Good afternoon, ladies and gentlemen, and welcome to the Yahoo! First Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Ms. Marta Nichols. Ms. Nichols, you may begin.
Good afternoon. And welcome to Yahoo!'s First Quarter 2011 Earnings Conference Call. On the call today will be 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-K, filed with the SEC February 28, 2011, 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, April 19, 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, then we'll have a brief Q&A session with Carol and Tim. And with that, I'd like to turn the call over to Carol.
Good afternoon, everyone. Thanks for joining us. On today's call, we'll discuss Q1 progress and financial results, update you on the Search Alliance with Microsoft, share our financial highlights and outlook, and of course, take your questions. First, I want to update you all on how we're executing our strategic plan for returning Yahoo! to sustainable revenue and profit growth. We have a lot of proof points this quarter that highlights very tangible progress.
Just take a hard look at some of the key stats. Display revenue is growing in the mid-teens on an underlying basis. After a couple of years of overhauling listings and fees, other revenue is primed to come back into positive territory by year end. We're now shipping the new major tech platforms we've been working on in the past two years and engagement is growing. Yahoo!'s global users were up 13% in Q1, page views on our media properties were up 8% and minutes on those properties were up 17%. The operating momentum we've been building continues as we modernize our technology platform, driving engagements through enriched content, introducing well-received new products and leveraging innovations in digital advertising to boost display revenue growth. Overall, our turnaround is proceeding on schedule, and we are very confident Yahoo! is heading in the right direction.
With all that said, the Search marketplace is encountering some issues related to Microsoft adCenter technology. There is a clear plan to address that, and I'll touch on that more in a moment.
On the financials, we beat the midpoint of our guidance on the top and the bottom. While our GAAP revenue was down over 20%, this is not the story. Without the funky comparisons because of the Search Alliance and other non-comparable items, our revenue ex-TAC would have been flat. Remember that GAAP revenue reflects the impact of divestitures, fee step downs and the two biggies, the required accounting change related to the Search Alliance and of course, the Microsoft rev share.
As you know, the required change in accounting from the Search Alliance hits our GAAP revenue especially hard, but, and this is very important, the accounting change has no impact on the bottom line. To put it simply until all markets are transitioned, revenue ex-TAC will give you the clearest picture of our real business dynamics. In January, we explained that 2011 would be a year of major comparable revenue headwinds because of the items I mentioned a moment ago. And we said that comparisons will get cleaner going forward. That has not changed.
So let's move on and speak to three key elements of our strategy to extend Yahoo!'s lead as a premier digital media company: First, modernizing our technology; second, driving engagement; and third, innovating in digital advertising. So first on technology, we said two years ago that we had to modernize the technology platform that powers our site. Our content was not interactive, it was in silos and we were managing hundreds of sites running on this fare code basis. We've been talking about these investments every quarter, and the payoff is starting to become apparent. We now have 34 sites across the Americas, EMEA and APAC, live on a new global content platform. The pace of our rollout is accelerating with 31 of those sites coming online in just the last 3 months. And this year, we're on target to meet our goal of getting 135 total sites. That's 85 existing and 50 brand new sites on to our more modern, flexible platforms. By year end, we'll have Entertainment, Lifestyle News and other sites rolled out in new markets and new languages, some in places where Yahoo! had little or no presence before. That means more users, greater engagement and more ad inventory.
These platforms bring other great benefits as well, speed to deploying new sites and features, efficiency for our editors to manage more content, and most important, personalization. The platforms will enable tools like content optimization and search engine optimization to deliver on our vision of deeply personalized content for each user on every site. We expect that to drive engagement up.
Beyond the technology advances, we're doing even more to improve the user experience on our sites. We're driving engagement within increasingly personalized and richer content delivered to any device. Let me give you two great examples this quarter. Namely the blockbuster events of the Super Bowl and the Oscars. Yahoo! always sees big traffic around major events, that's nothing new. What's new this year are the technology advances and editorial focus that allowed us to program these big events in ways that drove even more engagement. For example, using our content optimization engine, we showed different Super Bowl packages to many different audience segments during and after the game. Hardcore football fans got on the field news, other users got roundups of the buzziest ads and still others saw broader interest stories. This simple, personalized programming drove more than 37 million clicks, double last year's numbers. That's huge.
For the Academy Awards, we did even more. We leveraged new ways of promoting the events across the Yahoo! network through the Homepage, Search, Mail and media properties. We developed custom videos focusing on buzz-worthy topics. And for the first time in our Entertainment sites, Yahoo! broke realtime stories during a show that generated huge clicks.
My favorite part of our Oscar programming were the two new social games, Winner Pick 'Em and Red Carpet Bracket that allowed users to select the winners. A whopping 49% of users who visited these pages interacted with the Game and many shared their picks with friends. All of this created fantastic results. We generated 1.2 billion page views around the Oscars, a 23% jump over last year. Those are impressive numbers, but even more so in a year when TV ratings for the awards fell yet again.
But I want to be very clear. Our focus is not just these major temporal events, our goal is to add more original voice and video to complement the scale of these mega-events and keep existing and new users coming back for more of what they find interesting every day.
Like we do with our news blogs. Two years ago, there were no blogs anywhere on Yahoo! News. Now blogs like The Upshot, Weekend Edition and others are huge hits. In Q1 alone, our U.S. News blogs did more than 400 million page views. That's up more than 50% in three months. Three months ago, we were less than 200 million. We are up 50% in three months. You'll hear a lot more from us about how we intend to bring original voice to our media properties. This is just one example of how it really works.
And the engagement data is encouraging. According to comScore, minutes on our global media sites were up 17% year-over-year in Q1. Meanwhile, our internal data shows page views on our global media sites up 8%. Now let's talk about monetization. Of course, the best way to drive revenue is to deepen user engagement, so we have more ads to sell and we are doing just that. The new features on our Display ad platforms also drove our Q1 results. For example, new features in apps continue to improve the efficiency and yield of trafficking and managing premium Display campaign. And we've made huge improvements in our ad inventory prediction tools in both apps and light media, increasing the accuracy of forecasts and campaign delivery. These improvements translate directly into higher ROI for our advertisers.
We're also selling ad packages and solutions that make use of the whole Yahoo! network. I talked about the Oscars content earlier. On the ad side, we worked closely with Chrysler on our unique sponsorship of our awards coverage this year, including the Oscars, the Grammys and the Globe's. This broad and deep campaign called the road to the award shows, leveraged rich original voice, social content and ads across the network. And it generated huge results for Chrysler. We delivered 1.6 billion ad impressions and saw a big uptick in related car shopping activities on Yahoo!. The pull through on the social element was especially cool. Chrysler tripled the number of likes on its fan page.
No one else can deliver what Yahoo! did. Sponsorships like these are extremely successful because Yahoo! is taking ad solution selling to the new level, finding the specific audiences our advertisers seek wherever they are on Yahoo!, on and off. All these examples of advances in technology, programming and ad products are indicative of the exhilarating pace of innovation at Yahoo!.
I've a lot more I’d like to share, but I know you want to get to the numbers, so let's do that first. To put it simply, we delivered in Q1, beating the midpoint of our revenue guidance. Our Display business was strong everywhere and we expect Display revenue ex-TAC to grow in the midteens in Q2. We are growing ad supply and accelerating the pace of new ad products and it's clear that our new ad platforms are letting us monetize better. For Search, Q1 was a mixed bag. Let's focus first on the performance for the Search Alliance.
The good news is that many of our most important advertisers are realizing a much higher ROI on their campaign in the combined marketplace. We see major financial, auto, retail and customers spending multiples of what they spent with Yahoo! and Microsoft previously because returns have been great.
And some recent third-party reports have reinforced why we did the alliance in the first place. Advertisers CTA and ROI and Yahoo! has improved dramatically. This is good news for advertisers as they seek an alternative for their online search marketing spend.
On the downside, however, adCenter isn’t yet producing the RPS we hoped for and are confident as possible. Advertisers are seeing strong ROI, but technical limitations in the current adCenter platform mean the click volumes just isn't there yet. We had expected RPS to be neutral by midyear, it's now evident that it will take Microsoft longer to achieve that goal. We expect that to happen by year-end. In the meantime, the RPS guaranty helps protect our revenue and our view of the long-term potential of the marketplace remains unchanged.
We are working very close with Microsoft on this. They understand the issues and they're hard at work on systems architecture, science models and better features and functions in adCenter. They have an aggressive roadmap to bring those to the marketplace.
As Microsoft focuses on RPS improvement in the U.S., we're holding off on transitioning more paid search markets this year. We'll transition the remaining paid search markets once we believe the changes are in place to yield the right results for our advertisers. We are almost ready to begin the rest of the elbow transition.
In the meantime, Yahoo! is focusing on our we can do in Search to create better and better user experiences, and help our advertisers and publishers optimize their results. On the user’s side, our growing list of new Search experiences and our focus on providing users answers, not links is helping us grow U.S. Search volume. This quarter, we launched Search Direct which provides answers directly in the Search assist tray realtime as you type. We are making it incredibly easy for the user to scan, comprehend and quickly access the top results, without even having to navigate to a Search result page.
For Search advertisers, Yahoo! account management teams are expanding the work we are doing alongside many of our largest customers to help advertisers get the most out of their Search spend. They are hungry for clicks and conversion, so we're helping them implement better optimization techniques as advertisers see higher ROI from these efforts, this is also helping to grow their Search budgets with us. We have specific plans in place to scale those solutions to more advertisers in the coming months.
Finally, we're also working with our publisher partners to help them optimize their sites and realize more of the volume they are seeking. So obviously, there's a lot going on in Search.
Now let's come back to the quarter. As I said, revenue beat the midpoint of our guidance. On the profitability side, we are balancing investments and content in technology with increased efficiency. As we roll out new sites and get existing sites onto the new platforms, we’re seeing the efficiency gains and faster rollout pace we knew was possible. And we're delivering on the bottom line at the same time. So let me turn it over to Tim to give you more details. Tim?
Thanks, Carol. Good afternoon. Let's begin with our first quarter narrative and then progress to second quarter guidance. Highlights of our first quarter performance include $1,064,000,000 ex-TAC revenue, $14 million above guidance midpoint; 10% year-over-year ex-TAC Display revenue growth at the high end of our guidance range. As I highlighted in January, our reported Display growth rate this quarter is muted by the first quarter 2010 benefit of transitioning our automotive customers back to accrual accounting. Excluding that adjustment from prior year, our Display business grew nearly 17% year-over-year. Returning to our highlights, our $190 million operating income was above the high-end of our guidance range and 1% ahead of last year, but up 31% year-over-year, excluding the $43 million one-time Search Alliance reimbursement catch-up in first quarter 2010.
Ex-TAC operating margins were 18%, which represents year-over-year expansion of 5 points, excluding last year's Search Alliance one-timer. And finally, we generated $0.17 earnings per diluted share, including a $0.02 noncash impairment charge I'll explain more fully in a few moments. Excluding the impairment charge from current year and the nonrecurring Search Alliance in Zimbra items from prior year, EPS was up 23%.
Now let's break down our revenue performance in the 3 reporting categories you see in our press release: Display, Search and other.
As I mentioned a few moments ago, Display revenue performed at the high-end of our guidance range for the first quarter, growing 10% year-over-year on an ex-TAC basis. Both our premium and nonpremium segments contributed with strong impression growth on relatively flat yield. From a geographic perspective, all three regions exceeded our expectations this quarter. We have good Display momentum around the globe.
Turning to Search. We ended first quarter down 19% year-over-year on an ex-TAC basis. The underlying dynamics of the decline were consistent with guidance, 8 points related to Search Alliance WebShare and the remainder primarily driven by affiliates. More on that in a minute. First, let's dive into core Owned and Operated Search.
Although O&O RPS underperformed our original expectations, we were protected financially by the RPS guarantee for Yahoo! properties. With the guarantee, O&O RPS was flat globally versus last year. The guarantee extends for the next 4 quarters as well so we're comfortable with the financial floor we've established while Microsoft implements operational improvements in the joint marketplace. O&O Cleary volume was also flat globally but the U.S. registered 6% year-over-year growth exceeding expectations. Although, we are still in the early stages of our answers not links strategy, innovations like the contextual Search initiatives, wow modules and QuickApps we launched late last year are tangible positive drivers of our improving volume performance.
Finally, with respect to Search, ex-TAC Affiliate revenue was in line with expectations for first quarter, but down 23% year-over-year as anticipated due to the loss of neighboring Korea and the impact of the Search Alliance transition on the U.S. marketplace.
Rounding out the top line for first quarter. Other revenue declined 10% as we've deliberately overhauled this category with divestitures and new partnerships. We believe our fees, listings and leads businesses are now positioned for future growth and profitability.
Moving down the income statement. First quarter ex-TAC expense landed at $875 million, $30 million below guidance midpoint and 7% lower than prior year. The under-run versus guidance was primarily driven by hiring efficiencies and favorable stock-based compensation timing. We continued to focus on improving efficiency across the company to enable investment for revenue growth and margin expansion. Below operating income, our earnings and equity interests included a noncash impairment charge required under U.S. GAAP of $26 million or $0.02 EPS related to an investment held by Yahoo! Japan whose fair value was determined to be less than its carrying value. Including the income statement discussion, our first quarter effective tax rate was 27%, slightly better than forecast as a result of timing. We continue to expect a structural rate in the low 30% range.
Now let's take a few moments to review our key balance sheet metrics. Cash and marketable debt securities ended first quarter at roughly $3.5 billion. Cash flow from operating activities was $208 million for the quarter, up 45% from prior year. During 1Q, we repurchased a total of 8.4 million shares for $137 million or $16.35 per share. Capital expenditures were $168 million for first quarter, including approximately $60 million in construction of newer, more efficient data centers both in the U.S. and abroad. Data center construction should peak in second quarter, and therefore, we expect second half 2011 CapEx to be lower than first half. Finally, as of March 31, the pretax value of our 35% stake in Yahoo! Japan and our 29% indirect stake in Ali Baba.com was roughly $9.9 billion or a little less than $7.50 per share.
These figures are based on public market quotes and do not include estimates of the value of Ali Baba's privately held businesses.
Turning to second quarter guidance. We expect ex-TAC revenue to be in the range of $1,075,000,000 to $1,125,000,000. Display revenue should accelerate versus first quarter while our Search and other segments should be flattish sequentially. Compared to prior year, this outlook includes roughly $35 million of Search Alliance revenue share and another $20 million related to broadband amortization and fee rates step down, as well as the HotJobs divestiture. Excluding these headwinds, as defined at last MACE Investor Day and our January 2011 earnings call, our ex-TAC revenue guidance midpoint would be up roughly 2% year-over-year. For ex-TAC expenses, we expect a range of $915 million to $935 million for second quarter, although 3% lower than prior year, ex-TAC expenses are growing sequentially as the result of annual wage increases, seasonal marketing spend and stock-based compensation timing. At the midpoint of these revenue and expense expectations, our outlook for operating income is $175 million. Finally, our effective tax rate should be in the 30% to 33% range.
We'll provide a deeper dive on revenue, cost, margins and our balance sheet at our Investor Day next month. But for now, I'll turn the call back over to Carol.
Thanks, Tim. I've already highlighted some of our great work in Q1, but let me hit a few more highlights. Yahoo!'s reach is huge and our user base continues to grow. ComScore now accounts 680 million users of Yahoo! branded properties around the world. We ranked number one in 8 categories worldwide and in the top 3 a cross 22 categories. Engagement on our media and Search properties is growing. No one else on the web has that kind of scale or reach when it comes to digital media.
In Q1, all 3 of our regions exceeded our expectations. APAC continued its audience leadership and exceptional growth. Even with leading audience reach in most major records APAC markets, our user growth there continues to outpace the market and despite the loss of Naver, revenue ex-TAC in APAC grew 11% year-over-year, driven by great performance in premium ad sales. In EMEA, we're experiencing a real turnaround. Q1 represented EMEA's best growth quarter in recent memory, with revenue ex-TAC up 9% year-over-year. Display grew 16% over last year while audience reach in the 5 largest EU markets grew to an all-time high. Meanwhile, Maktoob continues to be a big win for Yahoo! in the Middle East. In fact, the new Yahoo! Maktoob front page has become the fifth-largest Yahoo! Homepage in the world. So we feel good about each of our regions. Engagement in our media properties is up, extending our lead as a premier digital media company and we're complementing our entire network of media properties with great features and distribution through the four O’s: Video, mobile, social and local. Let me take hit each of these briefly. First, video. Video is seeing tremendous growth. Our media properties have invented and implemented a lot more video content which encourages user engagement and our original video products continue to draw a big crowd. With audience up 80% year-over-year and time spent has more than doubled. After just 4 quarters, our news trivia program, who knew, is the number one online show with more than 5 million visitors spending 8 million minutes. And our biggest show, Primetime in No Time, surpassed 500 million total streams in Q1, making it the most watched online show ever.
We continue to add new originals, too. We're now producing more than 20 original video programs, each of which is sponsored by major advertisers. In fact, Yahoo! has 9 of the top 10 original video programs on the Web. So that's video. What about mobile? Apps and HTML5 experiences for phone and tablets are a major focus for us this year. At Mobile World Congress in February , we previewed Livestand, an innovative new publishing platform concept designed for tablets. Publishers and advertisers alike were really wowed and have expressed great interest in Livestand which we plan to bring to market late this year. And we've introduced several other great new experiences on phones and tablets. My favorite is MARKETDASH, our newly designed app for Finance. Our Finance app for iOS has been around for a while, but I love the new iPad version, the data, content, elegant format and speed make MARKETDASH far better than anything else that's out there.
In social, we are deeply integrating social experiences across many Yahoo! sites, utilizing our own social technology, as well as leveraging our relationship with Facebook. Along with the Oscar win for Yahoo! and Chrysler, we got similar great results with our March Madness coverage. Our Tourney [Tournament] Pick 'Em game set records for registrations and helped to double sponsorship revenue. And finally, we’re ramping up quickly in local. Our hyper local flip of a Yahoo! front page is now live in 300 neighborhoods around the U.S., ten times what we had in Q4 and we're continuing to add more every day.
There are other main great points of progress in Q1, but I know you have questions so I'm going to wrap up. As you come away from today, I hope you have a clear sense of our progress. We focused on extending our lead as a premier digital media company through great content experiences and the advanced platforms that help us rapidly create and monetize them. We continue to make headway on our plan to increase profitability and grow revenue. We’re executing and innovating faster. We’re implementing modern technology and expanding our media footprint. We’re growing engagement and monetizing it. We continue to lead and to differentiate in Display and we're confident in the Search Alliance and the plan to increase RPS.
We'll talk to you all about this and more at our upcoming Investor Day, May 25th at the Fairmont in San Jose. We hope you can all come. Now let's open the call to questions. Operator?
[Operator Instructions] Our first question comes from Youssef Squali of Jefferies.
Youssef Squali - Jefferies & Company, Inc.
Carol, you talked about your Display ex-TAC business accelerating. Can you help us understand what will drive that acceleration? And such as the elimination of the auto adjustment, was there something else in there maybe you can help us with pricing versus volume? And then, Tim, on the Q4 call, you talked about monetizing the Yahoo! Japan partnership, can you just please update us on where that stands?
Yes, Youssef. As far as Display goes, it really is engagement being up, the fact that with our new platforms, we are actually better able to predict, and therefore, monetize our content, and therefore deliver a better ROI for our advertisers. Better CPMs, better ROI, so everybody kind of wins in this whole thing. Also, the thing that's interesting is as we're bringing new sites up now and we are around the world, especially in Lifestyle, Entertainment, Women's, that sort of thing, these are a sort of built-in advertising magnet sites. So it really is about engagement and users coming to these new sites.
Let me just jump in on 2Q also, Youssef. 2Q is a clean comparison. There's nothing really unusual either in the 2010 quarter or the upcoming 2011 quarter, we've guided to mid-teens growth. As far as YJ [Yahoo! Japan] goes, we continue to make progress and that's really the only update we have for you today.
Our next question comes from the line of Mark Mahaney of Citi.
Mark Mahaney - Citigroup Inc
You talked about some of these other revenue items regaining stability and then growth next year so could you just remind us maybe 1 or 2 key elements in there, 1 or 2 key Listing or Fee segments in there that you think could return and show some reasonable growth starting at the end of this year or next year?
Well, I'd start with Real Estate, our Real Estate partnership. As you know, Mark, that was the area of all the sort of kind of side businesses, personals was in there, HotJobs is in there. So that's a lot of the things that we cleaned out to get on our media strategy. But Shopping is getting stronger. It's clear that Travel is strong, in fact, we've got some great ideas on how to even enhance that site. Our Small Business is just hanging in there, and in fact, doing a nice job. So I think I'd say probably in general, what is left in other, with the exception of the fees for broadband, is starting to go on a positive trajectory.
And we've talked about this before, Mark. It's a matter of actually figuring out where these businesses fit in and how to leverage them against Search particularly, but also Display. So they are a very valuable part of the network and they can be leveraged to a much greater extent so we've now kind of made those connections internally a lot stronger and again feel like we've got some reasonable opportunities.
And don't forget, I mean, we're still, until we get to pretty much Q4, we are still going against comps where we have HotJobs and we have Zimbra and we have full access to personals and so forth. So it's a matter of growing and then having apples-to-apples comps.
Our next question comes from Ben Schachter from Macquarie.
Benjamin Schachter - Macquarie Research
I was wondering if we could dig into the Search a little bit more. If you can explain the two separate pieces, one, Search volume, subs query volume and the other revenue per Search. The revenue per search, can you just talk about why you're confident that, that can turn around? And then on the Search volumes, two things, one point of clarification, in the engagement ventures, you talked about U.S. Core Search from comScore were up 26%, but then the page views from, I believe, the internal Yahoo! numbers only up 3%. If you could help us understand the difference there. And when you're forecasting the Search volumes, do we expect those to grow at market or below market or above?
Let me handle the volume questions. So what you see in the earnings releases is what were the PowerPoint pages that are out on the website, U.S. Core Search, that's 26% growth, that is all Search, including the contextual initiatives that we have going when we speak about our -- those, a lot of that actually, as you may know, focuses on Display revenue. But it is counted in the larger sense by comScore Search. What we usually talk about for our O&O Search is just our Core Search, just the Search boxes across our networks. So that's the difference there.
Ben, relative to RPS, it was flat in Q1, but that's because of the revenue guarantee. Actually, RPS is below what either Microsoft or Yahoo! had expected. It's because when we brought the 2 marketplaces together, a lot of the variability of bringing 2 huge market places together can't be tested until the marketplace forms. So there's just some issues that have come forward around prediction of what an ad campaign for new advertiser's going to be versus one that's been on there. There's been some budgets smoothing issues, some relevance issues. We've all -- they've gotten down to the bottom of each of these things, and it presented us with a plan for how they're going to use, as I said, hard science and just new technology in adCenter to get this thing back where it needs to be which is flat, and obviously, as we had predicted when we made the alliance, up into the mid-single digits.
Our next question comes from the line of James Mitchell of Goldman Sachs.
James Mitchell - Goldman Sachs Group Inc.
Was the stock-based comp the main reason you beat your first quarter margin guidance? I mean when you look at the stock-based comp, did you indicate that was going to tick up in Q2 with another options package issuance?
James, yes. The timing of stock-based comp was half, maybe a little bit less than half of the under-run of guidance in the first quarter, and yes, it will tick up due to, again, timing. And yes, this is the annual time when stock-based compensation is issued and we renew the Employee Stock Purchase Plan.
James Mitchell - Goldman Sachs Group Inc.
What is the other half of under-run cost guidance?
As I said in the script, mostly hiring efficiencies. Payroll taxes are down a little bit farther than we anticipated, benefits were a little bit lighter, that kind of thing.
[Operator Instructions] Our next question comes from Jeetil Patel of Deutsche Bank Securities.
Jeetil Patel - Deutsche Bank AG
I guess you talked about the RPS not living up to the expectations that both parties kind of set out. Can you talk about the spread or delta between the expectations versus the guarantee? What is that percentage differential? And then second question, what percentage of the display revenues today come from video-related advertising?
First of all, no, we will not provide specifics because that's part of our agreement is to not go into that kind of detail. Relative to video advertising, it is still a fairly small part. In fact, that's the fastest-growing part. In fact, it wasn’t until a few quarters ago that we even allowed video advertising on the homepage. So this is -- we think this will be our fastest growing segment. We have some new ad formats; farmer video is one. So we're very, very excited about video both as pre-roll but also as original shows that we talked about. As I said, we have 9 out of the 10 original shows, and we had a lot more. We're hoping to bring at least 10 more on this year, if not more than that. And that is huge advertising partnerships.
Jeetil Patel - Deutsche Bank AG
Just going back to the search RPS, do you think -- were you expecting it to improve gradually throughout the year under your original assumptions?
Well, under our original assumption, we knew we couldn't really tell what happened in Q4 since demand in Q4 was so high, last Q4. And things were pretty loaded and so on and so forth. So we expected a dip in Q1 as, frankly, market places normally have. But the dip went a little lower than we expected and lasted a little longer than we expected. So again, I personally sat down with people from Microsoft last week, as did a lot of the team members here, and feel good about their plan. First of all, feel good about the disclosure and then about their plans for improvement. Both, as I said earlier to get us back to where Panama was as a baseline, and then, of course to get the power of the larger market and go beyond that.
Our next question comes from Spencer Wang from Credit Suisse.
Spencer Wang - Crédit Suisse AG
Carol, you've been focused on positioning Yahoo! as a digital media company and you referenced to growth in video in your prepared remarks, but it's a pretty crowded field in online video. So I was wondering if you could just speak to what you see Yahoo!'s competitive strengths are, via the Netflix, YouTube, Hulu, Amazon, et cetera. And then just as a follow-up for Tim, in your slide deck on Page 6, you gave the page view growth by category. I was wondering if you can share with us a rough approximation of how big each category is as a percent of the total page views.
Well, there's a lot of areas of video. Of course, as we all know, the biggest one is user generated. That is not something Yahoo! is interested in. We're more interested in it as a media for entertainment. In other words, video about entertainment, celebrities and being entertaining about sports events. Our original videos that we talked about, so we called them -- I call them video snacks, 3 to 5 minutes. These shows have become very, very viral. I think the area that we wouldn't stand out is the fact that we could have some longer format videos, similar to partnerships, et cetera. But UGC [user-generated content] is that one area that I can unilaterally say, except to the point -- Okay, I will say this, except to the point that some UGC become so interesting that it appears on our front page because it's like the talking twins or something, that was a cute one. Then, of course, it will show up there because that's what everybody wants to see that day and be cool about around the watercooler. But there's huge advertiser interest in being connected with video snacks that users come to see every day in and out. Users love it. In fact, probably our biggest problem would be right now, as we know it, is it's pretty hard to find on our sites. And one of the things, as simple as it sounds, we're doing is just having our video be much more discoverable, and so therefore, the fan base can follow it much easier and develop new fans for the snacks.
Spencer, on Page 6, the engagement metrics question, a couple of caveats here. This is, as you all know, this a new disclosure for us. We've gone to the trouble of breaking things into the pieces that we believe most represent how you should be looking at the business and that most tangibly relate to our engagement efforts on the one hand and certainly, our Display growth as a related piece of that. That said, if you look at things, communications, the communities, I'd say is a little bit more than half of the page views. The caution there that I wanted to make sure you're aware of is, and we've talked about this before, there's no real way to measure access to the communications and communities properties from mobile. So that's a whole big segment that's kind of gone uncounted here and makes it -- while we work through that issue, as an industry, makes it a number that maybe isn't quite as indicative as you'd want it to be. But I would say, again, that section is a little bit more than half and the vast majority of the rest of the media properties.
Our next question comes from the line of Justin Post of Bank of America Merrill Lynch.
Justin Post - BofA Merrill Lynch
Can you tell us if there's been any impact on your licensing fees in Japan? And Tim, did you say earlier, you feel better about a deal since you worked on it last three months or about the same? I know it was a big topic on the last call.
I would say, yes, there's a little bit of an impact on the licensing fees out of Japan, nothing material. They still continue to do pretty well -- very well. What we report is one quarter in arrears, so you won't see of their impact on the equity interest line just yet for us until June. And then on the second one, I didn't say one way or another, I said we continued to make progress.
Our next question comes from the line of Brian Pitz of UBS.
Brian Pitz - UBS Investment Bank
A question for Carol on Display. Did the TAC decline in Display mean that third-party underperformed O&O in the quarter? And then separately, any comments you have on specific verticals of the content that you may be interested in pursuing going forward?
Tim, you want to do that first question? I wasn't sure I understood.
O&O was very strong. Affiliates did well. Affiliates are very small. I'll have to look and see what you're seeing Brian, maybe you can have a follow-up afterward.
What was the other one on video?
Brian Pitz - UBS Investment Bank
Just the specific verticals of content.
I'm sorry. For video or just anything? The verticals we're interested in are ones you see expanding, like when we talk about 50 brand-new sites, vertical sites, it really is all about Entertainment, Lifestyle, Females, Mothers, Men and Sports, Movies, and Gossip. The things that people want to do. I mean, they kind of want to disappear. Now obviously, we already have news and hard sports and so forth in most of the places, but we are really talking about expanding beyond that and with our new platform. And frankly, equally importantly was the editorial tools. We can bring these sites up very quickly without Sunnyvale [ph] engineering support. And those are really, really good engagement opportunities. I'll just tell you a little story. We brought News up in Canada in December. In December and January or we were debugging it. When Canada in March had this sort of crisis of confidence in the government. I don't know if you guys followed that at all. We were able to bring up a special site in Canada, the editors by themselves got huge engagements. In fact, freaky huge engagements. We weren't sure that we believed it at first just because we could really put a site around a series of articles, stories and really pull page views up, minutes up. So that's an indicator. It's a little too soon to be braggadocio, but if that's an indicator of what we can do, it's real power in the hands of our regions.
And there was not one engineer involved in that. The site’s new platform went up and the editors were able to be creative and innovative and...
That's because the engineers did their job in the first place.
Yes. They did a great job.
Our next question comes from the line of Kenneth Sena of Evercore Partners.
Kenneth Sena - Evercore Partners Inc.
So I had a question just around the right media exchange. Given the increased competition there in terms of Microsoft investment and Google's further integration of Invite, how satisfied is Yahoo! with the current margin investment level and capabilities of Right Media right now? And if you could just maybe give some examples of modernization and innovation there, that would be great.
We'll talk more about this in May 2, but impressions are up in Right Media, RPM is up, we're really -- we're adding more signs to the product because it's -- we're cleaning it up, as well, so we've got better prediction technology, better analysis. So we're still in inventory management. So a lot of the things that we are doing for App now flow nicely also to the exchange.
So we're very happy with the level of investment. In one feature alone among the many that Carol just noted was responsible for RPMs going up 2% in the quarter.
Yes, 2% worldwide. That's a nice number in exchange.
Our next question comes from Heath Terry from Canaccord.
Heath Terry - Canaccord Genuity
On the communications side, is there an answer to the declines you're seeing there particularly in email that seems to be key to stemming the overall decline in engagement that you're seeing? And then Carol, you talked about the success that you're seeing with your mobile apps particularly on one like Finance that’s been around for a while. Can you talk about what monetization looks like there?
Yes, let me start with Mail, Heath. There's an interesting issue with Mail, and what it is, is -- so the Mail coming through mobile is not being counted by anybody yet. And so we actually believe that we'd be pretty much flat, is what we think. But hold that thought for a minute. What's more important to us is that we have a new Mail under beta. We've got, I don't know, 7 million, 8 million people using it now. Too early to tell because these probably are the enthusiasts that came over first. But engagement is up 30% on the new Mail system. What we focused on is it's twice as fast. It is literally twice as fast. It has great features. The way photos work, the way you bring in your social graph. So the general G&A or general whatever in May, we're working hard on not just saying, "Oh, Mail is going mobile," we're working on a great Mail product. As far as the rest of the products are going, again, you guys really go up and look at MARKETDASH, but we're aiming for very modern new app-based HTML-5-based products. Think of the tablet as a reference port and then down and up from the there. So that the PC will get a modern look eventually. As far as ad platforms, it's still new. We are doing really well off a small number, but ad format. We're working with the IEB to make sure we have new mobile ad format the industries interested in. But there's not enough monetization there now to break it out.
Our next question comes from Ross Sandler of RBC Capital Markets.
Ross Sandler - RBC Capital Markets, LLC
First just things for upgrading the Mail product. A couple of questions on Search. Back to the RPS question, so when does exactly the RPS guarantee expire in the U.S.? And then second, you said that Search spend and ROI is up significantly for some advertisers. So how do we reconcile that with the RPS underperformance? Was it just a few categories that were up or is it across the board? And then last, are you planning on introducing any new Search ad formats that maybe you see from some of the competition? Is there any of that in the roadmap? And what gives you the confidence that the RPS will start to turn around?
I'll answer the Search guarantee is up at the end of ...
March 31, 2012.
So at the end of Q1.
Another four quarters.
Another four quarters. I can tell you about the RPS. It's kind of interesting. One of the things that -- it turns out that adCenter doesn't have a good handle on is called prediction. And so it can actually take an advertiser that's been in the system, understand by looking backwards what should happen going forward. But a new advertiser that doesn't have a history, the system doesn't do a good job predicting what's going to happen. And therefore many of the new advertisers can't even get their campaigns in because they're not meeting the auction levels. So that's why some folks are doing better and other folks are -- because we're not predicting correctly for them, aren't even able to run their campaigns. So this is one of the things that Microsoft is very, very much focused on.
Our next question comes from the line of Rory Maher of Hudson Square Research.
Rory Maher - Hudson Square Research, Inc.
Can you just talk a little about how any kind of local advertising campaigns that happened in the quarter and how that might've differed from national campaigns? And then I thought it was interesting that you mentioned kind of Chrysler and your March Madness campaign is driving Likes to Facebook pages. Is that kind of a trend you're seeing from advertisers on your platform that they want to incorporate Facebook more into your spend on Yahoo!? And maybe you can give some more examples of that?
Yes, I just have one thing and I don't have the stats in front of me, but we just had the biggest we gathered in the newspaper consortium. In fact, one of their releases, which one was it? Gannett, in one of the releases, just basically was praising the fact that using their inventory and Yahoo!'s inventory, they really are seeing ad benefits. It was amazing to see the list of the advertisers that the group sold last week. I mean, seriously, it was roofing contractors, everything that you expect in a local marketplace. We can maybe focus a little bit more on that for you in May. When you ask about Facebook, yes. You know, what's interesting is I think there's a little confusion among the analysts that companies want to social ad therefore, they're going to run over and they can only place a social ad in Facebook because they are the social company. When in fact, what companies are looking for is a place to do a great brand story, but they want to make sure it has a social component because these days, you're smart if you do that. So when we went to Chrysler and pitched this Road to the Awards, they wanted a social component and they -- you're not going to run a big branding campaign necessarily on a social-only company. But the fact of the matter is they were thrilled that we tripled Likes on their fan page because they were drawn into the story of Chrysler on Yahoo!, but told their friends. And so we’re seeing more and more of this kind of thing. They've got 1.6 billion ad impressions. That's what they're really looking for and they're looking for this viral event of also taking it out to people's social graphs.
Our next question comes from Aaron Kessler of ThinkEquity.
Aaron Kessler - ThinkEquity LLC
Just got a couple of questions on the following on the local strategy. Any insights into the daily deals of business in the quarter? And then also, what's your sense for correlation between some of the comScore data you provided versus your internal metric?
Aaron, this is Tim, obviously. The Daily Deals space, the Local Offers space definitely we're seeing it grow. From last year it was almost nothing, it's starting to obviously contribute to our growth. And we think we can do a whole lot more there. We think we have terrific, terrific assets to be able to leverage against that between Mail, a lot of the engagement we've got there. And finally, I've mentioned our JV in Australia, Yahoo! 7 did a great acquisition of a company called Spreets. They’re in first quarter that is kind of the big Daily Deals purveyor there in Australia. So there's an awful lot going on in that space, and an awful lot that we are working on to take a big chunk of it. You also asked the question on correlation between comScore data and ours. It seems to be, there're always a little differences here and there, but things seem to be directionally the same. And a lot of what we publish obviously on our engagement page there on website is labeled comScore. Some things like volume, measurements and metrics are absolutely internal. But again, I think directionally the same as what comScore has seen.
Your next question comes from Mark May of Needham.
Mark May - Needham & Company, LLC
It's good to hear you're bullish on the online real estate business. But my question is are you able to see how the new content platform is impacting engagement? Maybe can you provide us some examples of some real life examples? And does the new content platform have any impact on your ability to innovate on the ad side? And then the other question is you've talked about how the third-party data around mobile is not great right now. But as mobile devices become an increasingly more important channel for your users, do you have any internal stats that can make us comfortable that you are translating your share of user and usage online into the mobile world?
Well, we are looking at this mobile step very seriously because we want to measure ourselves. We're also working with the outside ratings people to figure out how they want to do it. So trust us in that we're very serious about trying to figure out where our customers are going every minute of the day. And I mean, it stands to reason that if they are on the go, they're checking Mail and Finance and whatever from a mobile. So we are watching that very closely, but we don't have anything concrete to tell you about when we are going to have numbers that we think are good enough and when a third-party. There's no good third-party right now.
It's an industry-wide thing.
Yes, it's industry-wide. Relative to these new sites, it's interesting. If you look at Canada, and again, it's very early, but page views are up twice. If you look at some of the sites we put out in Asia, we have anywhere between 30% and 50% lift. So the good news is, it's all in the right direction. Totally all in the right direction. And we're literally on pins and needles because we really, really think we can drive unique and engagement because these sites are interactive, they're modern. If you look at a Yahoo! site two years ago, they were static sites. Look at the News blog growth. In one quarter, in three months, we went to 400 million hits. That's up from less than 200. So I mean, that kind of stuff is a big deal.
Okay. Thank you very much, everyone.
Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may all now disconnect.
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