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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

Brian Pitz - UBS Investment Bank

Jordan Rohan - Stifel, Nicolaus & Co., Inc.

Youssef Squali - Jefferies & Company, Inc.

Anthony DiClemente - Barclays Capital

Benjamin Schachter - Macquarie Research

Justin Post - BofA Merrill Lynch

Douglas Anmuth - JP Morgan Chase & Co

Herman Leung - Susquehanna Financial Group, LLLP

Scott Kessler - S&P Equity Research

Jeetil Patel - Deutsche Bank AG

Jason Helfstein - Oppenheimer & Co. Inc.

Ross Sandler - RBC Capital Markets, LLC

Mark Mahaney - Citigroup Inc

Yahoo! (YHOO) Q2 2011 Earnings Call July 19, 2011 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the Yahoo! Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Marta Nichols. Ms. Nichols, you may begin.

Marta Nichols

Thank you, Stacy, and good afternoon and welcome to Yahoo! Second 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 may contain forward-looking statements concerning matters such as our expected financial and operational performance, our long-term financial objectives and negotiations regarding Alipay, 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 products 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 May 10, 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, July 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.

Carol and Tim have prepared remarks, and then we'll have a brief Q&A session. And with that, I'd like to turn the call over to Carol.

Carol Bartz

Good afternoon, everyone, and thanks for joining us. We have a lot to cover, so let's get started.

Our results in Q2 were a mix of good, encouraging, and at the same time, unsatisfactory. First was good. Expenses were well managed, profits were up and we bought back a lot of stock. We're making clear measurable progress in Search, and we have continued to accelerate the launch of sites on our new publishing platform. But we know 2 issues are top of mind for you after seeing today's announcement: where are we with Alipay and what happened to Display this quarter? So I'm going to address both of those upfront. Tim will then talk more about the results, and I'll finish with an update on our Search Alliance and new publishing platform progress.

With regard to Alipay, we've been working on this negotiation continuously, in fact, daily. We're moving in a direction that's consistent with what we told you at our May 25 Investor Day. We told you then that the parties have been working with 2 agreed-upon principles in mind. One, ensuring that intra-company relationship between Alipay and Taobao is structured to preserve the value within Taobao and, therefore, Alibaba Group. And two, ensuring that Alibaba Group is appropriately compensated for the value of Alipay.

We have made substantial progress on the definitive agreements. But until every word is finalized and every document is signed, we're simply not done. We'll continue to work in earnest on the definitive agreements in a manner that best serves the interest of our shareholders.

Now let's turn to what's unsatisfactory. Our overall ex-TAC revenue was at the low end of our guidance range. That was entirely due to U.S. Display, which did not perform the way we expected. Overall, Display revenue ex-TAC was up 5%. Display in EMEA was up 27%. And in APAC, it was up 20%. However, the Americas region was flat, with U.S. Display down unexpectedly. Obviously, I'm not happy about our U.S. Display performance. Let me tell you what happened, why it happened, and what we're going to do to fix the problem and reaccelerate Display growth.

In the first half of Q2, Display revenue in the U.S. was pretty much consistent with our expectations. But as the quarter progressed, we saw increasing softness, especially in June. Let me be clear what this was not. Business was not about new competitive developments. It was not about the economy, although the economy didn't help as we saw softness in the CPG, auto and retail categories.

Finally, it was not about engagement, which grew nicely in Q2 as you can see from the engagement metrics on our IR site. Rather, the root cause is the comprehensive changes we discussed with you at our Investor Day, changes to our U.S. sales leadership, which led to changes to our sales org structure, and then to changes in our sales force. In May, we made a decision to reorganize the U.S. field organization and to move aggressively to position ourselves from our rapid Display growth in the future.

However, the combined short-term results was significant turnover in our field sales rank. That is the actual feet on the street. Turnover accelerated as all these changes affected the sales organization. As with any reorg, we initiated some of the departures and some people chose to leave on their own. Frankly, however, we underestimated how much the changes would increase turnover, and hence, our ability to close premium Class I sales in the back half of Q2.

That, in a nutshell, is what happened and what drove it. Now what's the bigger picture? What did we see that led us, even though we were generating double-digit Display growth, to make these major changes in our sales operations?

As we said in Investor Day, we've been focused on taking our sales organization and client relationships to new levels. Over the past 8 months, we brought in new Americas sales leadership, from Ross Levinsohn, who you met at Investor Day; to Wayne Powers, who joined us from Time Warner; and Mark Ellis, who joined more recently from AOL. They did exactly what you would expect good sales leaders to do. They got close to the customer and closer to salespeople in the field. They have been out on many, many client pitches, which drove home to them the opportunity to reorient our relationship with advertisers and substantially change the way we sell.

With our massive user base, too often it was easy to fall back on pitching Yahoo!'s huge reach and scale. But selling on reach and scale alone leaves meaningful revenue opportunities on the table. We need a sales organization that can craft customized solutions and creative executions because this is what distinguishes Yahoo! from our competitors in Display.

We think of it this way. The most differentiated way to sell Display advertising and the way we want to sell is customize audience-based and solution-oriented across multiple devices. The fact is the way that industry sells is evolving, and we must evolve too.

So where are we now? First, we believe the field sales force is moving in the right direction. We've hired a lot of new people, and we see sales leaders and teams that believe in the opportunity and the changes we're making. Field sales is staffed back up to where they were 6 months ago. However, many of the account execs are new to the roles, and it will take time for them to get up to speed on their new books of business.

Second, we're investing in the growth of our overall U.S. sales force and sales development teams. We will hire more salespeople than we had before. We're increasing our coverage ratios for clients and agencies, and growing categories like video and mobile.

We're also investing in better tools and training. We're organizing our teams with a deeper industry focus. We're packaging our offerings differently, and we're continuing to work on making ourselves easier to do business with.

Perhaps the most important signal we see is that this new approach to sales is beginning to prove itself. Where our new management and salespeople are making calls and deliver solutions-oriented pitches, we are getting the orders. These changes are part of the evolution of our turnaround efforts. First, we had to get the strategy right and clearly define our vision as Yahoo!, as the premier digital media company. Next, we had to focus and get the scalable technology platforms in place, and then begin launching new, more dynamic sites. And now we're intensely focused on monetizing those sites with the right solutions for advertisers.

We believe the changes we're making will bear fruit later this year and into 2012. In the meantime, we expect it will take some time to ramp our new sales team and scale our training and packaging efforts. And that's reflected in our Q3 guidance that has revenue flat with Q2. That also means we'll be below our 13% to 16% long-term Display growth target this year, but we are committed to getting back into that range next year.

Now let's get to the good news of the quarter. Search was better than we expected. Microsoft adCenter launches are helping to close the RPS gap, and all our innovative work with new front-end user experiences are contributing to our Search results as well. I want to give you more color on this, but before I do, let me turn it over to Tim to review the quarter.

Timothy Morse

Thanks, Carol. Good afternoon. Let's move right into a discussion of second quarter revenue dynamics before proceeding to the rest of our 2Q results and 3Q guidance.

Display revenue grew 5% year-over-year to $467 million on an ex-TAC basis, coming in roughly $30 million below our expectations. As you heard earlier, both EMEA and APAC performed as expected with 20% or better Display growth versus last year. So I'll focus my comments on the shortfall in the Americas region and, specifically, in the U.S.

As Carol described, our U.S. sales force is under transition, and we simply didn't have appropriate coverage to close 2Q as we'd originally planned. Our sell-through rate this quarter was the most tangible expression of that fact. By and large, ad supply wasn't an issue. That is, engagement on our major media properties was essentially where we expected it to be. So we had ad inventory available to sell at premium rates. However, without our sales force operating at full capacity, many of the ad units we would typically sell on a guaranteed or premium basis were, instead, run through the exchange as nonpremium inventory at far lower prices.

Our Homepage was a clear example of this dynamic. Due to the sales force transition and turnover, we sold significantly fewer days as guaranteed placements in second quarter 2011 than we did in the prior year. Many of our media properties experienced similar dynamics.

Another way of viewing the same issue is by industry category. Lower revenue in 3 specific ad categories, consumer packaged goods, autos and retail, accounted for 2/3 of the shortfall in U.S. Display revenue. Typically, we would have been able to sell some of that inventory intended for those customers to other premium advertisers at guaranteed placements. Although non-guaranteed upside provided a small offset, the revenue mix effect was very unfavorable.

Turning now to Search. Second quarter ex-TAC revenue landed at $371 million, roughly $15 million ahead of our expectations, driven primarily by O&O. Owned and Operated revenue was down 10% versus last year, including the Search Alliance revenue share, but up slightly without the revenue share. We continued to benefit from the Microsoft RPS guarantee in the second quarter.

For affiliates, ex-TAC Search revenue was down 27% year-over-year as a result of the marketplace transition challenges I described on our April earnings call. However, we did see some Affiliate stabilization this quarter, which contributed to ex-TAC Search revenue exceeding our expectations.

With respect to operational Search metrics, our worldwide O&O query volume was down mid single digits versus last year, and worldwide RPS was up mid single digits. In the U.S. marketplace where we fully transitioned to Microsoft systems, query volume in RPS were both roughly flat, including the guarantee. However, operational RPS in the U.S. did show meaningful improvements sequentially, as Carol will describe more in a few minutes.

Rounding out the top line, our other revenue category was $239 million ex-TAC for second quarter and performed in line with expectations. Although down 3% year-over-year, the category grew slightly, excluding the HotJobs divestiture.

Moving down the income statement. Second quarter ex-TAC expense landed at $885 million, $40 million below guidance midpoint and 7% lower than prior year. The underrun versus guidance was spread across a number of line items led by workforce. There were, however, roughly $10 million in nonrecurring items that benefited second quarter results.

In terms of our primary profitability metrics, operating income of $191 million was up 9% versus prior year and exceeded our guidance midpoint by $16 million despite the revenue shortfall. Ex-TAC operating margins were roughly 18%, an expansion of 2 points versus second quarter 2010. And finally, EPS improved 18% year-over-year to $0.18 per diluted share.

Now let's take a few moments to review our key balance sheet metrics. Cash and marketable debt securities ended the quarter at just under $3.3 billion. Cash flow from operating activities, or CFOA, was $331 million for the quarter and roughly $540 million year-to-date. First half 2011 CFOA rose 10% versus first half 2010. During the second quarter, we repurchased a total of 30 million shares for $472 million or an average of $15.63 per share. We had $1.6 billion remaining under our current authorization as of June 30.

Capital expenditures were $172 million for second quarter, including approximately $30 million in construction of more efficient data centers both in the U.S. and abroad. CapEx was slightly lower in the quarter than what we had previously communicated to you as approximately $20 million of data center spending shifted from 2Q to 3Q. We continue to expect second half 2011 CapEx to be lower than first half.

Finally, as of June 30, the pretax value of our 35% stake in Yahoo! Japan and our 29% indirect stake in Alibaba.com was roughly $9.1 billion or just over $7 per share. These figures are based on public market quotes and do not include estimates of the value of Alibaba's privately held businesses.

Turning to third quarter guidance. We expect ex-TAC revenue to be in the range of $1,050,000,000 to $1,100,000,000. Given the sales force dynamics Carol and I described earlier, we expect Display revenue growth will again be in the mid single-digit range year-over-year, while our Search and other segments should be down slightly on a sequential basis in line with seasonality.

For ex-TAC expenses, we expect a range of $915 million to $935 million for third quarter, down approximately 1% year-over-year, but up $40 million sequentially at the midpoint of the range. While disproportionate to our sequential revenue growth, $20 million of the increase represents key investments in our sales force, content and products.

The remaining $20 million sequential uptick breaks down roughly into 2 separate $10 million increments. The first relates to the one-time items I referenced a few minutes ago that won't repeat in 3Q. The second is related to our Search Alliance transition costs. We've now, essentially, used up the $150 million transition allowance from Microsoft, so the ongoing transition work will be reflected in our cost structure. Going forward, we plan to manage that transition cost within the parameters of our profitability goals.

At the midpoint of these revenue and expense expectations, our outlook for operating income is $150 million. While the short term step backward in ex-TAC operating margin rate compared to second quarter, we believe the investments we're making in 3Q will enable us to deliver improved margin rates for fourth quarter and beyond.

Before closing, I'd also like to provide a quick update on our efforts to unlock the value of our investment in Yahoo! Japan. Over the last 6 months, we've explored a few different paths to achieve that objective, some have dead-ended and some have continued to evolve. Many of the structures we're pursuing are unique, so it's expected that some will prove unviable. Our focus is to find the right solution and that effort remains a top priority of ours.

With that, I'll turn the call back to Carol.

Carol Bartz

Now back to Search. I know this is an area you are all watching closely. As a reminder, we partnered with Microsoft in Search to improve our search performance, expand margins and focus our effort on what's most important to Yahoo!. We're behind in the RPS benefits from the combined marketplace, but our revenue is protected by the Microsoft RPS guarantee.

Advertisers like the ROI of the new alliance. We've seen real improvements in algo Search quality, and we began to stem the declines in Search market share. We're innovating on the front end of Search. And last but not least, our operating income is benefiting by at least $50 million a quarter through this partnership.

So what about RPS? As we discussed last quarter, RPS is below the expectations we have for the alliance due to technical limitations in Microsoft's adCenter platform. The alliance has worked aggressively to implement a plan to address these issues. Working together, Microsoft and Yahoo! have uncovered and addressed several platform gaps and inefficiencies in the adCenter marketplace. With a lot of collaborative work and planning, Microsoft systematically launched many new capabilities throughout Q2, including improvements to campaign budgeting features and click prediction models.

These launches are improving the monetization of paid search results and lifting RPS on both Yahoo! O&O and Affiliate sites. By the end of Q2, we've closed approximately 1/5 of the RPS gap that we measured in April before the new platform initiatives were launched. Let's be clear about what that means. That does not mean that RPS was up 20%. It means that 1/5 of the RPS gap that existed in April has already been closed.

We're really pleased with our improvement. Additional initiatives to improve the adCenter platform have been identified, and hence, are scheduled to launch throughout the year. And we believe we're on track to achieve RPS parity by the end of the year. Volume remains healthy in the combined marketplace, and we continue to see solid ROI for advertisers and their search campaign. As we said before, the low CPA and high ROI we're generating is great news for advertisers.

Let me also touch briefly on where we stand with future plans. The transition to our algo Search to Microsoft system is complete in 5 countries, including the U.S., and we plan to move the rest of the world markets this year. We plan to complete that transition of paid Search in India by the end of this year as well, and we hope to make significant progress on moving global paid Search in 2012. We will solidify our transition schedule as we see continued improvements in RPS and adCenter's global readiness.

We usually share other product updates and progress with you on these calls, but we did a lot of that on our Investor Day, so I won't go through all of them again today. However, I do want to share one important update on the progress of site launches on Yahoo!'s new publishing platform.

Two years ago, if you remember, we started on a major project to build more flexible, scalable content platforms to manage our sites. We started launching on the new technology late last year and now have 67 sites operating on our new publishing platforms. In June alone, we brought up close to 20 entertainment and lifestyle sites.

This new technology allows fresher, more flexible site design, deeper personalization with our core personalization engine, better photo, blog and social integration, search engine optimization, a single worldwide editorial tool set and a lot more. And we're on track to have 135 sites up on the platform by year end.

Near the end of the quarter, we completed one of the most important transitions, Yahoo! News in the U.S. This was a significant milestone as U.S. News is by far the largest, most complex site to launch on the new platform.

In conclusion, we made substantial progress transforming Yahoo! as we discussed with you on our Investor Day, but we'd like to be farther down the road than we are. As we look ahead, we know what we need to focus on: transforming Display, increasing Search RPS, launching sites on our new publishing platform and improving our capital structure. In addition, we're also very focused on preserving and unlocking the value of our Asian assets. We believe we're on track to achieve our goal of revenue growth in 2012.

Now let's get to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brian Pitz with UBS.

Brian Pitz - UBS Investment Bank

Thanks for the color on the Display side of things. Wondering if you can give us an idea of the growth you're seeing on the Right Media Exchange outside of the extraordinary effects of the sales force reorg? And then going forward, when do you think we'll get to a balance of momentum being driven by the sales force versus being driven by exchanges and RTBs that are flowing through the exchange?

Carol Bartz

Well, Brian, we'd actually like both of them to grow. Most importantly, of course, and of most important to us is the Class I Display. And that does, as you know and as I said, involve face-to-face relationship selling. I hope you've picked up on the fact that we are, again, back to where we were 6 months ago with our headcount. But we have a lot of work to do because a lot of these folks are new. They're not necessarily new to the industry or new to the accounts, but there's all kinds of combinations of newness. So we'll be training, we're going to do a lot more work on ad technology and packaging. We think that's really important, much more creativity, just as we did last year with our Login Page. Our customers like larger ads, more interesting ads, so we're working on that creative palette. So we predicted flat Q3 because that is, indeed, a proper thing to do when you have a new sales force. But Q4 is typically a big quarter for us anyway, and we'll have a lot of those folks back being productive. As far as the exchange is concerned, we're spending a lot of time internally looking at real time bidding, looking at agency desks, looking at DSPs, and working to understand what our position should be. And we're going to make some changes, some very interesting changes that will make our exchange for premium digital media much, we think, bigger and more important in the industry.

Operator

Your next question comes from the line of Doug Anmuth with JPMorgan.

Douglas Anmuth - JP Morgan Chase & Co

You mentioned, Carol, that a lot of the premium ads ran through the exchange. Can you just talk about how hard it might be to move advertisers back to the guaranteed at those higher rates? And then secondly, can you also just help us parse out the difference between really what you thought was Yahoo!-specific versus industry or macro-specific during the quarter for Display?

Carol Bartz

Yes, Doug. I didn't mean that the same premium ads did not run through RMX. The dollars changed to be performance advertising and non-guaranteed advertising. So it wasn't -- if you're in there and you want to work on a campaign with a customer for, say, front page takeover login, front page of sports, whatever, you're actually doing joint planning about what you're trying to accomplish and so forth. And that's a sales force, that's definitely a sales force. And it's a sales force that is selling more than, "Gee. We're big." It's really selling what the audiences are, what the different packaging solutions could be, and so it's different advertising when it runs through an exchange.

Timothy Morse

And typically, different customers.

Carol Bartz

Yes, yes, typically different customers. Now as far as the economy is concerned, I wanted to be very specific that since we initially did the forecast for the quarter, yes, we've seen softness in retail and consumer products. That's a fact. But this quarter is not about having the economy be the issue. The issue was we didn't have enough salespeople in front of the big clients.

Operator

Your next question comes from the line of Mark Mahaney with Citi.

Mark Mahaney - Citigroup Inc

Could you just walk us through your options if the RPS gap is not closed by the end of this year, or meaningfully, sometime into next year, just so we know what the downside scenarios are again? And then could you take off some of the verticals? You mentioned ones that were underperforming, some of the verticals that were perhaps outperforming?

Carol Bartz

Well, I think Tim and I can both take that, Mark. But as I know you know, we have guaranteed RPS through the end of Q1 next year, obviously, but if it's not closed, then we take a hit. I mean there's nothing -- it's not like we're going to be moving the RPS forward for the U.S. But we don't expect that's the case. We've been very involved. In fact, I had a long meeting with the head of adCenter, and as I've told you before, it was a former SVP from Yahoo! and someone I really trust. Their plans look good, they look doable. In fact, they don't look overly aggressive, and I'm not trying to sneak a comment in here. They just look like it's something we can do. And our scientists and technical people are working closely with them and believe it as well. Now by the way, that doesn't make me happy because the alliance predicted we'd be plus 6% to 8% by now, which is where we'd like to be. So just struggling back to get to parity kind of chews me out. But we do believe parity will be there in time for, as we said, the end of the year. And we're also working on plans to get that 6% to 8%, as we had all hoped, and beyond that.

Timothy Morse

And Mark, I'd just chime in that we're protected all the way through March 31 of next year. So really, what we're talking about when you asked to quantify what the delta might be, it will really just depend on what second quarter next year, so nearly a year from now, averages versus the second quarter that we just closed here in 2011. So as Carol said in her script, we closed about 1/5 of the gap. We continue to see the trajectory improve, anticipate that, that will continue to be the case with the new rollouts that Microsoft will do on adCenter throughout this year. We continue with our front-end user experience to be able to optimize RPS, also, and some of the things that we can do just on the Search results page. So there's a lot going on and a lot of time to work this through. On your second question, it looks like Entertainment, Finance and Travel actually were up fairly decently, call it, double digits year-over-year. And then as we both said, CPG, auto, retail and tech were on the soft side.

Operator

[Operator Instructions] Our next question comes from the line of Spencer Wang with Crédit Suisse.

Spencer Wang - Crédit Suisse AG

I just have a 2-part question on the strategic side. First on Yahoo! Japan. Is the rationalization there, Tim, contingent at all on the resolving the Alipay situation, or is that on a totally separate track, independent of what's going on with the Chinese assets? And then secondly, Carol, you talked about being a premier digital media company. I was wondering if you could just talk about your relative interest in Hulu.

Timothy Morse

So I'll take YJ. It's really an independent track. We have independent plans. We're executing on those plans. So there's no read-through back and forth between those 2 ongoing situations.

Carol Bartz

And Spencer, gee, you know I can't comment on that, but thank you for asking.

Operator

Your next question comes from the line of Anthony DiClemente with Barclays Capital.

Anthony DiClemente - Barclays Capital

I have one for Tim and one for Carol. Tim, on the EBITDA margins, on the outlook for margins, I think you said that starting the fourth quarter and beyond that there'd be improved margins sequentially. I just wonder if you could elaborate a little bit more on that and talk about the drivers, particularly as you see the new hires and the sales force cycling through the model. And then for Carol, you said in you opening comments, you said that what's happening in Display is not because of new competitive developments, and I'm just wondering if you could elaborate on what gives you that confidence.

Timothy Morse

So I'll start, Anthony. We'll talk on operating margin not EBITDA margin. On operating margin, as we've talked a lot about, we came in -- 2008 was about 9% operating margins on an ex-TAC basis. We're now up in the first half to 18%, so we've doubled those over the last 2.5 years. 3Q, because it's a little bit of a soft seasonality quarter and we're getting the sales force ramped up to speed, there'll be a little bit of a step backward. But fourth quarter, you get the disproportionate effect the other way. It's a great seasonal quarter on revenue. We will be investing in the third quarter and into the fourth quarter to make sure we take advantage of that, but revenues and margins are typically strong. So we would expect it bounce back significantly from 3Q to 4Q as we typically get. Looking into 2012, really, no news here any different than what I talked about at Investor Day on May 25, which is we will continue to endeavor to expand our margins. The cost efficiency plans, the investment plans, and of course the revenue growth plans, all contribute to that.

Carol Bartz

And Anthony, relative to your question, I certainly don't mean to indicate we don't have competition. But what I wanted to be clear was we didn't see any different competitive environment than when we first gave you the guidance for Q2, so that was not the issue. It's interesting. Where we have the strong positive relationships, advertisers want to tell their brand story. And as I said in the script, when Wayne, and Mark and Chris, our new sales leaders go in, the advertisers are actually very, if you will, I don't want to say the word grateful, but we're talking about Yahoo! much differently than the fact that it's big because, guess what, our competition is big too. This is about how we can work with them to creatively tell who they are to the people they want to reach.

Operator

Your next question comes from the line of Herman Leung with Susquehanna.

Herman Leung - Susquehanna Financial Group, LLLP

Two quick ones for you. First, I guess, you talked about the CPG, auto and retail categories accounting for 2/3 of the shortfall in the pricing for Display. I'm wondering if you can talk about what your expectations are in the second half, maybe some early trends in July for the Display category and, potentially, if that factors in a potential NFL lockup for you. And then second, very quickly, is just curious on -- I think, Tim, you talked a little bit about Yahoo! Japan, where we stand. Curious on what didn't work and what we can take off the table, and what are the options that are left on the table today.

Timothy Morse

Okay. Let me handle the last one first because that's the one I remember first. I would say there's no category that you take off the table. I talked about a few different things at Investor Day, a traditional spin. I mean, we could do a cash sale if we have the right Use of Proceeds, but don't like the Use of Proceeds being buyback. We talked about traditional spend, we talked about a tracker, and some other tax efficient structures. So there's none of those 4 categories that you take off the table. What I'd say is some of the more unique and creative structures we found after fully vetting them aren't going to work, but some others are ongoing. So we'll just keep working that. On the categories, it was in my script where I talked about 2/3, and it wasn't about pricing. It caused a yield issue as you mixed from guaranteed to non-guaranteed. But it was a revenue. We had a revenue shortfall in certain CPG, auto and retail customers. And as I said, typically, you'd be able to take that inventory and sell it to other premium advertisers that want guaranteed placements. Without the sales force capacity to do that, it therefore fell into, so to speak, the exchange. And when it runs through the exchange, it runs through at lower prices, that inventory. Again, not the same customers, different customers, different kinds of ads and lower pricing. And 3Q factor of the NFL, I'm a big NFL fan, I just hope they play. But no, we haven't gone and tried to factor in big macro or even slightly macro factors like that into the forecast. But what we've looked at is our momentum across the board, where we are in bringing our sales force up to speed. We look at seasonality, we look at pipelines, and we factor it all into this guidance.

Carol Bartz

But we're not going to sit here next quarter and say, "Oh, the NFL is still striking, and that's why we missed the quarter." I mean, we're very cognizant that this issue is going on.

Herman Leung - Susquehanna Financial Group, LLLP

And then just one follow-up, if I may. On the exchange, the inventory that did fall into the exchange, what was the spread between what was actually paid for in the premium side versus what was actually recognized in the exchange?

Timothy Morse

On the pricing spread, it varies really widely by product. But it's up to, on average, probably a few times better premium, certainly, than it is on the non-guaranteed.

Operator

Your next question comes from the line of Jordan Rohan with Stifel, Nicolaus.

Jordan Rohan - Stifel, Nicolaus & Co., Inc.

I got a question about engagement within the various platforms. It seems like engagement for the media properties, with minutes up 26% on 8% growth in page users, is really exciting. Can you discuss the initiatives that led to this increased engagement, stuff that you're doing around programming and royal weddings and various sporting events? On the flip side, it seems like paid TVs for communications and communities down 8%, decel down from 6% negative last quarter and minutes are down 5%. Is the e-mail platform a real drag? Is it at risk to people shifting to text messaging, social platforms, whatever else?

Carol Bartz

Yes, good question. I'm happy to answer it. First, let's talk about the media. We have, essentially in the first half of this year, almost totally rebuilt our U.S. media team, from the editorial staff to better SEO, better -- more video programming. Of course, we have some big events in the quarter. But as an example, for instance, we really went after looking at, say, News, and we're really working on what the Yahoo! Voice should be, how much original programming, meaning breaking news and that sort of thing. And to give you an idea, in each month of Q2, News averaged 2.9 billion minutes a month, which is up 23% from Q2 of last year. And that's the kind of information with -- and I hope you guys have gone up to see News, it's nowhere near where it's eventually going to be. But it's a new look, it's exciting, much more creative, much more photo, slide shows and that sort of thing. We're going to focus, as we said at the Investor Day, in anchors and tent poles, which means big events that we know how to sell and package ahead of time, and we know how to do network-wide programming to enhance people's excitement and interest in it. Also, with the new platforms, the publishing platforms, we can actually do the kind of personalization on these sites that we've only been able to do heretofore on the front page and one module in News. So we're very excited about that technology. Now your second question. Yes, communications products are down for a couple of reasons. One is IMAP and what's happening with cell phones and how all of this is counted. So we're really paying attention to this. Now a couple of good things. Our new News platform, which has gone to general availability, is progressing quite nicely -- I mean mail, I'm sorry, I said News. Well, we have new News, too, but in Mail. People are spending more time on it because it's a much more interesting experience. It's 2x faster; it's much less spamming, if you'll say; easier-to-use; photos, all that sort of thing. So we're both trying to entice people to come and spend time. And we're also looking at how to better monetize that experience. But yes, it's not unnoticed that people are changing the way they communicate. So we've got to change with that, and also the kind of products and services that are modern and interesting to users.

Operator

Your next question comes from the line of Ross Sandler with RBC.

Ross Sandler - RBC Capital Markets, LLC

Just 2 quick questions. First for Tim, and then a quick follow-up clarification on the RPS comments. So Tim, on the op margin guidance, at the Analyst Day, you didn't put a long-term target on the op margin, just saying it was going to be below the 27% previous range. But given the comments on kind of Display next year and RPS progress, what do you think is the new long-term operating margin target? And if RPS is kind of the hold back here, can you give us one with the caveat of RPS coming through next year? And then a quick clarification on the RPS comment. When you refer to this RPS gap, are you talking about the gap between where we are today and where the guarantee is? And do you think the remaining 4/5 are harder, easier to close than what just happened in the quarter? That it.

Timothy Morse

So Ross, on margins, what I said at Investor Day is, yes, it looks like because revenue is off the pace that we were looking for that, therefore, margins will be off the pace also. So it's very revenue-dependent. Our cost structure work, as you've seen, is actually ahead of schedule as of now, and it will really be very revenue-dependent. So in terms of a target, I would say we are continuing, and I said this at Investor Day as well, we are continuing to look to invest in the business, but also to expand margins. But that is going to be very revenue-dependent going forward here.

Carol Bartz

And on the issue about the technology and the gap, you're absolutely right. The gap in the RPS is, essentially, where Panama was. And so the promise of Microsoft is we would be at least as good as Yahoo! was and better. So that is what is meant by the gap. So you're exactly correct. We have 4/5 yet to close. Relative to is it harder or easier, I don't -- first of all, I shouldn't answer it that way. But I think there's a couple of things to think about. First of all, yes, we did some obvious things, so you could say that was some low hanging fruit. On the other hand, some of the things that Microsoft has done aren't fully tuned yet. So we're not even seeing the benefit of a whole quarter and more tuning and that sort of thing. I think if you would just -- I mean, we've gone out here and said that we firmly, firmly believe that this will be met by the end of the year based on very, very technical criteria and a lot of criteria.

Operator

Your next question comes from the line of Jason Helfstein with Oppenheimer & Co.

Jason Helfstein - Oppenheimer & Co. Inc.

Just wondering if you want to break out, how much -- was any of the increase in the media time spend driven by mobile? And then any commentary on mobile CPMs versus the website?

Carol Bartz

Of course. I mean, our mobile usage is going up, and we're very, very happy with that, and working very, very hard to get more interesting mobile apps from all of our major properties. And that's not only here, by the way, that's in the rest of the world. But comScore doesn't measure mobile yet and so -- on the time side, so...

Timothy Morse

On PVs, they do, obviously, and mobile grew nicely. And CPMs, as everybody -- we've talked about a number of times, lower mobile as that market matures.

Operator

Your next question comes from the line of Jeetil Patel with Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank AG

First of all, I guess as you kind of revamp the sales force, I guess can you talk about when you expect the sales kind of productivity to ramp up? Is it more of a first half '12 event, second half of this year or second half '12, kind of rough 6-month time frame as to getting your kind of productivity up? And second, Carol, you alluded to kind of telling the Yahoo! story. And if you look at the industry as a whole, there seems to be, obviously, YouTube on the Display front, and Facebook is getting out there on the stories front, as well, and doing well. I'm curious, how do you kind of differentiate yourself and your messaging vis-à-vis some of these newer players, or these folks that are selling a unique property in the marketplace, and how do you differentiate from a selling standpoint? I guess that dovetails back into kind of getting pricing back if you're selling through non-guaranteed going to guaranteed. How do you get the advertisers and the agencies back into a guaranteed format in light of kind of a lot of different alternatives in the marketplace today from a Display standpoint?

Carol Bartz

Yes, I think it was -- it's just natural that when markets certainly gain traction, that it has many choices. I mean, if you look at the TV market, offline market, there's cable, there's major channels, there's specialty channels. Same thing with print. And all the sites have a different purpose, or all of the end points have a different purpose. That is the same way if you look at what's happening, especially, with the top 3 in the Display side of the business. It's not just -- again, some customers want to go down a very social experience. If you think of Yahoo!, you're still thinking of 9 #1 properties in the U.S., 9 #1 properties worldwide, top 3 in 23 categories. We have a very different proposition for the advertisers. And with increased video, both for the users' entertainment but also for the advertisers to tell their story much like it's a commercial. I mean, I don't know how much time we're spending up there, but it's much more of a commercial experience now. And users are watching those because it's not an odd concept to them and it's not an odd concept to the advertisers. So there is a definite place for what Yahoo! does, not only with -- in this case, I would sort of follow myself back on scale, but it is on being able to use our science to do a really good job with our data and other data to find the right -- put the right ad in the right context.

Timothy Morse

And on the first question, the expected productivity ramp?

Carol Bartz

Oh, yes, ramp, I'm so sorry. I've got so blown on, on that one. Every sales force has different ramps, but it's 6 months, is the minimum of being able to carry a full book of business, we believe. The other thing is, we're actually trying to reduce the quotas because our salespeople were carrying too high a quota, which is why we are adding -- we have an investment case, we are adding sales reps, and all the support around them in the U.S. And so -- and the other thing I think, and it probably just slid by too fast because it's just 2 words, but we were regionally focused and while we -- and so we went from 7 regions to 3 regions. That was also a bit of a turmoil on who got jobs and who didn't. But we're also overlaying industry experience. So that -- and technical experience. So we will have actual people that will help with video sales, mobile sales. So we have expertise on, what I would call the horizontal concept, and also expertise on auto, TV, on and on and on. So it's really a real enhancing of how we go to market.

Operator

Your next question comes from the line of Youssef Squali with Jefferies & Company.

Youssef Squali - Jefferies & Company, Inc.

Just 1 question. Tim, did the -- more of a clarification. Did the fact that in May, when you guys gave guidance and said that Display was still in line and then you ended up being only up 4% for the quarter, did that imply negative growth in the second half of the quarter? And if true, is growth back to positive growth in Q3?

Timothy Morse

Well, yes. So revenue in Q3, as I said -- in the second quarter, year-over-year grew 5%. We said it will be mid single digits again in third quarter. What we did see is softness, Youssef, in that back half, and especially in June -- back half of the quarter and especially in June. U.S. was definitely down unexpectedly in June year-over-year due to the dynamics that Carol talked about. So that's kind of the -- that's the trend that we see.

Youssef Squali - Jefferies & Company, Inc.

Has that reverted itself back in July?

Timothy Morse

Well, as Carol was saying, as salespeople come up to speed and know how to sell their book of business, they're reaching out more extensively to the big branded advertisers and reengaging in those conversations. And we have a great value prop for that. So we expect that to continue to improve as we go forward here.

Carol Bartz

But there was no magic thing that happened on July 1. I mean, this is...

Timothy Morse

It's just process.

Carol Bartz

It's a process. That's why -- that's what our guidance is all about and so forth, Youssef. And by the way, this is the first time since I joined Yahoo! that you haven't asked the first question.

Operator

Your next question comes from the line of Justin Post with Bank of America.

Justin Post - BofA Merrill Lynch

Can you talk about the motivation of the partners in the Alipay discussions? Is there any sense of urgency there to get something done? And you mentioned some progress on your prepared remarks. How would you define that, and what do you see? And then finally, when you think about next year, I think your guidance at Analyst Day was 7% to 10% growth, correct me if I'm wrong, Tim. But at the end of the call, I think you said, "We plan to grow next year." Have you changed your outlook for next year's revenue growth?

Timothy Morse

So first on Alipay. Everyone, all 3 partners, are working hard on this. We've issued joint statements to that effect. Everyone's motivated, everyone's engaged. When we say we're working on it continuously, we mean the larger we. Go ahead, Carol.

Carol Bartz

There's a lot of we're involved with this whole negotiation, and the partners are all there trying to get the goal accomplished. And so I don't believe -- I mean, we naturally have a slight different motivation, but the real motivation is to finish this. As far as our growth, no, we're still talking about 7% to 10% growth next year, just as we have said.

Justin Post - BofA Merrill Lynch

Great. And just maybe a follow-up. When you think about operationally or employee morale, is there any kind of reason to get this done sooner than later when you think about it on an operational basis, just talking about, again, Alipay and Alibaba?

Carol Bartz

Oh, no, we're dragging our feet. No, we are working really diligently. I mean, just so you understand, there's multiple agreements that have to be signed. There's IP agreements, there's -- it's like 4 or 5 different documents. This is hundreds of pages.

Timothy Morse

I think it's best put, as Carol put it in her script, there are a lot of agreements. There are -- and until every word is finalized and all those documents are signed, you're just not done. And we're working in the best interest of the shareholders to make sure that everything gets done correctly, and that's of paramount importance to us.

Operator

Your next question comes from the line of Scott Kessler with Standard & Poor's Equity.

Scott Kessler - S&P Equity Research

Just following up on the last question. I'm wondering where you think the recent experience related to Alipay have provided opportunities to take a fresh approach with Alibaba, and potentially revisit some of your corporate governance-related practices?

Carol Bartz

Well, I actually don't understand your question because it does -- corporate governance on Yahoo! -- actually, Scott, I don't know what you're talking about.

Scott Kessler - S&P Equity Research

Okay. What I'm talking about is, so on the corporate governance front, obviously, there have been questions that have arisen related to the nature of the initial disclosure, how the company oversaw the nature of that relationship. And I guess going forward, I'm wondering whether this experience has given you guys reason to say maybe we should be doing things differently than we did before. And in conjunction with that, I'm wondering whether it also offers an opportunity for you to take a fresh start with your relationship with Alibaba because, obviously, if the companies were more aligned, presumably this issue wouldn't have arisen as it did.

Carol Bartz

Well, Scott, you have a lot of comments in there. What I will say is that, we believe we disclosed appropriately and our corporate governance has no problem, and so there's nothing to change there. We're working very productively with these partners. So these are complex issues, as we said, involving 3 countries, 3 corporations and so forth. So we stand by what we said at the investor meeting.

Operator

Your next question comes from the line of Ben Schachter with Macquarie.

Benjamin Schachter - Macquarie Research

If we go to Alibaba one more time, and then a separate question on Search. Carol, can you give us any gut feel for the timeline of when this can get closed? Is it a couple of months, or is this going to fall into 4Q and beyond? And then separately, on Search, given that the engagement statistics seem pretty good, why do you think Search volumes were down? And when you forecast your model going forward, do you anticipate Search query volumes going down on a go-forward basis?

Carol Bartz

Ben, considering the complexity of what we're doing, even though we've all agreed on the objectives, as I said in my script, every word has to be documented and there has to be signatures. And so to guess, that doesn't do me or you any good.

Timothy Morse

And then on Search, Ben, flat to up in the U.S., flat to up, I believe, in America -- in Europe. And it was down, the down was in Asia. So that's where the Search volume kind of broke down into regions. And going forward, we expect to be growing Search. I mean, we feel like we're on a good platform now on algo with Microsoft. It will continue to roll. And we'll be rolling out the other markets, which will help their freshness and relevancy and all that kind of stuff that has helped the U.S. So we feel good about that going forward.

Carol Bartz

Absolutely.

Timothy Morse

All right. Thank you very much everyone. We're going to wrap on that question.

Carol Bartz

Thank you.

Operator

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

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