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Yahoo!, Inc. (NASDAQ:YHOO)

Bank of America Merrill Lynch Global Technology Conference Call

June 04, 2014 01:00 PM ET

Executives

Ken Goldman - Chief Financial Officer

Joon Huh - Investor Relations

Analysts

Unidentified Analyst

Thank you for joining us today, very pleased to have Ken Goldman Yahoo!’s CFO with us today; [Mr.] Joon from IR is going to help us clarify some answers as we go through the presentation. But I’ll probably do Q&A for about 30 minutes with Yahoo! and then we’ll open it up for questions from the floor. So thanks for coming Ken.

Ken Goldman

Thank you. Let me just (inaudible) before I start let me disclaimer thanks for, I do thank you for coming. I may talk about forward-looking statements to the extent that you want to see the risk factors that relate to those they’re in our latest 10-Q filed for the first quarter as well as in our annual 10-K and other filings.

Let me actually make a couple of comments before I start. We have now been up in here now since the end of ‘12, I think most have came in July of ‘12. And so we've been there almost two years and made a lot of progress from my perspective, a lot of progress relative to sort of reinventing the company from the point of view of attracting the right people, changing and moving the culture to be a much more internet friendly company. So, we hired a lot of people, brought out a number of new and refresh products really driven to mobile which for a lot of intensive purposes really didn't exist, an issue that really didn't exist at a time focused on the social site, on the video site and recently came up with a whole stream and made of advertising process.

So, we have made some very, very good process. Change the culture and so far as a very, very performance oriented, we have annual and quarterly goals, we have reviews. So, we're very, very focused on the performance of the company and what people have to go do; what’s just interesting in is ISS meeting going to with them, the performance, the kind of way which we think about performance metrics and our goals, all of which are laid out in our annual proxy.

So, we've made a lot of progress, if you look at our overall numbers, some progress -- very honestly we've a lot of work to do. You’ve seen consistent growth in Search; nine quarter in a row we have grown Search business. We've nimbly always referred to a Search quick revenue growth which really takes out the Microsoft Guarantees and some of the anomalies by getting out our Korea and Japan and that was up 14% overall, revenue is up about 8% or 9% in terms of search, up modestly into display about 2% where we had ads sold up about 7, we are pricing down by 5. So we are seeing some progress there. In the Americas, it’s really been our focus, and I’ll come to three or four challenges in a second.

In the Americas, if you look, if you take out other revenue, just look at search and display was actually up in Q1, about 8%. So there are some signs of progress; having said that, we have a lot of work to do. We actually have a lot of work to do. We know we need to provide more metrics as we get to keep on working on a business rhythm and so forth. We do know that capital allocation is foremost in a lot of folks’ minds, so that is both in terms of what we’ve done with our prior cash as well as forward cash and I’m glad to discuss how we think about stock buybacks and so forth.

We know over time, we need to keep on improving as well a lot of new products, the stability and variability of our products, so we are working very hard on that. We have invested a lot of money so to speak in terms of these new initiatives. On the other hand, we do know we continually to be more efficient in our company and that’s really some of functional areas, so we are going to continue to focus on efficiency.

And lastly, we know the key is ultimately is going to be growing the engagement in this company and how that will then translate into growing the revenue of the company. So we are very, very focused on the core business and growing the engagement and growing revenue. And that’s really where we are today in terms of how we think about transformation of the company.

So we knew this is going to take some time, it is going to take some time to get where we need to be. As I said, a lot of work has to be done with the team in place and that’s where we are really very, very committed to do.

Question-and-Answer Session

Unidentified Analyst

Great, thanks Ken. Really interesting time to be a CFO of Yahoo!. You’ve got a business that you are trying to turn around and then you obviously have a lot of assets that people are very interested in and a lot of opportunity to create value as a management team if you use that. But we will start with the core business and how is Yahoo! changed in the last year? Maybe you can talk about the culture, your position in the valley, just kind of relevance versus other internet media companies, how do you see that right now?

Ken Goldman

Well, I think the one thing that I always come back to I knew guy used to run BD at Yahoo! I knew him as a friend before I came to the company and I would see him, and he would basically commiserate to me that he had all these great companies he love to acquire but these companies didn’t want to get acquired by Yahoo! They really, they didn’t see how they could succeed as a company; they didn’t feel it was an internet oriented technology company. And so he was just very and actually ended up leaving because he just felt he could not achieve his goals as a BG and M&A guy because frankly most companies really didn’t want to be part of Yahoo! That’s really changed.

So we have acquired something in order of 25 roughly companies in the last couple of years; most of them have been small. We continue to do that. We find companies very much want to talk to us. They clearly like the direction we’re taking. They know and respect Marissa and what’s she is trying to do. So she just has a great number of people that will that attracted to come work with her and the team here. They see a whole new Yahoo! from the persona of what the company stands for. There is no question and this is a company -- I mean I go to various events; people are polling for this company to succeed and do well. We don’t have to succeed, we don’t have to have others lose us big because we sort of play an interesting role in terms of way we have our properties and content versus what most of the companies particularly in the valley have, most of the companies have primarily UGC, user generated content, we think search that way, certainly Facebook and LinkedIn that’s sort of -- Yelp that's a lot of what they do.

We want a very few that really equates to original content Katie Couric is just an example of how we sort of think about creating a unique content that we provide at news and so forth. And yes, we may collect a lot of content, we also create a lot of that as well. So we have a differentiated aspect, one of the -- we just want the Apple award in terms of news digest product, which is a great product.

The M&A, that's an example of an M&A from the Shanghai [Nick] who at the time I think was 17 out of the UK came to work with us and is there a number of great products that he has helped us develop overtime that’s just a young kid wasn’t even in college the time we affect that we acquired [Kim] and his company.

So that's sort of Tumblr, Tumblr was a company that wasn't for sale first at all but again we look at that as a company that we felt had the right demographics so we wanted the right space or we wanted tremendous number of users and as a company that again I think in Yahoo! a couple of prior years ago probably would not have been interested in and working with us. And so there is just a number of examples of where we have been successful acquiring talent. So yes, I think cal just changed tremendously.

But also let me just say, I think you can't just sort of, you have to sort of color that, complement that with discipline. And so we have strong discipline in our expense processes, our capital processes, how we hire people, how we measure and track performance. So yes, we have a lot of these things that make it very attractive, the lot of things that you do in terms of making sure people have the latest laptops and phones and all that’s just part of being in business if you will on internet but on the other hand we are very performance driven as well. So, it’s a complementary capability, in terms of a great place for work as well as making sure we are performance driven.

Unidentified Analyst

Got it. And you mentioned maybe disclosing more metrics down the road. But as you look at the metrics and I know you currently talk about Q1, are users and usage growing, are there some encouraging signs in there as you looked in performance of that?

Ken Goldman

I am not going to, I am not going to -- I don’t tend to update from the quarter. We clearly saw some favorable trends. And I think there is no question you have to be successful in mobile, there is no question you have to be successful in video. And then mobile we have some like 430 million users, the thing I liked in Tumblr is the fact that I think 60 [channels] of users now come through the mobile site, usage up 100%, actually on mobile revenues are up 100% both in Search and display in the first quarter. So we are seeing growth there.

We need to do more. There is clearly more work, we do need to do in terms of our property and making sure the content is relevant for the people because the world is changing is to what people, how people get attracted to finance sports and news today, weather or any of these keeps on evolving. So we need to keep on evolving as to how we think about that. And I would just add one other things thinking about is it gives us a competitive advantage. If you want to work with us on search and there is a lot of folks that obviously Google is extremely strong you don’t need me to tell you that in terms of search, but one other thing that gives us the ability as we have not only search and a lot of people want to have another player beside Google in search as we have these various apps and by the way the way people go on mobile now is 78% on apps, that’s what drives mobile. But we can combine this ability to connect Search with our applications. So, if you want to work with us as a partner we don't just have search, but we have our applications which helps drive Search and vice versa.

So, we are one of the very few companies that has both, a number of apps and sort of the core 8 to 10, 12 areas of that apps uses was on a daily basis if you will and that we combine that with Search. And that's one of the advantages we have and how we look at search vis-à-vis some others that are just purely in the search business.

Joon Huh

Yes. I think if I could just jump in here also is that if you go back to a couple of years ago, I think the issue was that people thought that there was a big platform shift happening over the mobile. And that the question was where was Yahoo! going to play, like where was our audience and where were our products. And as Ken mentioned I mean for two years in a row now we have won an Apple design award. So, I don't know that we could have done that couple of years ago or we have that leadership in the product and technical talent in place to do that. But that's a significant milestone.

And then secondly the fact that our audience, more than half of our audience is engaging through a mobile platform now.

Unidentified Analyst

Yes. It is impressive number and I think people wonder what those 430 million people do with Yahoo!. Can you provide any visibility [Multiple Speakers]

Ken Goldman

Yes. It’s interesting a lot of people like if you get outside the company and just talk to folks, it is really simple product we talked about and Joon just mentioned we've got the award as News Digest and I'm a big fan and I would like to see things push. So, I see a push in the morning and I see it on my phone, I see it in the evening. And so, that's just an example of people want to get a quick thumbnail sketch, a simple summary with the latest news.

I know when it's basketball season or baseball now I guess it's probably basketball season. You want to see the scores, you want to see the highlights, you want to stats. And so that's people do that. Weather is obviously something people constantly look at; finance and stock close and so forth and portfolio and all these things. These are things that people do think about every single day. Obviously you get your email on the phone. I mean how much people focus on getting email through the tablet or the phone, I mean these are things that people do every single time, I think every moment but constantly during the day.

Unidentified Analyst

Got it. And when you think about what they are doing on mobile and you compare that to PC; and definitely I appreciate that more of news feed format that you have moved to, but is it as monetizable for Yahoo! or are other new challenges there as you think about monetizing that mobile use versus PC?

Ken Goldman

Yes, let me, again I always like to sort of say that the things we have to work on. So clearly today we made the challenge, desktop PC is clearly in terms of how we -- particularly on display side that is a challenge because people are gravitating to mobile. But I personally think over time, again this is my opinion that I think mobile be every bid is good, over time as PC, a desktop and why is that, so yes obviously much smaller form factor although I think over time form factor is -- clearly if you look at Samsung, these form factors are getting bigger and bigger. And clearly tablet is much bigger form factor.

So I think -- but I think the fact that people use phones much -- many more hours than they would have on a PC, so the usage is greater. I think the fact that they more often they know who you are, where you are, because much more time sensitive, I do think will credit. The thing that having been at Yahoo! now for I guess almost two years is that sort of allows me just the way add formats, people and changing, so the technology and the ad technology and how that evolves not just programmatic but just ad format and where to place them, how place them and so forth that is just the science in and itself and the streaming and native all of that is things that didn’t exist two years ago.

And so yes, I do think it will be a different experience, but I do think the opportunity because of the time people or the engagement people will be on mobile, I do think because of knowing where you are and sort of the action orientation of phone, your (inaudible), you are doing this, you want to book a reservation, you want to go buy something, want to check with some places, you want to go order something, all of those things are -- people can do right when they want to. I think that does create the opportunity. Will it be right away, no. And so is there discount today in terms of ads on phones versus desktop, yes. But do I see that changing over time, in my opinion, yes.

Unidentified Analyst

Got it. And how are your in-stream or in the news feed ads performing as you put them both on PC but on mobile how is that program…

Ken Goldman

Yes. Clearly the pricing is still less, but I think something like 20% of our ads were stream ads this past and Q1. And again I think that again there is a lot of technology focused on this and making it more relevant to the advertiser, to the users looking at the ads. And frankly as I -- again we see it, there is no question we still need to do better job of targeting and making sure we do it -- we target the right ad, to the right person and so forth. So there is more work to be done there. But I do think the fact that they are [non-intrusive] per se. As they became better targeted and more useful, I do think there is no question. And I think again when I look at a lot of these things and again if you are next to a restaurant and you see an ad for that restaurant come in here and we have -- restaurant we have, there is not a waiting list, you can come in right now. I just think there is so many ways you can make that ad work better if you are at best site. You see it, you say, hey this is on sale all of a sudden, come and now, you can buy this Samsung TV or the Sony TV whatever. I do think that’s the opportunity that we’ll be playing out.

Joon Huh

Yes. And we like to think of it as native advertising or the stream advertising that’s a huge opportunity for us, right? So, it’s less than a year old, the marketplace that is units are growing as the market price that is units are growing. As Ken said over 20%, or around 20% of our units last quarter was stream advertising. And we think that pricing -- we believe that over time pricing will get better as we improve targeting, as we improve personalization, relevancy and getting more advertisers into the marketplace. So we think that's a huge opportunity for us and especially with the mobile format native advertising is sort of the future for display.

Unidentified Analyst

Got it. And let’s move onto video. Are you seeing a lot of video usage on Yahoo! and what is your strategy related to video, both PC and mobile?

Ken Goldman

Yes. I think that’s exactly, I think we’re fourth and fifth largest video. We have a ways to go in video. And I think after watching last year and a half, there is some things you see that absolutely work and some things that don't work as well. I think clearly what works and then you can then for what doesn't work as well is unique content is clearly the killer app if you will. And so when you do something like Live Nation and you have the ability to have unique concerts by a number of artists and so both well known artists and not well known artists and they will be playing effectively every single day and if you want to see them, you have to come Yahoo!, great opportunity for sponsorship of those, we have tremendous demand for that.

We think we bring on these two sitcoms; we'll have tremendous demand for that. So there is much more demand for that than if you just have clicked if you will that folks define other areas on the net. So a lot of -- so you need that as well, but where we -- and by the way we pretty much -- our challenge is to have more content because we pretty much do sell out with content we have in video, but the challenge for us is get more great content that's frankly unique if you will to us.

So I think that will be continued to be used as a creative. We’re very hopeful as I mentioned earlier when Katie Couric continues to do unique interviews and interviews very influential folks so to speak in our studios in Europe. We think again that is something as unique, it can be Yahoo! far or you find somewhere else. So, I think when you have folks like David Pogue, Katie Couric, Bob…. what’s that?

Joon Huh

Bobbi Brown.

Ken Goldman

Bobbi Brown. So you have those folks and they can work and have unique content value-add good interviews, we think that is what we can play to, that will be our strength as opposed to effectively regurgitating content that you can see that’s basically just UGC. I think UGC is bad but they have some things also unique we think is really is something we can really bring to bear that people will associate Yahoo! with in terms of video.

Unidentified Analyst

Got it. Let’s move out a little bit to the search business which is obviously a big profit generator for Yahoo!. Is the mobile transition a headwind for Search and what is your strategy….

Ken Goldman

In terms of mobile transition?

Unidentified Analyst

Headwind for your Search business and what is your strategy for the goal?

Ken Goldman

Again I think the way Search really runs for us is through our own properties. I mean if you go back the last few quarters some of the affiliates have come down, we do more search through our own properties, we thought we think that’s good. And to make search very seamless to find and so whether you’re on news whether you’re on a finance, mail and if you look at our mail is much easier now to go for mails to some of our other site stuff. So it’s all a unified concept of apps really very, very important. And so the value-add we have if you want to search not only just having a good product but it’s the ability to have search seamless. So whether you're on Yahoo! whether yahoo.com or whether you're on mail, whether you're on weather, whether you're on finance. The apps address it right there. And so again, if you are on mobile that's where people are going to be searching, because they are going to be on their phones and many hours more than they will be on the desktop on a normal basis.

And so I think -- and again I will think about this that is one of the -- as I think about some partnerships we continue to work with. One of the things that we do bring to bear that others don't is the ability to connect mobile apps with Search, others tend to be just in search or just in apps, but not having both.

Joon Huh

Yes. And what I would add if I could just jump in here is that the biggest difference is that we have leadership in that understand search that believes in search, Ken might see the term that we're long in Search. So we continue to invest and we think there is still a lot of growth ahead of us. And that's why you see things like doing Gemini where you’ve a unified marketplace for mobile search and native adds together, so that advertisers can allocate much across Search and display on one platform.

So, I think the leadership that in place really believes in the long-term viability and health and sustainability with Search. So, we'll continue to invest there.

Ken Goldman

I think you have to remember, Yahoo! has been the search for effectively all 18 years of its existing. So Search is core to Yahoo! it has been core for the number of years. Clearly as an area of core from research who search for a number of years at Google, at obviously Google. And so we think we can do a lot of creative ideas both in terms of UI aspects as well as what we can do on the mobile site of Search. So, there is a lot of emphasis there. We're investing heavily in Search in areas that we think we can differentiate ourselves and bring a better product to market. So absolutely right, the Search is very, very important to us.

Unidentified Analyst

Are you seeing the mobile [query] volumes for Yahoo! product?

Ken Goldman

Again we saw in terms of revenue is up, Search year-over-year and mobile up 100%, so we are absolutely seeing great growth in mobile and that’s clear where we are going to be look at the growth going forward.

Unidentified Analyst

Go it. Great. So move on to the other side of the equation which is the asset side, which I know there is a tone of interest in that. You saw the F1 filing? Yes. Well obviously the F1 filing….

Ken Goldman

You are talking about our cash, (inaudible)

Unidentified Analyst

And what you got going on there, but I did look like your ownership [available] maybe dropped a point with some dilution. Is that reading that right and is there any updates there you want to provide?

Ken Goldman

Yes. I think again there’s different ways to calculate, I just I think the calculation that use was 22.6% to be exactly correct for calculation, there is different ways to think about dilutions. I just going to we use the end numbers and so there we put that number and there has been -- as they gave stock to employees as they buy companies with stock whatever it is, there has been some dilution, but that is not abnormal in companies because clearly they are growing. So in their case they are growing their share count not in the case of Yahoo! we are actually contracting our share count because we are actually close to 1 billion share now we should be like do almost 1.3 billion. So you were doing the opposite from a share count point of view. So no, we -- I don’t know if you want to have a specific question relative, the share count clearly -- our share count stays the same which is that year-over-year share count has gone up a little bit?

Joon Huh

Yes. What I would say is that obviously on the bottom to topic we can take questions from the audience too, but they are not quite there yet. So there are certain questions that we will just sort of or questions that we may not be able to answer and let their information just sort of end on phone and hopefully can [argue that].

Ken Goldman

The one thing I will say is this is a public through the 10-Q, I think we bought, which is as of May 8th, for Q2 we bought back something like $225 million of stock. And so that should just give you all in this room that confidence and hopefully people listening, confidence that we think very strongly about how to best allocate capital to buy back stock and we think it’s attractive for us. We -- no one tried us to go do that; this has nothing to do with -- we more than gave back if you would look at the amount of funds we got back from Alibaba and that’s net of tax last year. We more than gave those back to shareholders if you look at all of our buyback.

So, we always remind people, we are 80%, 90% compensated as management team by stock. And so we are clearly incented to think about how to do right if you will by shareholders and part of that is capital allocation. The one thing I would say and again and we stay away from Alibaba because as Joon says, they are in the quiet period.

We duly have some great new directors coming on board and as we think about capital allocation, we’ll obviously think through that with them and all the various things we can do on tax and so forth. But I am very excited to have Chuck Schwab who I have known over a number of years; Lee Scott who came from Walmart and Jane Shaw who formally was Chairman of Intel. These are all great, great folks. And so as we think about how to be very, very thoughtful in capital allocation in terms of what we need for the business, what we need in terms of potential M&A but also how do we think about returning cash to shareholders in a way that continues to reduce our share count.

Unidentified Analyst

Got it, one from me before we open to audience. How does the stock price factor into your decisions, like do you have like a range in your mind and what the value of…

Ken Goldman

Yes. I am not going to obviously give that but yes we have, we do have different prices and different ranges. And I think one of the things, you try to be thoughtful on how you do it. One of the things I’ve looked at over a number and number of years is if you go back, I think the big -- highest amount of stock repurchase we owned in '07 just before the downturn. So you try to be thoughtful as to buying back stock and so yes, at least our mentality and our thinking is that, as [$0.06] of stock goes down, we are bigger buyers than otherwise. So yes, we are price sensitive in terms of our stock acquisition.

Unidentified Analyst

Got it. Let's see if there is any question, I see one here.

Unidentified Analyst

Ken, this is [Kevin Saddler]. So, the key premise is that you have very valuable asset Alibaba, your stock price is going to go higher after the IPO. So why wouldn’t you issue debt now and buy back your shares very, very aggressively? You $35 billion market cap and you’ve got $325 million, is that right? And that's not very aggressive. So, but the key premise, the key question is you have very valuable assets, why would you not issue debt and buy back your shares very aggressively right now?

Ken Goldman

Well actually, we did that. I mean it is always a level of how much to do. First of all, I don't know when the stock will go up, but I don’t after Alibaba goes public, so I'll just leave that to other people that sort of work in the investment world. But if you remember, we did do a $1.4 billion debt offering convert last year, and I’m very proud of because effectively zero up a 100 which I think was a pretty attractive deal at a time and [Merrill] helped us in that, so thank you. And so we did that actually. We previously said we wanted to keep net cash around $3 billion; if you look at after Q1, we are at $4.6 billion and if you take out minus 1.4 for debt, there is about 3.2. And I already said that we’ve bought 300 million back of stock in Q1 as of May 8th. And I haven’t even updated because I can’t really update you for today but we have been buying stock back by just number I just gave you.

So I think we are doing just exactly what you just said, could as a level I mean do a lot of our work and thinking. And by the way not everyone was the supportive of doing of the debt, I was, I drove it, I thought it was the right thing for the company, I thought it was a one way to get ahead of the curve relative to buying back stock. And I’ll let when we report numbers for Q2, I’ll let those stand on their own relative to our buybacks how much we’ve done. So I agree with you and we’ve done some of that, could we do more perhaps but concept that’s exactly what we have been doing.

Unidentified Analyst

(Inaudible) the Alibaba asset against please?

Ken Goldman

Well it all depends, I don’t want to try to…

Unidentified Analyst

Last reporting period?

Ken Goldman

I mean we have about 22.6% if you want to use the numbers that came out of there if we call F1, I mean then you can use whatever valuation you want to use in Alibaba, it’s a big range and I don’t want to get into and it can be one the quarter to range and getting troubled for quoting a range, so I don’t want to do that.

Unidentified Analyst

(Inaudible).

Ken Goldman

It absolutely will create billions of dollars, yes.

Unidentified Analyst

So, the 1.5, I mean debt you’ve issued is probably municipal in reference to what you could do and as a shareholder, it’s the strong recommendation is to get ahead of this to issue debt offshore, I believe the sale side models have even 38% tax rate. So this is an offshore asset, is that correct? Can you confirm that?

Ken Goldman

I am not going to say it’s an offshore asset. Well, I will confirm that much of the stock is held by our Hong Kong subsidiaries. That is correct.

Unidentified Analyst

Well, the company is in China, so what's the ambiguity there?

Ken Goldman

No, I'm just saying some of the stock is actually held by U.S. our U.S., I mean obviously it's China company but some of the stock is held by U.S. entity, some of the stock is held by our Hong Kong subsidiary.

Unidentified Analyst

But the U.S. stock you own is got a [third], is that correct.

Joon Huh

We haven't broken that piece down.

Ken Goldman

Yes.

Joon Huh

So I think you can -- we haven't broken out what the distribution is?

Unidentified Analyst

In planning for that debt issuance, of course if it is 70% roughly which I believe it is, then I think that the strong recommendation is that again issue debt on a tax efficient basis, buy back shares and that's strong…

Ken Goldman

I understand the recommendation.

Unidentified Analyst

The second question if I may. And this is a different topic is there was a $100 million plus in employee contract and while you were just talking about carefully monitoring expenses, and I think you have done a wonderful job doing so. Can you just reassure us that you are not going to write employee contracts for $100 million again? And if that -- if you do one, can you do it for me, but realistically can you just assure us that that won’t happen.

Ken Goldman

You have every ability to apply for job. So, but no, that’s a fair comment. I understand the comment. I would say two things relative to that and which I give much a lot of credit. I mean it wasn't working culturally for a lot of reasons and I think you talked about one of the persons we let go. And so, it is what it is. The contracts really get into just I said two key pieces, one is it was as a time, it was “to make whole for stock that was being left at a prior place.” And so it is what it is. Two is a lot of value went up immensely because our stock went up from the time he was attracted or recruited to the company. So, it didn't work out the way we had hoped. I understand that there is nothing else I can really say about it and obviously it’s unfortunate and you will have to learn.

Unidentified Analyst

Okay. Last question if I may is that, you do have the focus on search in mobile. Could you talk about the capital expenditures what -- when you say you are spending a lot of money in search, could you put some parameters around roughly what you think you spend maybe in last 12 months and what you think you are going to spend in [search]?

Ken Goldman

Well, we haven’t broken out capital by which each group, I would just say that we spend about $303 million in capital expenditures last year, and we have said we will spend around $500 million this year which is about 10% of revenue is actually quite a bit less than some of the others like Google and Facebook but now the M&A growing lot faster than that so it’s appropriate.

I think last year we were able to get the benefit of being more efficient in capital that was deployed in prior years, as we think about this year, there are -- I would say technology improvements we need to make that is really important to us, and so some of that is in Search, some of that display, some is actually product focus, be it Flickr so to speak, much of it’s in service and technology there, some of it is in storage. So we continue to be more affective as to how we think about -- and again I am not going to say, who we buy home pages, let’s say in terms of who we buy from in general and how we think and how we get discounts and structure that.

So capital will be up, and frankly we go back years ago, we were spending $600 million $700 million on capital expenditures and today our depreciation actually is going down because we are spending less in capital on a quarterly basis than our quarterly depreciation.

Unidentified Analyst

Great, well thank you very much.

Unidentified Analyst

Any other questions in the room? Will come to minor business but I am sure it’s been a headache for you, it is the fees business, the broadband agreements and some other things. Any way of kind of stabilizing that? I think on the call you mentioned most of that allocated and you can, so what do you think in there?

Ken Goldman

Yes, it’s one of those things where I think unfortunately we’ve had -- it’s a very good point. I mean if you look at last quarter, the LLS, I would just say other revenue was down about 11% year-over-year and it certainly created a headwind. My goal was to arrest some of that. Unfortunately some of those businesses when we get into them, they don’t -- they probably made sense a time, they don’t make as much sense today in terms of how we think about it. So our goal is to stabilize that business. I don’t necessarily think it will be a growth business for us over time. But my goal is to in a number of areas where I am working at it is. So some of it is e-commerce, some of it is small business, some of it is just relationships we have with people pay us amount of money, they get to be on our site in different places, so some of that. But sometimes it’s trade-offs, so you might get money there but we give up -- we had given up money on display by giving them time real estate if you will.

So there is a trade off. My goal was to keep that from being a headwind. So as we hopefully grow in other areas, if we don’t have that headwind and offsetting our growth. And that is clearly one of the ways I am thinking about at least. And again I think the other thing I would say is that’s the strategy we have. We may find those, some of those and again I am not giving any direction here but we may find some of those businesses aren’t core enough that we may decide that it may make sense to sell some of those off for cash as well. And so and again come back to capital allocation, I feel good that we get some good hedging on Japan on the yen and then we’ve gotten I think almost 500 million to that yen hedge and we use all of that cash to buy back stock effectively as well.

So we are doing a lot of things I would say from capital allocation and we think about that a lot as to how do best frankly for the company and have us best positioned for growth going forward from ultimate EPS point of view.

Unidentified Analyst

Got it. Last one, fairly or unfairly people are going to guys Tumblr as a gauge of how your acquisition strategy just working out, just any updates on how Tumblr's doing and how enthusiastic you are on kind of helping grow revenues over the next couple of years?

Ken Goldman

I feel -- I actually feel great about it. They feel there are on target for what they want to achieve this year. We put market down and we want to be breakeven by Q4 from EBITDA point of view there. The other way you can do that is a lumpy from expense reduction, because expenses are going up. So only we can do that is through growth of revenue and we're tracking to that. So we feel very, very good about the mobile side, the ability I think some like 150 out of 350 top brands advertising in that. We’ve done some good stuff with Apple there. So we do feel very, very good about that. I actually think that -- I think we bought it the right time and that in the world that we live in, we bought it at a very reasonable price. And I recognize regional prices, the eyes if you hold it, but in the world we live in, I think we got it at a very reasonable price.

Unidentified Analyst

Got it. Thank you Ken and Joon. We’re out of time. I really appreciate your time. Thank you.

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