teams brought the reimagined homepage experience which we rolled out in the United States and Europe last year to key markets around the globe. In the Americas, we launched in Canada, Brazil, Argentina, Colombia, Peru, Chile and Venezuela. And in APAC, we launched in India, Singapore, Malaysia, Indonesia, the Philippines and Vietnam.

Sellthrough globally on our homepage was another point of strength this past quarter. For advertisers the power of the homepage takeover essentially the biggest and best billboard on the web is unmatched. It was also an incredibly busy quarter for our sports team. We kicked off Q1 with extensive coverage of the Winter Olympics. In addition to our own editorial coverage of the Sochi Games, we expanded our existing partnership with NBC Sports, giving users access to the network’s exclusive digital video rights including live competition streams and highlights.

Throughout the game, we saw an almost 30% increase in page views, compared to our coverage of the 2010 games in Vancouver. Just days after the closing ceremony, our sports fanatics were back at it with March Madness. Yahoo! powered the first ever billion dollar Bracket Challenge. We provided up-to-the-minute coverage, scores and insights across mobile and desktop and we saw record engagement numbers on mobile sports, with nearly 1 million downloads over the course of the tournament.

Yahoo! continues to be a market leader in sports and fantasy sports. This quarter, we announced we are now the official commissioner of fantasy partner of Major League Baseball, building on similar partnerships with the NBA and the NHL. And finally in video, we had some exciting progress in Q1. We saw 30% sequential growth in video streams that led to additional monetizable video inventory.

In Q1, we also announced the partnership with Vevo, the home to the Internet’s largest collection of music videos, with more than 90,000 in total. Vevo joins our growing library of high-quality, engaging video on Yahoo! screen. And we’ve also continued to innovate the video watching experience, bringing users great content whether they are on-the-go or on the couch.

In Q4 2013, we launched Yahoo! Screen on Apple TV and this quarter, we launched Yahoo! Screen on Roku. With this launch, users have more ways to enjoy clips from Saturday Night Live, The Daily Show with Jon Stewart, live news, events, music and Yahoo! Originals. I’m really proud of the progress we’ve made around our products and execution over the last 20 months.

Over that same period of time, our advertising technology teams have been experimenting with a number of new and innovative ad formats and we’ve seen some encouraging results. Our advertising strategy is founded in the belief that great advertising creates unique opportunities for advertisers while enhancing the user experience.

We have been pioneering innovative ways to approach mobile advertising. To this end, we launched Yahoo Gemini, the first unified ad marketplace for mobile search and native advertising. For the very first time, we are leveraging our years of experience, building and optimizing ad technology across search and display into a one-stop shop. Assembling tremendous cross functional team here in Sunnyvale, we created a product that combines the performance and ease of search with the scale and creativity of native advertising.

Advertisers can now buy, manage and optimize their mobile advertising campaigns in one place, driving performance and impact. To streamline the experience, Yahoo Gemini is accessible through our existing ad platform, Yahoo! Ad Manager. In March, we also launched Motion Ads, a new format that introduces subtle animation into rich brand images to create high-impact experiences for advertisers that are entertaining and engaging for users. So you can see from the [craft] [ph] campaign on our login page, this format really creates a powerful and unique form of brand storytelling.

We also see exciting potential to grow our video and display businesses through audience ads on our new Yahoo! Ad Manager Plus buying platform. The opportunity here is to leverage our powerful combination of ad technology, optimization expertise, rich data and targeting for advertisers to connect with target audiences on the Yahoo! network and elsewhere in our publisher network. Improving and innovating on our ad technology offerings was a key focus in Q1 and you will continue to see us work hard and invest in ad tech, as we migrate to these new platforms and tools.

Over the past six quarters, we’ve made bringing the best people to Yahoo! a priority and this continued to be a focus in Q1, especially bringing great technical talent to Yahoo!. Last quarter alone, we hired more than 300 talented engineers. We’ve also brought great talent and technology to Yahoo! through our M&A strategy. When you look at the acquisitions we’ve made over the last year, teams are leading the development and execution around a number of our key products.

The Alike and Summly teams for example build News Digest. The teams from Rockmelt, Snip.it and Tumblr came together to develop the digital magazines platform. The Xobni team utilized their technology and our user’s data to bring smarter contacts to Yahoo! Mail. The teams from Distill and Bread played a key role in building our new comprehensive advertiser offering, Yahoo! Ad Manager Plus and OnTheAir developed the popular Loops feature on the Sports App. And finally PlayerScale worked to launch the Yahoo! Games network.

This quarter, seven companies joined Yahoo! Each of whom will play important roles on our mobile communications and digital magazines teams. We also have some important leadership hires. Alex Stamos joined Yahoo! as VP of Information Security. Alex brings vast information security experience to Yahoo! and will be on the frontline of continuing to ensure that our products are as secure as possible. He will be furthering our significant security efforts to date, especially around enabling SSL as a preferred option across our offerings. We continue to see tremendous potential in the talent we have at Yahoo! and the talent we are attracting.

With that, I’ll turn things over to Ken.

Ken Goldman

Thank you Marissa and good afternoon everyone. Thank you for joining us for our first quarter 2014 earnings presentation. As we discussed on our year end call, we believe we have laid an essential foundation, positioning us for reestablishing long-term growth. Today, let me start by providing a progress report of sorts by highlighting areas that have performed well in our business, while also touching on the areas of continued focus and emphasis requiring improvement.

So let me put this in context by covering the areas of our business in which we have executed well. First in search, search continues to perform well. In revenue, ex-TAC grew year-over-year for the ninth consecutive quarter. Our ongoing improvements in technology, ad formats and overall user experience are clearly leading to better monetization. Second, display, underlying metrics for display had begun to show improvement last year. But Q1 represents the first quarter of display revenue ex-TAC growth since mid-2012.

As Marissa has previously outlined, we are expecting mobile, social, video and native to be future catalysts within Display and growth has accelerated within these four growth businesses. Third, on capital returns for shareholders. In Q1, we repurchased another $450 million worth of shares, bringing our total repurchases to approximately 267 million shares, or just under, 60- 6 billion since the beginning of 2012. This far exceeds the amounts spent on acquisitions.

Now for the areas in which much work remains, more transparency and detail in our operating metrics, we do appreciate that investors want to learn more detail about our operating metrics in our business, especially in our key growth business like mobile, video and Tumblr. We intend to provide more transparency over time in our operating metrics around these businesses as they become more meaningful.

On capital allocation, we understand this is of critical importance for our shareholders. We intend to continue to be good stewards of shareholders asset, as shareholders ourselves, we will be extremely diligent pursuing areas of capital allocation that we believe to be in the best long-term value creation, contemplating both a healthy return of capital to shareholders as well as opportunities to reinvest in our core business.

We will continue to review our options in conjunction with our Board. Now stability and products, we have been moving fast and innovating rapidly in our products. We also recognized there have been some issues in stability in both user and ad products. In particular to continue our investments in protecting our users, we migrated all of our properties to SSL, making Yahoo! the largest secured publisher on the web. We feel securing our offering makes good sense for our ecosystem. Simply put, for our users, we believe if we offer greater security in our products, they will use them more.

Now let me move on to our quarterly results, and then I will close with our views on guidance. As a reminder, I will focus most of discussion on our non-GAAP results. These numbers exclude stock-based compensation expense of $109 million and restructuring charges of $9 million. Please see our earnings slides on our Investor Relations website for complete reconciliations between GAAP and non-GAAP results.

Now start with financial highlights for Q1 as seen on Slide 5. Q1 GAAP revenue was $1.133 billion and revenue ex-TAC was $1.087 billion, both within our guidance range.

Search revenue ex-TAC continues to show nice growth, with a gain of 9% versus a prior year. Display revenue ex-TAC grew 2% and posted their first quarter of year-over-year growth since mid-2012. Other revenue ex-TAC fell 11%. If we exclude the other revenue category, revenue ex-TAC in our core search and display businesses grew a combined 5%. Importantly, total revenue from our four growth businesses was up 98% year-over-year, a dramatic acceleration from the approximate 6% growth we discussed for 2013.

Adjusted EBITDA was $306 million in Q1, near the midpoint of our guidance range. Non-GAAP operating income was $149 million, nearly at the midpoint of our guidance range. Non-GAAP net income was $402 million. Once again, we saw a strong performance in our earnings in equity interest line, which grew 39% year-over-year, driven by the Alibaba Group. Non-GAAP EPS was $0.38, which is flat versus the prior year period, as our fully diluted share count decreased 7% to 1.031 billion shares for Q1. Finally, free cash flow was $114 million for the quarter.

Now let’s walk through the financial results for Q1 in more detail, and let me start with search. GAAP search revenue grew 5% and search revenue ex-TAC grew 9% to $444 million versus Q1 2013. GAAP revenue growth was a bit slower as prior year period included gross affiliate revenue from markets not yet transitioned to Microsoft. This is the ninth quarter in a row of year-over-year growth in search revenue ex-TAC.

Search revenue from mobile approximately doubled in Q1 versus prior year. We continue to see improvements in click yield, which has been the primary driver of performance for some time.

Now looking closer at search metrics, paid clicks grew 6% on a year-over-year basis and price-per-click turned positive, growing 8%. This was driven by strong performance in both PPC and number of paid clicks in Americas region, but was partially offset by drop in paid clicks in Asia Pacific. These trends resulted in year-over-year growth of 14% in search click based revenue in Q1, marking seven quarters in a row of double-digit growth in this metric.

As we stated previously, we believe this metric best represents the overall health of our search business and we are pleased to see continued strong performance here. Paid click growth was healthy but a bit slower than prior quarters due primarily to a decrease in affiliate traffic in both APAC and Americas regions.

We also face a tougher comp in Q1, as paid clicks grew 17% in Q1 of 2013 versus 13% comparison we faced in Q4 of last year. Price-per-click grew 8% in Q1, driven primarily by a favorable mix shift, as more search clicks came from Yahoo! Properties relative to affiliates. We also saw year-over-year PPC growth in Yahoo! Properties in both Americas and EMEA regions.

Looking geographically, the Americas region performed well, with search revenue ex-TAC up 11%, as paid clicks grew 10% and pricing was up 3%. In APAC, the Yahoo! Properties were quite strong versus prior year, as paid clicks on Yahoo! Properties were up 32% in the period. A mix shift away from lower yielding affiliate clicks drove an increase in pricing of 16% year-over-year also in APAC.

Now turning to display, revenue ex-TAC grew 2% year-over-year in Q1 to $409 million. More importantly, the metrics once again showed improving trends as growth in ads sold accelerated and the decline in PPA improved quarter-over-quarter. Display revenue from mobile also approximately doubled versus the prior year, as our daily active users of mobile were up 5x versus Q1 2013.

Looking closely now at the components, display ad volume clearly reached an inflection point in mid 2013 and it continues to improve, as we drive engagement from product improvements and launched innovative ad formats. The number of ads grew 7% in the quarter, more than double the rate of growth from Q4.

In the Americas region, the number of ads sold grew 18%. Stream ads were the primary contributor to ads sold growth as a number of stream ads sold grew 12% sequentially in Q1 and now represent approximately 20% of our display ad volume. Price per ad fell 5% as a relatively new lower priced stream ads once again resulted in a negative mix shift.

Price-per-ad excluding our stream product was up 7% in the quarter, driven primarily by strong pricing in our premium segment and higher sell-through rates on key ad units such as the homepage and login page.

Looking by specific properties, our homepages and sports products were key drivers of the year-over-year growth in display revenue ex-TAC. Our homepage continues to generate significant advertiser interest and our sports vertical benefited from high visibility programs as noted, including this Sochi Winter Olympics and the March Madness in the quarter.

Mobile page view growth was strong across the board. In addition, Yahoo! Food and Yahoo! Tech were both launched with advertiser sponsorships already in place. And as Marissa has previously mentioned, we have continued to invest in key talent for our digital magazines initiative and expect to launch more in the future.

Other revenue ex-TAC fell 11% year-over-year to $234 million, driven by declines in some of our leads, listing and fees businesses. Our e-commerce business in APAC continues to remain steady, and we do need to better address the other revenue as this has not been an area of adequate focus. I would note however that some of this decline has also resulted from our deliberate decision to de-prioritize relatively lower monetizing properties.

For revenue detail by region, please refer to Slide 10. In the Americas region, total revenue ex-TAC grew 3% on a year-over-year basis. As I described earlier, search revenue ex-TAC grew 11% in the quarter and display grew 6%. This was partially offset as noted by drop in other revenue ex-TAC of 12%.

If you exclude the other segment, revenue ex-TAC in the Americas region which has benefited the most from initiatives we have made grew over 8% in Q1 year-over-year. We believe this is demonstrably strong sign of the success of our investments as we rolled out many of our new products and ad formats in the Americas region first.

These early results are encouraging, and provide confidence that we are in the right track to grow the business. In EMEA, revenue ex-TAC fell 1% versus the prior year. Finally turning to APAC, revenue ex-TAC was down 8% year-over-year, once again driven almost entirely by favorable foreign exchange, which negatively impacted top line by approximately $13 million year-over-year. In constant currency, revenue ex-TAC fell approximately 1% in the region.

As we continue to roll out our new product experiences, international regions we believe this can be a driver for our future growth.

Now let me turn to expenses. Beginning with traffic acquisition costs, TAC was down 31% to $46 million for the quarter. We substantially completed the migration of our APAC region to the Microsoft search ad platform in Q4 which is driving the majority of the delta.

Non-GAAP total operating expenses were $938 million in the quarter, roughly flat versus Q4, excluding the $70 million benefit from the patent sale in that period. Other cost of revenue and G&A were roughly flat as reported, but fell versus 2013 on a non-GAAP basis.

Product development and sales and marketing expenses were meaningfully higher versus last year, which reflects the investments in acquisitions we made in our business in 2013 in first quarter to reposition the company for growth.

Of note nearly all of this increase in expenses were workforce related, as we held the line on all other expenses. Specifically, this includes higher headcount, integration of Tumblr and other acquisitions, higher payroll taxes paid in stock vesting and some merit and associated incentive comp increases. We ended the quarter with approximately 12,400 employees, up 8% from the year ago period, some of this driven by contracted conversions as our contracted headcount is down by approximately 50% year-over-year.

Looking at GAAP expenses, stock-based compensation expense was significantly higher year-over-year. The two primary drivers of the change were one-off charges in period, relating to the departure of certain employees including our former COO as well as the credit that we experienced in Q1 2013. We're seeing the result of an unusually low SBC for that period.

In addition, the higher stock price also drove SBC up year-over-year. Depreciation expense was approximately $20 million lower versus prior year as the lower capital spending trend in 2013 is flowing through. Another amortization is higher, both sequentially and year-over-year due to our acquisitions, primarily Tumblr.

In terms of profitability, adjusted EBITDA was $306 million and equaled a margin on revenue ex-TAC of approximately 28%. Non-GAAP operating income was $149 million for margin and revenue ex-TAC of 14%.

Now, finishing up the income statement, other income was a loss of $13 million in the quarter versus a benefit of $17 million in the first quarter of last year. In 2013, this included interest on the Alibaba preferred shares, which were subsequently redeemed late in the first half of last year. In addition, we recorded imputed interest of approximately $15 million in the period related to amortization from a convertible note offering. Although, the notes are zero cash coupon, we recognize imputed interest for accounting purposes and will continue to do so going forward. Non-GAAP tax rate was 24% in the quarter. It’s a bit lower than normal due to certain discrete items in the quarter. Earnings and equity interest grew 39% year-over-year to $301 million, as Alibaba Group once again showed impressive growth in its calendar Q4 results.

The equity interest contribution from ownership in Yahoo! Japan was down slightly year-over-year. As you all know Alibaba's announced their intention to proceed with an IPO in the U.S. They advise they are in a quiet period and accordingly we will not comment any further on their results. Finally, non-GAAP EPS was $0.38 in Q1, flat with Q1 2013 as the fully diluted share count decreased 7% for the period.

Let me now turn briefly to a few balance sheet and cash flow items to call out. Cash and marketable securities were just under $4.6 billion at the end of the quarter. Walking through the change in cash over the quarter, we entered 2013 with $5 billion. We had positive free cash flow as noted of $114 million and major use of cash was share repurchases, totaling 12 million shares of stock for nearly $450 million and acquisitions of $22 million net.

In Q2, we’ve also recognized approximately $117 million of cash from the settlement of our yen hedges. Accounts receivable are $880 million, a decline of $100 million from the end of fourth quarter as we had strong collections.

Let me now turn to guidance. Looking ahead, we are pleased to see increasing signs of growth emerge in our Search and Display metrics. As I laid out in our progress report, there are a number of things that are working very well. And while we still have a lot of work to do, we are confident we are on the right track to achieving sustainable and meaningful revenue growth in the future. We expect key drivers of growth in our Display business to come from the four core areas of investment we had spoken about. Particularly as we make a concerted effort to improve relationships with key advertises and increase both the overall number of advertisers and the number of advertisers buying multiple products from us.

As it relates to Q2, we expect to see increased contribution from mobile apps, video, stream ads, Americas Audience Display, and improvements in international segments. The expiration of the Microsoft RPS Guarantee at the end of Q1 will however be a headwind. We note that Q2 is also typically very similar to Q1 from a seasonal historical perspective. So thus for guidance we expect the following.

GAAP revenue to be in the range of $1.12 billion and $1.16 billion, revenue ex-TAC to be in the range of $1.06 billion and $1.1 billion and as discussed in the Q4 call, we expect to continue our current rate of investment throughout this year, resulting in an adjusted EBITDA outlook of between $290 million and $330 million for Q2 and non-GAAP operating income to be between $130 million and $170 million.

Thank you again for your time today. Now let me turn it back to Marissa.

Marissa Mayer

Thanks, Ken. Last quarter we talked about our four growth businesses; mobile, social, native and video. These are growth businesses for the industry and for the future of Yahoo! These four areas also are our investment businesses as they are the focus of our investments. Mobile, social, video and native are businesses that are still small relative to Yahoo!'s broader business, but they are seeing accelerating growth as we continue to invest in them.

Last quarter I reported that we saw nearly 60% growth year-over-year in 2013, which we believe outpaced industry growth across these areas. Today I am happy to report that in Q1 we saw 98% year-over-year growth across these investment businesses continuing the growth trend. Let's take a look at how each of these four areas performed and how they'll define our future. Let’s start with mobile.

When you look at the success of our mobile products, it really follows the trajectory of the virtuous cycle we've talked about over the past earnings calls. We've hired incredible people; the mobile team has grown more than 130% year-over-year. Great people have built incredible products, accelerating our ability to release, iterate, and execute. In addition to our consumer facing products, we've also invested in our advertiser offerings, most notably with Yahoo Gemini; our combined mobile search and display platform.

And great products have driven user growth. As I mentioned earlier today, we have surpassed 430 million monthly mobile users, which we really think is tremendous progress. Our growing traffic has attracted the attention of advertisers and we have seen significant growth in our mobile revenue as a result. With our investment in Gemini, we anticipate this trend to continue and to grow future.

Next, I want to discuss native. From the start, we've talked about the growth opportunity here with stream ads and digital magazines. One of our most exciting accomplishments has been the success of our stream advertising product, which is now part of our Yahoo Gemini.

This day last year, stream ads on Yahoo! didn't exist. Today, thanks to the efforts of a cross functional team of Yahoo!'s. We have built a business that is now on track to grow exponentially.

It is also tremendous simplification of our advertising offering, as native ads and search ads are now sold the same way and through the same platform on Yahoo Gemini. We are investing in native ads because we've seen early success here and advertisers are increasingly understanding the value of this opportunity.

And looking at digital magazines, there are some really exciting early indications of native advertising success. As I mentioned earlier, one of the strengths of Yahoo! Food and Yahoo! Tech has been the share rates we are seeing with content. But what is really exciting for our business and our advertising partners is the engagement rates are similarly increasing with native add content on magazines. Native advertising is a growth business and we’re continuing to focus on expanding the opportunities for advertisers to benefit from these more and more immersive formats.

And now I want to turn to social and talk a bit about Tumblr. We continue to see growing user metrics on Tumblr especially on mobile and really healthy user engagement measures. In Q1, Tumblr’s monthly mobile active users grew 71% year-over-year but more than 60% in daily active users accessing the platform on mobile devices.

Additionally in Q1, we saw 122% growth in Tumblr’s mobile engagement versus Q1 of 2013. In Q1, we also announced that we would be bringing native ads to Tumblr powered by Yahoo!’s ad technology. At the beginning of the quarter, we introduce a cost per engagement ad product for web in-stream and a similar product for mobile in-stream at the end of the quarter.

As I discussed before, Tumblr strength is really about the power of their distribution network while the average Tumblr post is re-blogged 14 times, the average sponsor Tumblr post is re-blogged 10,000 times. Today 150 of the top 350 brands in the world have a presence on Tumblr. This number has and will continue to grow as brands really recognize the unique and unmatched opportunities to engage across the platform. With Tumblr’s continuing growth, we’re excited about the creative canvas that offers to advertisers.

Finally with regard to video, we are really encouraged by the progress we saw in Q1. Our constraint on video has always been inventory and our investment in building our library in the Yahoo! screen brand is helping us to address this. We have continued to grow users and monthly streams and that’s beginning to translate into revenue growth. While we are only getting started, we’re very focused on this growth business in 2014.

For example, in the past, Yahoo! has produced more than 70 original web shows. Moving forward, we will continue to bring our users great original content. We will do so with much more focus and quality. Smart, more strategic investments in video can really help us grow our user offerings, traffic and ultimately revenue.

While we’ve launched many new products on the user side, it’s clear we are also focused on investing a new and existing relationships with our advertisers and partners. As we continue to deliver new offerings across mobile, native, social and video. We hope to continue to deliver an accelerated growth for Yahoo!

On previous calls, I’ve said, it would take multiple years to get the revenue growth that we desire. Moving into 2014, I feel confident in the foundation that we build in 2013 and our early but modest success in the first quarter of 2014 is evidence that we are on the right course.

With that, Ken and I would like to take your questions.

Question-and-Answer Session

Lauren Lyster

Thank you, Marissa. That concludes the -- or that brings us to the Q&A portion of our live earnings event. (Operator Instructions) The first question will come from Anthony DiClemente of Nomura Securities. You can go ahead with your question.

Anthony DiClemente - Nomura Securities

Thank you very much. Hope you can hear me. I have one for Marissa and one for Ken. Marissa, you were just talking about your video content strategy. I’m wondering, should we expect you to really accelerate the investment in ad supported professionally produced content? And when you look out at the marketplace in terms of Hulu and the media companies, full episode players, I wonder what gives you the confidence that there’s room for a new player in the original ad supported professional content space?

And then, Ken, just a question about the Alibaba results. There’s once again a big gap between the Alibaba net income and your earnings and equity interest line that you report on the P&L. And I know that you guys take sometimes tax and one-time charges in there. So it’s not always a linear kind of reconciliation, but it does seem like a bigger gap this quarter. So I’m wondering what’s driving that, please? Thanks.

Marissa May

Thank you for the question. So I’ll start on the question around video content. Our philosophy has been around -- we have been evaluating should we build, buy or partner in terms of our platform. In terms of the content what we have really been looking at is a really broad range, different types of content. Some originals, some through partners, some curated by our editors and some UGC and while we want to make fewer, more focused investments in the content space in terms of Yahoo! Originals moving forward, we imagine that the spend will be in line with that you have seen in prior years.

Ken Goldman

Anthony, on your question, let me -- I’m going to probably get back to you because to give the exact reconciliation, I’d rather show the exact numbers. There are some minor accounting adjustments we do make. The other thing is just always recall, we are in one quarter lag. So this is, we’re taking it to their Q4 numbers. But let us -- I can give you a little bit more reconciliation after this call.

Lauren Lyster

Our next question comes from Eric Sheridan of UBS. Go ahead with your question.

Eric Sheridan - UBS

Sure. Two quick questions, one on Search. Ken, is there any way to quantify the revenue guarantee going away from Microsoft and what sort of drag that is, starting in Q2 and going forward? And then question again on Search, but for Marissa. Marissa, maybe, can you walk us through your views on contextual search and mobile search and the relationship with Microsoft, and how you think your own ambitions in Search both inside and outside the partnership might develop over the next couple of years? Thanks.

Ken Goldman

Yeah. I would say, we have not relative to Microsoft Search Guarantee, we have not in the past quantified the number. Many quarters is relatively consistent. It was a little higher last year Q2 because we did amend the agreement a little bit. So it was a little bit higher Q2 than normal perhaps last Q2 of ‘13, but other than that we really haven’t in the past actually quantified that number.

Marissa May

And moving to the second part of the question, I would actually just tag something onto the first part of the question, which is one of the reasons why we have been describing in our slides. The Search click driven revenue is because that actually takes away some of the elements of Search revenue not driven by Search clicks. So we’ve been seeing actually really nice growth in that segment.

In terms of contextual and mobile Search, we basically think that there is a huge opportunity moving forward to innovate in mobile search. Mobile is such an exciting new platform and what users are really looking for when they do search is really at this time undefined. Sometimes they’re looking more for local, sometimes it needs to be more personal, what types of information they really like to see in that search is really not well understood, defined.

We think there is a great opportunity there to really be industry leading and that was what our acquisition of Aviate is really about. We look at mobile advertisements, we were really excited to roll out Gemini because it basically allows us to offer both mobile search ads as well as native display ads in the form of our stream ads on our mobile applications and on PC, all in one marketplace because the formats are very similar and what advertisers are looking for in terms of clicks is uniform across that entire offering.

And so it really helped us simplify the overall platform, but it also gives us freedom to start thinking about what formats might work well when we start looking at contextual search. We do think that overall context is incredibly important. When you look at some of the early advances from Aviate, the fact that you’d like to see different apps or different information when you’re in your car or at the gym or when you’re at home or at work, it’s just kind of incontrovertible. I think there is a lot of experimentation and a lot of exciting offerings we could develop for our users.

Lauren Lyster

Our next question comes from Robert Peck of SunTrust Robinson Humphrey. Go ahead.

Robert Peck - SunTrust Robinson Humphrey

Yeah, hi Marissa. Thanks for taking my call. Just curious if you could talk a little bit about your penetration with the AdAge 100, their advertisers, your core clients. What do they think? How are they embracing your new initiatives? As you think about wallet share, where do you think you are now and where could these new initiatives take you over time? Thank you so much.

Marissa Mayer

Thank you for the question, Robert. We have been really working on our relationships with advertisers as well as our offering for them and we’ve made good strides across the board particularly in consumer packaged goods. We’re continuing to meet with them and really cultivating the relationship. I think that when you look at -- we’re certainly on the radar of all of the AdAge 100 most of them, the vast majority of them spend with Yahoo! and advertise on our sites.

And so we are excited at that -- with that and that’s how we know that there is going to be a huge shift of dollars into the digital medium as PC and mobile continue to increase overall in use. And so this is why we’ve been investing in things like the Yahoo! Ad Manager and the Yahoo! Ad Manager Plus because it really helps us take our products, make them much more powerful and uniformly offer to all of our top clients.

So for example in the past, we had different ways of buying ads and different ways of targeting ads and access to different data that were available on different platforms. So for example if you’ve had a particular way you wanted to pay in terms of CPC, CPM, CPA, CPE, CPI, you might need to use one platform and you may not be able to for example, access data on a different platform.

Yahoo Ad Manager Plus and Yahoo Ad Manager break all that down and they make all the data targeting payment and targeting methods that we have available all in one place. And so it’s a great simplification and unification across our ad products and it’s particularly important for very sophisticated top advertisers like the AdAge 100 to have the access to that kind of tool because it really means that you don’t have to pick and choose different types of methods from different formats and not be able to crossbreed them.

It really makes it a lot easier for us to increase our overall share of their wallet. So right now, I’m overall happy with their spends, but that said, it’s clear that overall, the display market and the native market will grow precipitously, especially as there is more and more digital advertising and the tools we’ve put in place as well as our outreach to those advertisers is designed to gain wallet share.

Lauren Lyster

Our next question came via email. It was submitted by an institutional investor who asks, I think more and more people are starting to think about how to value your cash. Could you please help us understand how much cash do you want to have on the balance sheet going forward?

Ken Goldman

Yeah. There is a variety of ways I think about it. I think in the past I’ve mentioned a number of approximately $3 billion. I don’t think there is a hard and fast number. I have clearly said overtime that we want to have a strong balance sheet. We think that’s important in the space we’re in. We want to have the ability to make acquisitions and invest in business in terms of what we think is important.

I commented earlier and the word I have used is, we want to be and we will be good stewards of our shareholders assets and cash. We think about that a lot. We will work with our Board as to how best to deploy that cash. And clearly I think part of your question relates to as we in the future may get some additional proceeds and again, we’ll think about that and what makes the most sense.

At the time between proceeds back to investors as well as investing in business. Again, I think the best demonstration of that is a fact that we have bought back about $6 billion of our stock in the last 1.5 year plus for about, I think, I remember 267 million shares. So we have clearly reduced the number of shares we have and again we think that has been a very good use of our cash.

Lauren Lyster

Our next question comes from Carlos Kirjner of Sanford Bernstein. Please proceed with your question.

Carlos Kirjner - Sanford Bernstein

Thank you. I have two quick questions. First, Marissa, after the Alibaba IPO, you may end up with about $12 billion in cash in the balance sheet. Given where Yahoo! is today, it’s been a long journey. Do you see a plausible or likely scenario in which it makes sense to undertake transformation of large acquisition or you think the best way to go are small tuck-in acquisitions?

Second, Ken, I understand you may not want to get to the specific details but given the fact that Yahoo! has studied the issue for years now, can you please tell us if there is a non-trivial even if theoretical chance of getting some tax efficiencies associated with liquidity from Alibaba IPO or what information we are missing to make that determination? Thank you.

Marissa Mayer

On the question on the Alibaba proceeds, I would echo what Ken has talked about. We understand this is an issue of critical importance for the shareholders. We intend to be good stewards of our capital and we have been to date. When we look at the investments we need to make in the business, you’ll see the same type of mix we’ve been making to-date, some strategic acquisitions, some tuck-in acquisitions. And we really need to see what opportunities arise in terms of the ways we can deploy the cash at that time and we’ll do it in conjunction with our Board.

Ken Goldman

Yeah Carlos. I was wondering when you’re going to ask that question. I love theoretical questions. So yeah, in theory, we do -- we are still looking at it. We are working on it. And we’ll continue to, I mean, I guess the overall overwriting is that we will continue to think about how to maximize the overall use of the proceeds and so -- and how best to use that relative to structure of our business. So there are theories we continue to work on and at such time as we’re in a position to disclose more, we will disclose more.

Lauren Lyster

Our next question comes from Neil Doshi of CRT. Please go ahead with your question.

Neil Doshi - CRT

Great. Thanks for having me. A couple of questions, Marissa, can you talk about the native ad format and what opportunities do you believe Yahoo! has? Is it continuing just to have ad formats in the news feed or do you see potential for in app install et cetera. And then on the TAC side Ken, can you talk about what drove TAC to relatively low TAC rate and whether that’s sustainable or not? Thank you.

Marissa Mayer

Sure, I’ll take on the native ad format question first. Our stream ads are really where we started and these our basic text ads that appear in the news feed as you noted. That said, our Yahoo Gemini platform, not only has it expanded now to mobile search, but has also already begun to expand into new formats. So for example, we introduced image ads, which allow advertisers to upload large, full screen images that appear in slide shows.

So again, the whole principle of native is that the ads look like the content around them. They’re clearly marked as sponsored, but they’re part of the experience and they’re in line with the experience. And so those image ads have been a great foray into a different type of format on native. And in addition, we have also taken the same text based stream ad format that we had on the Yahoo! app and expanded it to cost per install, CPI advertisements that we have had available now since late in Q4. So we do have some ads where that actually do lead to the type of installs and downloads that you referenced.

Ken Goldman

Yeah. Let me mention -- really a two part question. I think I noted a little bit the primary reason the TAC was down for this quarter was the complete -- was the final transition of the Microsoft -- transition in Asia-PAC of various regions to Microsoft Search. So we completed that. And so that really is the bulk of it.

Going forward actually I do expect TAC to go up as we do more off network ads as we used the Yahoo! Ad Exchange more and we increased that business. I do expect that to help us both from a GAAP point of view as well as it will have more associated TAC with it. So my sense is this is probably the low point of where TAC will be and that it should go up over -- I expect it I should say to go up over time.

Lauren Lyster

Our next question was submitted via email. It came from an institutional investor who asks; explain how, when and why core Yahoo! growth should accelerate?

Marissa Mayer

Well, we are seeing some of that acceleration in some of that early growth already today. And as more of our business moves to mobile, social, native and video, we think some of the terrific growth trends we are seeing, 60% last year and 98% in this first quarter in terms of year-over-year growth is likely to continue to occur. And so we’ve been overall investing in those key areas, driving up our mobile traffic and our mobile revenue, driving up our social presence with the acquisition and the growth and investment we are making in Tumblr and also working on our native and video offerings, because we really think that this offers great opportunities for users and for advertisers in the future. And we think that our Q1 results are indicative of some of the early signs of growth that we can see are fostering these businesses.

Ken Goldman

I want to add couple of points. One is to reinforce a couple of numbers, I’d say maybe relatively quickly. If you exclude other, which actually Marissa has told me I have to help try to fix. But if you exclude the other revenue, if you look at overall growth globally, Search and Display were up about 5% year-over-year. If you just look at Americas, it was up about 8%.

Clearly, we have put the most attention in the past year to Americas. We do expect now to do a much more overseas, international and really drive growth there as well as we take some of those products that we’ve invested and move them over there. So we are looking for growth in international, which is really important to show our growth. If I look at some of the other firms and related industries where they have seen a lot of growth is internationally and we haven’t see those yet. And so that’s going to be a key focus of ours as well as continuing on the Americas.

Then you get into the four core areas we talked about in terms of driving those. And as those become more material, those areas in mobile, video, whatever as they become material, it will be much easier to growth the topline versus some of the smaller sizes they have been in the past and also easier to offset the basically flatness if you will on the PC side of the business.

Lauren Lyster

Our next question comes from Ron Josey of JMP Securities. Please go ahead with your question.

Ron Josey - JMP Securities

Great. Thanks for taking the question. This is for Marissa. So, I think we are almost a full quarter of post the launch of Yahoo!, the Yahoo! Ad Manager platform. And I think at the time of the launch, Marissa, you said that Yahoo’s data and UI were differentiating factors, but that now maybe the company is focused on building out its network. So, I just wanted to understand how is the -- is that something you still plan to do to build out the network, is it still a focus and what’s the progress there? And then a quick follow-up just with Ken, CapEx, I think was $85 billion this quarter. Are you still planning to spend around $500 million? Thank you.

Marissa Mayer

Sure. Well, we’ve been really excited overall about the addition of the Yahoo! Ad Manager and Ad Manager Plus to our portfolio. We announced the product in January. We launched it over the course of Q1. At the moment, we’re still working on migrating campaigns onto the platform and we expect that to continue throughout Q2. The other piece that the Yahoo! Ad Manager and Yahoo! Ad Manager plus really opened up for us is syndicating those ads to off-network, which enables advertisers to take the data and targeting from our system and actually apply it on the web at large.

And so one of the reasons why for example, you will see, you’ve heard Ken referenced the fact that TAC is likely to increase in the future is because we think our Display TAC will go up as we take more of those ads and begin moving them off-network. We are obviously going to continue to place ads on our core Yahoo! Properties, but we also want to grow off-network business, which to date has been reasonably small on the Display side.

Ken Goldman

Yeah. And this is Ken. Relative to the question on capital, yeah, I still think from what I can see today, $500 million approximately is about the right number. We have made a number of commitments as we go forward. Much of the work we are doing this year to -- on our data center conversions to our owned and operated data centers in building those out will hit us this year.

So there is a number of those investments that we are making. Plus there are some technology investments we have to make. So, I do think $500 million is probably about the right number and I think it’s an appropriate number frankly for us to invest in this business and it’s obviously up from $300 million. What really helped us a lot in ‘13 is we were able to utilize a lot of the capacity that was put in place earlier. And so, we’ve gained sort of the benefits of that, if you will.

The other thing I would add is over time, we do think we will be more efficient in our data centers and that will help our cost structure, as we do more that ourselves and away from the lease operations we’ve had in the past.

Lauren Lyster

And our final question comes from Youssef Squali of Cantor Fitzgerald. Please go ahead with your question.

Youssef Squali - Cantor Fitzgerald

Thank you very much. Two quick questions please. So first, Ken, going back to something you just said earlier about growing international. So on reigniting growth internationally, could you just walk us through what exactly do you guys need to do both on display and search that gives you the confidence that you can grow that business up to U.S. levels. And then, Marissa, between -- since you are not breaking out any of the big drivers of 2014 display, may be you can just help us rank order mobile, video, social, native, just kind of sense of which pieces are more important than others? Thanks.

Ken Goldman

Yes, I will start on international. There is a variety of things. First of all, we are focused on some core countries, so there is a number of countries we say we want to invest in and we’re very serious about investing in those. And some other countries, frankly, we don’t think quite are as critical in terms of at least near-term growth, so we are going to focus on that.

I think the other thing is, we consciously made decision in ‘13 that we wanted to update the products and properties first in the Americas. We had to get the process if you were right, so we spent our time doing that. We are now going to -- we had now have a very focused on as both bringing those products overseas as well as, as we introduce new products having their lag time between introducing them in Americas and overseas much, much shorter. So we are going to focus on that.

And then may be the last thing I’d say is, to the extent that we can find an acquisition that we think makes sense that it can help us. We have looked at some in the past, as you know. We think that’s also a way that we do want to increase our scale, if you will, overseas. So we are going to be more aggressive. I guess, the bottom line is, we are going to be more aggressive as we think about international. Basically, if you take out the FX and other sort of anomalies, basically international is about flattish, Americas was up, and so now we want to see growth internationally, and that’s what we are focusing on.

Marissa Mayer

And to take the second part of the question, I think that when you look at mobile, social, native, video, one of the interesting things is that they all overlap. So for example, the way that we are going to monetize mobile, social, video is in fact through native formats, because we think it overall enhances the experience and native is more of a concept than a particular type.

We have particular platforms like Gemini that are focused on native today, but there is a lot of overlap. So, it’s hard to actually rank order them because they are interdependent. That said, I would definitely put mobile as one of the key pieces and probably the most important of the four in terms of overall growth. But again, I would like to stress that these four businesses are investment businesses, but they are still nascent, it’s still very early on, and they are not material to our overall results.

Lauren Lyster

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

Marissa Mayer

You probably noticed today’s earnings presentation was once again in the format of the Yahoo News Digest. Here is the News Digest summary of our Q1 2014 earnings. One, Yahoo!’s best Q1 in four years. Two, more than 430 million monthly mobile users, active monthly mobile users. The ninth consecutive quarter of Search ex-TAC revenue growth. Four, Display revenue up 2%. Five, mobile, social, native and video collectively grew 98%. Six, Bobbi Brown, Joe Zee and others to lead new digital magazines. Seven, Yahoo Gemini, the first unified ad marketplace for mobile search and native advertising.

And 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 live stream. Thank you and see you next quarter.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Yahoo!'s CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts