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Yahoo! (NASDAQ:YHOO)

Q4 2010 Earnings Call

January 25, 2011 5:00 pm ET

Executives

Timothy Morse - Chief Financial Officer and Executive Vice President

Marta Nichols - Director of Investor Relations

Carol Bartz - Chief Executive Officer, President and Director

Analysts

Spencer Wang - Crédit Suisse AG

Imran Khan - JP Morgan Chase & Co

Youssef Squali - Jefferies & Company, Inc.

Benjamin Schachter - Macquarie Research

Charles Munster - Piper Jaffray Companies

Justin Post - BofA Merrill Lynch

Douglas Anmuth - Barclays Capital

Ross Sandler - RBC Capital Markets, LLC

Mark Mahaney - Citigroup Inc

Operator

Good afternoon, ladies and gentlemen, and welcome to the Yahoo! Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Ms. Marta Nichols. Ms. Nichols, you may begin.

Marta Nichols

Thank you, Derek [ph]. Good afternoon, and welcome to Yahoo!'s Fourth Quarter 2010 Earnings Conference Call. On the call with me today are Carol Bartz, Chief Executive Officer; and Tim Morse, Chief Financial Officer.

Before we begin, I'd like to remind you that today's call will contain forward-looking statements concerning matters such as our expected financial and operational performance and long-term financial objectives, as well as our expectations for the economy, in general, and online advertising, in particular. The financial and operational impact of our Search Alliance with Microsoft and our strategic, operational and product plans. Actual results may differ materially from the results predicted in our statements and reported results should not be considered indicative of future performance. Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are described in our Form 10-Q, filed with the SEC November 8, 2010, as well as in the earnings release included as Exhibit 99.1 to the Form 8-K we furnished today to the SEC. All information discussed on this call is as of today, January 25, 2011, and Yahoo! does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances. On today's call, we'll also discuss some non-GAAP financial measures as we talk about the company's performance. These may include total expenses less traffic acquisition costs, or TAC; revenue excluding TAC or revenue ex-TAC; and operating margin ex-TAC. Reconciliations of those non-GAAP measures to the GAAP measures we consider most comparable can be found on our corporate website, info.yahoo.com, under Investor Relations. We have prepared remarks that will last about 30 minutes, and then we'll have a brief Q&A session with Carol and Tim. With that, I'd like to turn the call over to Carol.

Carol Bartz

Thanks, Marta, and thanks, everybody, for joining us today. We've got lots to cover so let's get started. We just completed a very encouraging quarter and year for Yahoo! We made substantial strides to improve profitability. In Q10 (sic) [Q4 '10], we doubled our operating income, doubled our operating margin, doubled EPS and doubled return on invested capital. We did this while investing aggressively in our major products and the technology to drive our strategy to turn Yahoo! around. And in the process, create value for our shareholders.

The central focus of our plan is simple: increase profitability and grow revenue. To increase profitability, we have to be focused and efficient. To grow revenue, we have to deliver engaging products for users and advertisers. And to achieve our profitability and revenue goals, we have to execute across-the-board. What we've done during the past two years is all directed at these key drivers of success. We've made major strides reinventing our technology platforms so we can innovate and introduce new products and features more quickly than ever before. We've reorganized the company to improve its efficiency and to operate costs effectively. We've brought in some terrific new senior talents. The key to all of this is to deliver great content. That content takes a lot of forms, news, sports, finance, e-mail, search, entertainment and of course, relevant ads. It's what more than 630 million people come to us for every month, and it's what we're best at. It's our place in the online ecosystem, it's who we are. We focus on the aggregation, curation and creation of content, and we do it really, really well. Our direction and innovations are built around our vision of personalized content for each and every user.

Already, these investments are starting to pay off. Our U.S. Today module click-through rate is up 36% year-over-year, and we now serve 13 million variations every day. And engagement among early adopters of our new Mail Beta is more than 50% higher than our legacy Mail products. Our plan is that these new products and technologies will ensure a bright and sustainable future for Yahoo! as a premier digital media company. Now let's turn to 2010 for more detail.

As I noted earlier, we made substantial progress on profitability in 2010 and the quarter. Excluding restructuring charges, our Q4 operating margin ex-TAC went from 13% last year to 21% this year. And our operating income increased to $258 million, up from $159 million. That's above consensus and above the midpoint of our outlook. Revenue ex-TAC also came in ahead of both outlook and consensus. It was down versus Q4 '09, just as we told you it would be due to the beginning of the rev [revenue] share with Microsoft and because of the various businesses we exited that did not fit with our content focus. In fact, without these items, our revenue ex-TAC would have been up 2% and GAAP revenue would have been up 3% for the quarter. Remember, as we discussed last quarter, this is all part of our plan to turn Yahoo! around. We've been working hard to make the company more efficient, expand margins and increase profitability.

But revenue's a bit different, it's tied to our products and innovation. And while it takes longer for the full impact to kick in, our strong performance in Display is a positive indicator of the top line growth we expect to see in the future. Display was a bright spot for us this past year and quarter. Q4 grew 16%, 27% sequentially, and 2010 grew 17% over 2009, all on an ex-TAC basis. In fact, we believe our growth in Display significantly outpaced the market according to numbers from the Interactive Advertising Bureau.

As for Search, the revenue ex-TAC in Q4 was down 18% compared to last year and for the full year, decreased by 10%. Taking out Search Alliance rev share and Paid Inclusion, we were down 6% for the quarter and 2% for the year. Of course, Search is a very important area of focus for us. But whenever you make big changes as we're doing with our Search Alliance, it takes some time for the marketplace adjust. But we're confident that the Alliance will be able to show a positive growth in Search by the end of the year.

2011 will be the final year of major competitive revenue headwinds, including divested business lines, outsourcing and of course, our rev share with Microsoft. So to say it in another way, 2012 will have cleaner apples-to-apples comparisons. We also believe the investments we're making in new technologies and products for users and advertisers will add to our growth. But before I provide more color on this, I'd like to turn it over to Tim to talk about the financials in more detail.

Timothy Morse

Thanks, Carol. Good afternoon. Today, we'll address fourth quarter and full year 2010 results, first quarter 2011 guidance and also provide some color regarding expectations for 2011 in total. Highlights of our fourth quarter performance include: $1,205,000,000 ex-TAC revenue, $30 million above midpoint of guidance; 16% year-over-year growth in ex-TAC Display revenue; $220 million operating income, including a $38 million restructuring charge related to the actions we announced in December; operating income improved 85% versus fourth quarter 2009; and 62% excluding restructuring charges from both years. In short, we were really pleased with the fourth quarter.

Before diving into more detail, however, let me take a moment to highlight some major accomplishments for full year 2010. Operating income doubled versus 2009 to $773 million. Operating margins doubled to 16.8% on an ex-TAC basis. EPS doubled, even excluding one-time gains from both years. In the metric that best captures so much of our hard work, return on invested capital more than doubled, improving by nearly 2.5x to 13%.

During 2010, we also repositioned our cost structure for future growth and profitability, and it's now 22% below 2008 levels. That's a reduction of $1.1 billion.

We repurchased nearly 120 million shares at an average of $14.68 per share. And finally, we acquired four companies and divested two others as we continue to realign our product, business and technology portfolios.

We have much more to do, especially on the top line, but we're proud of these exceptional 2010 financial results.

Now let's turn back to fourth quarter, and review revenue in the three new reporting categories you see in our press release: Display, Search and Other. As I discuss these categories, please note that we've combined O&O and Affiliate revenue within Display and Search. Beginning with Display, ex-TAC revenue exceeded expectations with 16% year-over-year growth and 27% sequential growth. Once again, Americas and Asia-Pac grew strong double-digits and EMEA grew mid-single-digits. Both premium and non-premium revenue improved strong double-digits versus prior year, primarily driven by impression growth.

As expected, Search revenue declined 18% on an ex-TAC basis versus 2009, but this included nearly $32 million of Search Alliance revenue share. Excluding revenue share in our Paid Inclusion ad product, which was discontinued January 1, 2010, the comparison to prior year was down about 6%. The volume grew in the low single-digits in each of our regions, but this was more than offset by anticipated softness in click yield due to our platform transition in the U.S. Rounding out the top line, Other revenue, which includes fees with season leads, ended fourth quarter down 15% versus prior year. Back in July, we had guided that second half 2010 would be down 15% to 20% compared to 2009. So both 3Q and 4Q have been at the low end of the range. Fees revenue for 4Q did benefit from a one-time boost of $6 million related to successfully concluded patent litigation.

Panning out to the bigger picture, back in October, I had described the cosmetic accounting change to our revenue presentation that's required as we transition our paid Search platform. Let me remind you how this works.

The traffic acquisition costs, which we call TAC, represent the portion of our GAAP revenue that we share with third parties. The majority of our TAC has historically gone to partners that serve our Search results on their sites. While we were previously required to record TAC as part of our GAAP revenue, it was just offset in cost of revenue since it belonged to our partners and not us. In 4Q and going forward for all transitioned markets, TAC is no longer recorded in either line. We are simply booking revenue on a net basis in one clean step.

Once again, however, I'd like to emphasize that this accounting change has no impact at all on operating income or EPS. In the fourth quarter, this newly required accounting lowered GAAP revenue by $173 million. Therefore, GAAP revenue on an apples-to-apples basis, excluding Search Alliance impacts, would have been flat versus the prior year. If we also look through our other transitional items, such as the shutdown of Paid Inclusion and the HotJobs and Zimbra divestitures, GAAP revenue would have been up roughly 3% year-over-year.

Moving down the income statement. Fourth quarter total expenses less TAC were down 14% versus prior year to $985 million. For full year 2010, ex-TAC expense was $3,816,000,000, which is a full 11% or $480 million lower than 2009. We continue to proactively reposition our cost structure to drive both top line innovation and margin expansion simultaneously.

Concluding the income statement discussion, our fourth quarter effective tax rate was just 8%, falling well below guidance as a result of both discrete items and operational favorability. For the year, our rate dropped to 21% from 38% in 2009. While the low 20% range is not sustainable at this time, we continue to make substantial progress in lowering our annual structural rate, which we now expect to be in the low 30% range. This has been and will continue to be a focus area for us. The team did a terrific job in 2010 and their hard work is really beginning to pay off.

Now let's take a few moments to review our key balance sheet metrics. Cash and marketable debt securities ended 2010 at roughly $3.6 billion, despite share repurchases of nearly $1.8 billion this year. Cash flow from operating activities was $403 million for the quarter, up 15% versus prior year and $1,240,000,000 for the year, down 5%. The full year results were most significantly impacted by our transition to paying cash taxes as our NOLs are now largely utilized. In 2010, we paid roughly $120 million more in taxes than in 2009.

Capital expenditures were $247 million for the fourth quarter and $714 million for the full year. Our CapEx reflects two dynamics at year-end. First, we are able to take advantage of opportunities to accelerate 2011 spending at advantageous prices. Second, we continue to build out our newer data centers to improve our underlying cost structure.

Finally, as of December 31, the pretax value of our 35% stake in Yahoo! Japan and our 29% indirect stake in Alibaba.com was roughly $10.4 billion, or approximately $7.93 per share. These figures are based on public market quotes and do not include estimates of the value of Alibaba Group's privately held businesses, most notably Taobao and Alipay.

Turning to 2011. For first quarter, we expect ex-TAC revenue to be in the $1,020,000,000 to $1,080,000,000 range. This outlook reflects roughly $60 million of year-over-year headwinds, comprised of $36 million in Search Alliance revenue share, plus nearly $25 million related to step-downs in broadband deferred revenue amortization in certain fee rates in addition to the impact of divested business lines. This definition of revenue headwinds is consistent with our Investor Day presentation last May and notably, it excludes underlying operational dynamics.

We believe the sequential trends for two of our three revenue categories, Display and Other, are in line with expected seasonality. On a year-over-year basis, however, Display revenue growth of 5% to 10% looks less robust than recent trends as a result of a tough one-time comparison versus first quarter 2010.

Last year, we benefited from transitioning our large automotive customers from cash basis accounting to accrual accounting as they emerged from the difficulties of the recession. Excluding that prior year adjustment, Display revenue would be growing 10% to 15% year-over-year in 1Q.

The most meaningful revenue discussion, however, centers on Search. Obviously, given the U.S. platform transition in 4Q, there's a comparability issue versus 2010. That's the $36 million I mentioned a few moments ago. However, there's also a marketplace issue that needs to be addressed.

First, for our Owned and Operated properties, despite being encouraged by the RPS trend line, were still not where we need to be. Optimizing the combined marketplace to maximize click yield and price per click, will continue to be a critical focus for the entire first half of this year. Secondly, our Affiliate marketplace is farther behind than O&O. That, coupled with the transition of our Korean Affiliate, Naver, to its own search technology, drives our expectation that revenue ex-TAC in our Affiliate business will be down approximately $35 million year-over-year. Since that's operational in nature, it's additive to the $60 million headwind I spoke of earlier.

We're confident that the marketplace improvements for O&O, RPS and Affiliates will be realized toward mid-year 2011. There's no bigger focus for the Alliance. On a more immediately positive note, we are already encouraged by Search volume trends and by the innovations we'll be rolling out this year. Transitioning to ex-TAC expenses, we expect a range of $890 million to $920 million for first quarter. The midpoint of that range is down 4% year-over-year despite a one-time expense benefit of $43 million we recognized in first quarter 2010 related to Search Alliance reimbursements for costs incurred in 2009.

At the midpoint of these revenue and expense expectations, our outlook for operating income is $145 million. While down compared to 2010, it's flat excluding the one-time $43 million prior year benefit I spoke about a moment ago.

Although we'll continue to provide guidance quarter-by-quarter, given our expectation of improving Search revenue in second half, it makes sense to properly set expectations for the full year.

Once again, consistent with Investor Day, the full year impact of our 2011 revenue headwinds is expected to be approximately $220 million. Most notably, we expect roughly $170 million in Search Alliance revenue share or $140 million more year-over-year as we transition Search in most major markets around the globe. Rounding out the $220 million, as I noted earlier, are items related to broadband amortization, fee rates and divested business lines. While a few headwinds were loaded into 2012 as well, top line comparisons become much clearer after this year. In fact, we expect year-over-year net revenue growth in the second half of 2011 as headwinds lessen, RPS improves and Display strength continues.

With regard to cost structure, we expect 2011 ex-TAC expense to be roughly flat year-over-year despite wage inflation, volume-related cost pressures and continued investment in our growth programs, as we proactively drive efficiencies and better align our spending to high-return activities.

In terms of operating income, margin expansion will continue to be a key priority. Since we've transitioned to ex-TAC as our revenue measurement, it makes sense to similarly recast our margin goal on the basis of ex-TAC revenue. As a result, we are now targeting operating margins, or operating income as a percentage of our ex-TAC revenue, to expand from 17% today to 30% or greater by 2013. Capital expenditures for 2011 should fall to the $550 million to $600 million range despite aggressive investments to create a more efficient data center footprint.

Finally, our effective tax rate should be in the 30% to 35% range on a structural basis. We will, however, continue to take advantage of one-time improvements to that baseline where we can.

Before turning the call back to Carol, I'd like to offer a last word on 2010. While there are still much to do, we're executing well against our plan in a wide variety of areas and we're gaining momentum. Our product team has done a terrific job defining its strategy and progressing toward our goal of personalized content for each and every user. We've built and are rolling out new platforms and processes across the company to make Yahoo! faster and more flexible, innovative and efficient.

We continue to lead in Display advertising with substantial year-over-year growth that is ahead of the market. We're making significant strides on margin expansion, tax structure and capital structure. We're driving accountability throughout every organization and ensuring we have the right people doing the right things in the right locations all across the world.

Finally, we have a unified purpose. We're a premier digital media company focused on extending our competitive advantage, increasingly personalized world-class content. Carol?

Carol Bartz

Thanks, Tim. So as you can see, we're making clear progress on our plan. I'd now like to spend some time on several areas that are top of mind with many of you. First, let me discuss the latest on our Search Alliance. While we had a year of steady accomplishments and have a great deal more of work ahead, we successfully completed the North American paid Search transition on schedule in Q4 before the holiday shopping period and our systems remained stable. Our thousands and thousands of advertisers were able to execute their ad campaigns, reach their audiences and generate conversion. Publishers, including Yahoo! and our Affiliate partners, have had bumps unexpected as they learned to operate in the new unified marketplace. As we enter 2011, the marketplace is not producing the click yield and RPS we had hoped, and it's going to take continued focus over the next two quarters to get to the financial model we established for the Alliance.

Yahoo! and Microsoft continue to work very well together. We're aligned in our goal to achieve the scale benefit of the unified marketplace, and we remain confident in the value of the Alliance and its financial benefits. There is a lot of work ahead, especially for Microsoft, as they invest in their marketplace science team and technology.

We picked the right partner, and we know they're focused and committed to our joint success. For major markets we expect algo [algorithm] to be transitioned by mid-year and paid by the end of the year. We'll start the paid transition in Europe mid-year and with Asia to follow in Q4. Moving on, I'd like to talk about our leadership position in Display. Advertisers continue to come to Yahoo! due to our unique blend of science, art and scale. And that we lead the Web in display advertising. We bring in more revenue in display than anyone else, and we're growing strong.

Who did Wal-Mart choose as their largest partner when they were looking to engage with women online? Where did Macy's go when they wanted to take their bread-and-butter placements, circulars and fashion books into the online arena? What company did Toyota turn to when they wanted an out-of-box solution to launch the new Avalon? That's right, they all came to Yahoo! These big brands and their agencies know and value the same things that we do, quality content and context matters. Creativity matters. Insight into audience behavior matters. Brand trust and privacy matters. Innovative new ad formats, like our login page and new mobile screen takeover and video ads matter. And more importantly, these are the big brands and agencies that account for a big chunk of the market. They are the ones who are driving share shift from offline to online.

Reaching the right person with the right ad at the right time is Marketing 101. We know that, of course, but we also know that online, not all impressions are created equal, not all minutes or time spent are created equal and not all ads are created equal.

Next up, I want to address our interest in Alibaba and Yahoo! Japan. For Alibaba, I think that's in front of our point of view quite simply, our approximately 40% stake has been and continues to be a great investment, and we believe it has a bright future. Alibaba.com is growing quickly as is Taobao, which is now China's biggest online commerce marketplace with an estimated 75% share of the market. With e-commerce exploding in the largest country in the world, we feel our investment in Alibaba will grow in value and continue to greatly benefit our investors over time. As for Yahoo! Japan, our goal is to work with our partners in Japan to unlock the value of our investment for shareholders and attack efficiently.

There's one more thing I want to talk about before I discuss our product highlights from the quarter, and that's people. We've made some great new hires, attracting some really exceptional talent to the leadership ranks of Yahoo! We've got Ross Levinsohn running the Americas region, Wayne Powers running U.S. sales, Randy Roumillat [ph] as our new CIO and Mickie Rosen leading our media network, just to name a few. With these new people will come some changes as they reorganize and build out their team. Just as we made some changes in our product org last month, today we're making modest changes to the other organizations within Yahoo!, reducing about 1% of the jobs of the company.

As Tim outlined for you in detail at our Investor Day last May, these actions are planned and necessary to eliminate duplication and redirect investments to our core products and strategies. When I say redirect investments, I mean that our roadmap includes hiring additional Yahoo!s to develop new products and experiences for users and advertisers this year in support of our strategy.

Now I'd like to walk you through some of the Q4 highlights. Asia continues to outperform. Display in the region grew 35% ex-TAC for 2010. Meanwhile, both Yahoo! Taiwan and Yahoo! Hong Kong are number one in audience with more than 94% reach in all major categories including Search, Mail, News, Finance and so on.

We've also executed a turnaround with EMEA. The region had its largest ever Q4 with its Display growth of 6% ex-TAC. The U.K., Germany, France, Italy and Spain hit an all-time high in audience reach of 49%. This is a very big improvement over what we've seen the last few years.

Our Americas content properties continued to do well. Yahoo! Finance kept up its amazing run as number one in its category for 36 straight months with a 44% share of audience. Yahoo! Sports has spent 33 straight months at the top. And then Yahoo! News, visitors are now spending an average of 2.5 billion minutes on this site per month, up 22% from Q4 of '09. This was driven by our great mid-term election coverage and the five new blogs we introduced last year that generated 108 million page views in November alone. In Search, with Microsoft powering our back end, we continued to innovate around the Search experience. And for us, that means focusing on giving our users answers, not just links. We launched new [ph] features, products and experiences. Now users increasingly get what they want right at the top of the results page. We also introduced QuickApps, where users can add a movie to their Netflix queue or watch it instantly, make reservations via OpenTable, buy movie or concert tickets and more. And we have agreements with partners to generate new revenue streams beyond just ads and clicks.

On the communications front, we launched a new Yahoo! Messenger Beta that allows people to play and share popular games from Zynga, share their social status and view, comment on and like updates from Yahoo! Pulse, Flickr, Facebook and Twitter.

We also launched the new Mail Beta, users can e-mail, IM, text, see and update status on social networks, share photos intuitively and much more. As I mentioned before, engagement among early adopters of our new Mail beta is more than 50% higher than our legacy Mail products. In Mobile, we're really focusing on releasing apps in HTML-5 browser-based experiences that reach our users no matter what device or operating system they're on. We know that people assess Yahoo! on a range of devices. That's why you'll see us continue to unveil a slew of apps for iOS, Android and more. From Mail and Messenger to Finance and Flickr, it's been a successful approach as we've had millions of our apps downloaded. We've seen some big jumps in engagement as we released of these apps. Case in point, more than 40% of our Fantasy Football users access the product via mobile device during the regular football season. Look for us to release more of our popular products in mobile form, including MARKETDASH, our new Finance app for the iPad, that should hit the App Store within the next few weeks.

Our Connected TV product is generating a lot of momentum and interest. Its latest iteration got rave reviews at CES earlier this month. To date, there are 6 million TVs with our Connected TV platform. That adds up to more than 100 models from partners like Samsung, Sony, LG, Toshiba and Vizio. And lastly, we launched six new original, branded Entertainment video programs in the quarter. These new programs carry with them a great roster of CPG and auto sponsors, including Kellogg's, Lexus, Buick, Dodge, Toyota and Chevy. These new shows are having an impact. The latest comScore numbers show our original programming attracted 21 million unique users a month, who spent 60 million minutes with us. For all of our video, we averaged 640 million streams. That's up 43% from the year before.

As we bring this call to a close, I want to reiterate that our plan to turn Yahoo! around centers on two things: increasing profitability and growing revenue. Everything we're doing, from new products and ad formats to our Search Alliance, is designed to drive us towards these goals. During last quarter and last year, we made steady progress and gained important momentum on both. For the year, operating profit, margins, EPS and return on invested capital all doubled. For the quarter, revenue came in ahead of our outlook midpoint and consensus. Display grew 16%. We completed the important North America Search transition on schedule and our content properties continued their massive leads.

Looking ahead, 2011 will be another important year for us, where we'll complete the majority of our technology platform investments that will add to our growth strategy as a premier digital media company. And we'll continue to work with the Alliance to improve the Search marketplace, which will begin to show on our results for the second half of 2011. As the year unfolds, I look forward to updating you on our progress and how it will translate into value for our shareholders. With that in mind, please save May 25 for our annual Investor Day.

Now let's open it up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Imran Khan from JPMorgan.

Imran Khan - JP Morgan Chase & Co

I have one housekeeping question and one strategic question. So housekeeping question, it seems like Q4 2010 share repurchase was zero. So I was trying to understand if there was any significant event that prohibited you from buying any shares in the fourth quarter of 2010? And secondly, CapEx, I think was $247 million, which in my math, around 20% of your revenue ex-TAC. How should we think about the CapEx over time as you outsource the Search, if Display is a lower CapEx business, can you give us some more color on the CapEx front?

Timothy Morse

First on repurchase, you are indeed correct, there was no repurchase in the fourth quarter. I guess, the best way can express this is, we're not hell-bent on spending a certain amount. There's no fear of our authorization expiring. So we're just -- we're going to be disciplined about this, and we view it as more of a marathon rather than a sprint. And we want to make sure that, like we did in 2010, doubling down where we think were just an exceptionally good buy, we'll do that. And as you saw, we bought 120 million shares at $14.68. That feels great. We're going to continue to reset ourselves and where we should be buying and where we should be going forward. But again, we're going to begin disciplined, and we're going to be absolutely disciplined about that. On CapEx, yes, CapEx was a little bit high in the fourth quarter. It actually exceeded for the year by a little bit, the top end of my range from this time last year. But we did that pretty purposely in terms of really accelerating a lot of what was going on in 2011. 2011 now, it's $550 million to $600 million. I think if I recall correctly, the Investor Day last May, I talked about how the fact that yes, Microsoft will be coming down, investments in our new data centers, like the one in Buffalo, which came online pretty much in September of this year, a build out of our Nebraska data center. Those are events that will take CapEx up a little bit in the interim. And then by 2013 or so, we should be settling down, I think, probably in the $500 million range. So that's how it goes, it bumps up a little bit, and then feathers itself down. But we'll become more efficient on that as we go through.

Operator

Our next question comes from the line of Youssef Squali from Jefferies.

Youssef Squali - Jefferies & Company, Inc.

First on the Search Alliance, please. Can you expand on why RPS and click yield was not as good as you had hoped for and you don't expect anything until probably improvements on the second half of the year? So what are you doing exactly to kind of turn that tide around? And then Tim, the midpoint of the guidance for Q1, I think, at least on my math, implies about a 12% GAAP operating margin, down from 14.5% in Q4? Just help us understand what accounts for that again?

Carol Bartz

So Youssef, I would remind you that the market's actually been working for about 60 days, including the first 45 when a lot of the campaigns weren't changing because of Christmas. Essentially, it's a couple of areas. In Yahoo!, we actually had more experience in click prediction, so we could manage click yields and conversions a bit better than Microsoft because they have a different way to approach it. So they're working on that. We're actually transferring some employees with expertise in that area. Also, it's about ad matching technology. It's just a bunch of -- I don't want to say little things because they all add up to really big things, and all of that is happening as Microsoft does their measured releases over the next two quarters. So we knew, and if you remember, recall from last quarter that we said we really didn't expect to see the full benefit of the combined marketplace until mid-next year. And this is obviously what we were referring to.

Timothy Morse

Youssef, on operating margins. So we're obviously transitioning everything to the ex-TAC measurements. But let me give it to you both ways to make sure that we're as transparent as we possibly can be on this. So last year, excluding that $43 million one-time benefit, our operation margins on a GAAP basis was 9.1%, and it is indeed rising to 12.2% this quarter. On that ex-TAC basis, that 12.2% is 13.8%, so you'd expect it to be higher. You're dividing $145 million operating income on a lower revenue number, $1.050 billion is the midpoint of our ex-TAC range. That is certainly lower than where we expect to be as we progress through the year. But you've got to remember, too, this quarter bears the full brunt of $36 million of the revenue share for the Search Alliance. So starting off with costs down 4%, but bearing the brunt of -- let's face it, what will be in terms of headwinds, the toughest quarter we had this year is the reason why it's only roughly 14% and not a bigger margin expansion for the year. Although, again, I point out that it's at least one point and on GAAP basis, up to a few points of expansion versus first quarter last year, if you exclude that $43 million one-time item from last year.

Carol Bartz

Yes. When we talked about comps, we all like the benefit of the cost that comes from the Alliance. But this is the year we're going to see the first rev share. And that 12% tax that we paid Microsoft, We won't have a clear apples-to-apples comparison until the first quarter of next year. But long-term margin goals are, as we said, ex-TAC, is 30%, which is unchanged from what we told you in May. This is just the time when we start paying TAC, and it's compared against a period when we didn't pay TAC. So I mean, kind of in a way, it's simple as that.

Operator

Our next question comes from the line of Doug Anmuth from Barclays Capital.

Douglas Anmuth - Barclays Capital

I just wanted to ask two things. First, just following up on the last question regarding margins, you talked about ex-TAC expenses, I think, being flat on a year-over-year basis for the full year 2011. Tim, can you talk more about whether you still expect the costs to roll off from the ad platform, which I don't really think you mentioned on the call? And then also, the global tech investments you talked in the past, about those expenses rolling off in the middle of 2011? And then secondly, Tim, if you could just walk through -- I know you gave the numbers on the revenue headwinds, but if you could walk through in a little bit more detail what those are for 2011 that make up the $220 million?

Timothy Morse

So on the first, we will start to see the benefits of the costs rolling off in the second half of this year and toward end of this year. You'll see much more of the actual cost benefit hitting 2012. But nonetheless, a lot of that work does get done beginning mid-year and continuing or finishing up by the end of the year. So most of the cost gets out next year, actually, but you do see some benefit in the second half. I mean, when we talk about keeping a year flat with, by my account about $130 million worth of just normal operating headwinds between wage inflation, $50 million, $55 million. We've got another probably volume pressure on us just as data proliferates and the need to run more and more through our data centers causes increases, where that's probably $35 million to $40 million. We have obviously the headwind, the $43 million one-time benefit we had last year. So I could go on and on. I guess, there's probably up $15 million, $20 million of FX actually that's embedded in our outlook. So if you look at it, absent our work to take all of these other costs out, we'd be up substantially year-over-year. So we feel very good about keeping flat.

Carol Bartz

Yes, we're also investing. I mean, we're not trying to cut our rate of revenue growth. We're investing for revenue growth. So we have a lot of plans for that on how to spend that. Just to give you an update on the platforms, by the end of 2011, we will have moved 135 old platforms to our new Lego platforms, and that's in science, entertainment, news, sports, et cetera, and added 50 new products to market. All of these products will be more flexible, they'll have a consistent publisher tool, they'll be able to use our content agility from a cloud, and they'll be able to be content-optimized and for the first time, SCR-optimized. As I've told you before, we don't have SCR optimization at any of our sites, which is patently ridiculous. So not to mention, by the way, right now, we have three huge Mail platforms, our new one, of course, and the two legacy. By the end of the year, we will have one worldwide legacy platform. We will also, by the end of the year because of the new Lego building block sort of rectangles as I call it, we're going to go from about 20 languages to about 47, which allows us to get in many, many new markets that we haven't been in. And new markets means new users and more minutes and all that kind of stuff. The point is, by the end of the year, it's called faster, moving much faster, innovating faster, but we're investing to do this. So we actually believe being able to do all of these things and make these big transitions that holding costs flat is really important. But we are not cutting costs to grow the company. We are investing to grow the company.

Timothy Morse

And Doug, on your second question, the headwinds, I appreciate question. Again, I want to make sure we're as clear and transparent about this as possible and again emphasize that if you go back to the Investor Day presentation, it's the exact, same definition I used back then, The Search Alliance, I expect to be, as I said in the script, about $140 million. The broadband roll off portion for this year, the amortization, the step-down in amortization of broadband fees that were booked as cash a few years ago will be about $20 million. The combination of HotJobs and Zimbra will be about $35 million, call it. And the step-down in the percentage of Search fee that we get from Y!J will be about $25 million. So $140 million, plus $20 million, plus $35 million, plus $25 million gets you about $220 million. Those are the headwinds that I spoke about in the script. And I said there's about $60 million worth of that, that is impacting first quarter, aside from our Affiliate business and how it's reacting to the transition to Search Alliance.

Operator

[Operator Instructions] Our next question comes from the line of Mark Mahaney from Citi.

Mark Mahaney - Citigroup Inc

Do you think the workforce levels now are relatively right-sized? Or do you want to be careful about putting that stake in the ground? And then secondly, the Display Advertising results were pretty robust. Is there something that tells you that they can become even more robust? Are there certain verticals that you think are still lagging? Are there particular areas that you're bringing out that give you some conviction that we could actually see faster growth rates than we have now?

Carol Bartz

Mark, as far as the workforce is concerned, we will actually be adding people this year. What we're doing is that we're reallocating so that the people we have are working on our new products and our new strategies, so we can allow the movement of people. Also, different locations. So I think it's going to be less about -- I guarantee you we will exit the year with more people and still have flat costs. So we absolutely are hiring, we're going to hire in prioritized ways, but we're watching the costs and making sure we have the right people in the right place and that sort of thing. What was your second question?

Mark Mahaney - Citigroup Inc

Second was on Display. The opportunities for Display growth to become even more robust.

Carol Bartz

Well, we're looking at a lot around -- let's talk about ad market for a minute. I mean, we didn't talk because there's so much in this call. But by the end of this year, we will have the U.S. and some of the big international markets on the new APT platform, which really -- by the way, something like 75% of our orders, our marketplace in the U.S. is now on APT, so we rolled them over at the same time we were rolling over the Search side. APT just gives us a much better job, a much better way to manage the inventory, manage the yield, a new predict engine, all of those things that will allow us to do a better job targeting Display, as well as we're looking at new formats for pharma, new formats for mobile, so there's going to be ad formats much more science because the platform is new. Videos and video ads in video format is really coming on strong for us. So I think Display, the robustness in Display, just because of the creativity that's happening now. If you go back a year, two years and you look at the display ads versus now, you actually think you've gone from a black-and-white newspaper ad to like a full-blown, high-end Vogue ad, and you're just going to see more and more of that sort of thing.

Operator

Our next question comes from the line of Ben Schachter from Macquarie.

Benjamin Schachter - Macquarie Research

A couple of questions on Search. When you're forecasting your 2011 Search revenue, do you expect to gain volume share, maintain that share or lose the share? And then also if you have any thoughts on your current share on mobile devices versus desktop in terms of Search share? It seems that there's still a wide divergence between that share on mobile devices versus desktops, and wondering if there's anything you can do to help change that?

Timothy Morse

I don't know how to comment on Search share for 2011. I can tell you that we believe that we will have some pretty good Search volume growth. How that ends up playing with the other competitors in the arena, we'll just have to see. But unquestionably, we are in this game to grow this, and we think, having again ceded the back end of Microsoft so that we can focus on these new experiences that we're rolling out, the innovative QuickApps, et cetera, that this is going to be a terrific experience for users that we'll increasingly capture, especially many more of the users that are already on the Yahoo! network.

Carol Bartz

Yes, I'll go out and say that we're focused to be flat to up in 2010. And I really think we'll be up. But it really is about driving volume and driving that experience.

Timothy Morse

On mobile, honestly, I don't have any data for the difference between our share on the PC versus -- I just know that mobile, obviously, extremely a big focus area for us, a big growth area for us, but haven't seen any breakdown of share on that. It's unquestionably early going on that. I think a lot of the experiences that we're creating, that we're creating with mobile in mind, first, for Search, as well as for Display.

Carol Bartz

I mean, obviously, we have a bit of a disadvantage since the Android is loaded with Google Search. However, there's a lot of folks in the mobile business, whether it's operators or third parties, who are very interested in our applications in our Search for obvious reasons. And so we still think there is a great opportunity, especially because I was talking to another exec the other day, and we're focused on fantastic applications, whether it's cricket in India or our new Finance app here. We're going to have a March Madness companion app, a Super Bowl companion app. And a lot of Search is going to come back through the app world, as we all know. And so as we gain traction because of our content apps, we can gain traction with the way people discover information.

Operator

And our next question comes from the line of the Spencer Wang from Credit Suisse.

Spencer Wang - Crédit Suisse AG

First, for Carol, given your focus on positioning Yahoo! as a content company, I was wondering if you feel like you need to spend more on content to further differentiate Yahoo! from some of the competitors? And then secondly, on Search, I know you guys talked about RPS improvement in the second half. I was wondering if you could give us a sense of what you're targeting?

Carol Bartz

Yes. The content, you saw us this year hiring editors, bloggers, working on with our Yahoo! content partner, which -- we bought Associated Content. We're going more into local. We've said that before. So it's not that we have to spend more, it is the fact that we are focused on that, and a lot of what we're focused on, by the way, is the idea of content optimization. Because if you heard in the prepared remarks, the vision really is to serve up 630 different million sites so each individual user has a very personalized media experience. And so that's aspirational, right, to have 630 million, but why not? If you have the right machine learning, the right way to actually optimize content, whether it's videos or ad content or commercial content or search [ph] content, we just want to get people what they are interested in because then we can give, the adverts match the right advertisers with the right people. And therefore, the advertising becomes interesting content to them because it’s something they're interested in. So it's not about spending more, we've already told you we're managing. It's about focus and that's what we're doing.

Timothy Morse

RPS in the second half. And we said before, we expect the combined marketplace to be somewhere in the upper single-digits in terms of improvements. In first quarter, we're more flattish. So that's just not where we need to be and we'll continue to work that and very confident in what Microsoft's doing there to enable us to both get where we need to be.

Operator

[Operator Instructions] Our next question comes from the line of Justin Post from Merrill Lynch.

Justin Post - BofA Merrill Lynch

I think there's a little disconnect in your comments, gaining momentum versus kind of the financials. Could you kind of -- you've done a couple of really good reconciliations. Could you reconcile the low single-digit traffic growth in Search to the minus 6% and why you think you're maybe getting momentum in Search? And then secondly, quarter-over-quarter, I think you're 13% down sequentially for revenues ex-TAC, and last year, it was 10%. So maybe if you can just talk about maybe if there's a difference on a sequential basis this year versus last.

Timothy Morse

So let me take the last one first. So last year was down 10%. Again, we've got a fairly large release because of the auto customers going from cash basis to accrual basis accounting. Excluding that, we would've been down about 12%. So 12% last year, 13% this year. This year, of course, is burdened by a full quarter of the Search Alliance rev share, which impacts quarter-over-quarter. Also, the loss, as I said in my script of the Naver Affiliate in Korea, which takes away about $12 million. This quarter is further impacted by feeling the burden of the marketplace tuning for the Search Alliance. We talked in the third quarter in the setup for the fourth quarter, that as we moved algo and paid, that we were seeing a little bit less revenue to the tune of about $30 million per quarter, and it was going to take some time to recover that revenue as we optimize the whole marketplace. Well, you're seeing that not only in O&O -- maybe it's starting to get a little bit better in O&O, but feeling that the biggest brunt of it in our Affiliates. I said in my script, the Affiliates will be down about $35 million year-over-year. Now $12 million of that is Naver. And really, the remainder of that is predominantly coming out of a run rate of last year, one. And two, probably, $15 million of true marketplace impact as we fully transitioned here to the new platform. So that's how I'd reconcile that.

Carol Bartz

Plus, Justin, it's over a year and a half ago now that we talked about the Alliance, but we had to do the Alliance. So the fact that we literally moved tens of thousands of advertisers over to a brand-new marketplace and stayed this stable. I mean, you've got to remember the reason we wanted to do this. And the reason we wanted to do this is we thought a shared marketplace is important for comparative reasons, for cost structure reasons and that having two companies work on this together was better than one. Two heads are better than one. Having to get through that is exceptional momentum for this company. I mean, I will not back down on the fact that we are getting momentum, including, by the way, our own launches. Again, back to whether it's the kind of heavy multimedia image-driven results that we're showing, the fact that you're going to have, as I said, the Netflix right from Search, all those kinds of things. I mean, there is a lot going on here. So it's going to drive to a great Search marketplace for the second half of this year.

Timothy Morse

And just look at the bigger picture. I'm the one in my script who said gaining momentum. I really believe. I mean, a huge transition in marketplace, you haven't got a lot of tuning to go. But that's a whole lot of work that the teams did a fantastic job on. Exceptional Display results all throughout the year, and we continue to see strength into 2011 and beyond. Product launch momentum, whether it's video, blogs, Mail, Messenger, apps, feel really good. Cost structure, feeling really good, continuing to make some really good improvements there. The focus on the Search experience is working. Our volume and our share is up in 2010. The people we put in place doing these jobs, the plans are executing against as we outlined in great detail at Investor Day in May, all of that is great momentum. You're correct, the top line isn't showing it yet. That's why we're going so far as to give you so much transparency around the headwinds that, again, are consistent with Investor Day. But I'll go back to again, double operating income, double operating margins, double EPS, double return on invested capital. We are gaining momentum. If you want to look into the things that are going on in this company and the underlying dynamics that will mean better growth in the future, I think there's an awful lot there to be optimistic about.

Operator

Our next question comes from the line of Ross Sandler from RBC Capital Markets.

Ross Sandler - RBC Capital Markets, LLC

Just one more follow-up on Search. You talked about flat RPS. If you strip out the impact from Naver and the partner site cleanup, can you talk about what O&O RPS is doing right now and in the first quarter? And then can you guys tell what percent of your Search growth is coming from new advertisers that may not have been on Yahoo! or adCenter prior to this transition versus existing? Like do you have metrics around new advertisers’ signup in the early months here?

Timothy Morse

So the RPS number I quoted was O&O. We don't really measure Affiliates that way. We measure Affiliates more on just the total revenue dollars. So that O&O, that flattish number for the first quarter, that was O&O. In terms of new advertisers signing up in adCenter that weren't --

Carol Bartz

Well, I mean, the market just came together. And what our salespeople are seeing -- and I actually don't know about the automatic people that signed up -- is that the feeling of waiting for this to happen, most advertisers sat on the side to see if it was going to happen on time and what was going to happen. So it's only been the last couple of weeks that it's logical that new advertisers will jump in. This is more of a combining now the advertisers that we're in adCenter and were in Panama. So again, remind you, this is -- we're in the bottom half of the first inning here.

Operator

Our next question comes from the line of Gene Munster from Piper Jaffray.

Charles Munster - Piper Jaffray Companies

Carol, Yahoo! clearly stands alone in terms of the science and art and scale of brand advertising. No one can touch you. But obviously, there's a lot of talk about Facebook and their brand initiatives. Is there any comments you can give us about how their position is changing the marketplace, and maybe any thoughts on their sponsored post products that they announced today?

Carol Bartz

Yes, first of all, I would say there's some confusion, reported confusion about whether Facebook leads in display advertising. It's because they have a lot of little impressions. We actually lead in display revenue, and that is because of the art and science that obviously scales relatively similar. There’s a lot of advertisers that work with us that obviously, work with Facebook, especially on the top of the funnel. We expect that, that will continue. And the concept there of how you can paint your story on the pixels of Yahoo! is very different than you're going to do on a Facebook. So I think we're actually very compatible as advertisers always do, which is look how to put up proprietary spending in the best way possible. I think the most important thing that the Facebooks, Yahoo!s and Googles can do is to get them online, then we can argue about who gets what. But the idea is to get them online and feel very comfortable. We see them feeling a lot more comfortably because of video and being able to paint their story. We see them being a lot more comfortable because of the large formats, so they can actually put their products in context and feel much more creative. So there's room for everybody here because we're serving different parts of the Internet value chain. So it really is, again, as I've said many times, it's getting that ad money online and having people feel very comfortable about the audience and the targeting and all those kind of issues.

Timothy Morse

Thank you very much, everyone.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you all for participating. You may now disconnect.

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