Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 earnings conference call. My name is Katie, and I'll be your coordinator for today. [Operator Instructions] I would like to turn the call over to your host, Marta Nichols, VP of Investor Relations. Please proceed.
Thanks, Katie, and good afternoon. Welcome to Yahoo!'s Fourth Quarter 2011 Earnings Conference Call. On the call today will be Scott Thompson, 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 objective and the company's strategic review process, 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, our capital allocation decisions and our strategic operational and product plans.
Actual results may differ materially from the results predicted in our statements, and reported results should not be considered indicative of future performance. Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are described in our Form 10-Q filed with the SEC November 7, 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, January 24, 2012, and Yahoo! does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances.
On today's call, we'll also discuss some non-GAAP financial measures as we talk about the company's performance. These may include total expenses less traffic acquisition costs, or TAC; revenue excluding TAC, or revenue ex-TAC, and operating margin ex-TAC. Reconciliations of those non-GAAP measures to the GAAP measures we consider most comparable can be found on our corporate website, info.yahoo.com, under Investor Relations. We have prepared remarks that will last about 30 minutes, and then we'll have a brief Q&A session.
And now I'd like to turn the call over to Scott.
Good afternoon, everyone, and thanks to all of you for joining us today. For those of you who are counting, it's been 3 weeks since I arrived and only 2 weeks since my official start date. And as you would imagine, I have been extremely busy as I’ve been rapidly coming up to speed. As I said on our last call, I did an extensive amount of research on Yahoo! and had formed strong opinions before I arrived. And since then, I've spent all my time meeting Yahoo!'s leaders, our employees and our customers, and I have validated what I believed coming in. I see even more, today, the strength of Yahoo!'s assets, the talent of our people and the huge opportunity in front of us.
You all know Yahoo! has an exceptional foundation; a powerful brand; enormous numbers of unique visitors, 702 million of them globally; relationships with the world's leading advertisers and technology platforms operating at massive scale. We plan to do more with all of these advantages. We're going to work not just at scale, but with speed. We will focus on generating real, sustainable growth and value creation. I feel great about all that, but I'm also very clear that we have a lot of work to do. It’s still early, and I don't intend to lay out any detailed strategy until I fully assess our direction, but I think it may be helpful to talk a bit about my approach to operating the business and how that will guide the way we move forward at Yahoo!.
Anytime you plan to move a company as large and as complex as Yahoo! quickly, aggressively and successfully, you need a guiding principle to ensure you keep all your key priorities clearly in view. The guiding principle for me is to insist that we be balanced. That balance applies to many things: how we think about our customers, who we are, our processes and, importantly, the way we allocate capital. I'm going to talk about each of these 4 concepts a bit later.
By operating the business in a balanced way, we'll prioritize the most important things, move aggressively, and we'll move fast. We have to get great, innovative products that matter into the market, absorb feedback quickly from our customers and grab those products constantly. We'll discuss how we'll take advantage of our strengths and tackle our challenges.
So let's start first with the purpose of today's call: to discuss our Q4 results and progress and to lay out the foundation for our plans in 2012. Yahoo!'s Q4 2011 revenue was down 3% to $1,169,000,000. And our operating income was up 10% year-on-year to $242 million. Both numbers were near the midpoints of our guidance provided to you in October. At a global company, a few headline numbers like these don't tell the whole story. There's a lot more detail for you to know about Yahoo!'s performance in each of our businesses and the diverse regions we operate. In the future, I'll provide more insight about those details behind our results.
In the face of all the commotion around Yahoo! last quarter, a lot of people worked very hard to achieve this result, and they should be congratulated. Many of the products Yahoo! has brought to market are really driving engagement. You can see it in some of our core metrics this quarter, especially in our media properties and in our new global mail product. At the same time, there's no question that we need to do better, and we will. The company has been growing users and launching products at a faster rate, but we need better execution to accelerate time-to-market and to better monetize the engagement we have.
Before I get into more detail, though, I'll ask Tim to go through our Q4 results and our expectations for Q1. Tim?
Timothy R. Morse
Thanks, and welcome, Scott. Good afternoon, everyone. Today, I'll begin with an overview of fourth quarter and full year 2011 results and then move to a more detailed discussion of 4Q revenue dynamics. I'll finish with guidance and color commentary on first quarter 2012.
Let's start with our headline metrics for fourth quarter. As Scott said a few moments ago, revenue ex-TAC landed at $1,169,000,000, a 3% decline from prior year and 1% below the midpoint of our guidance. Operating income was $242 million for the quarter, an improvement of 10% from 4Q 2010 and 5% ahead of guidance midpoint. Operating margin was 21% on an ex-TAC basis, the highest quarterly result since fourth quarter 2006.
This quarter was challenging in many respects, but I'm proud of what the company accomplished. Despite numerous distractions, our teams remain focused on delivering our commitments. Thanks to their efforts, we rolled out great new products, continued to reshape our Americas sales force, executed on the strategically important Interclick acquisition, generated double-digit Display growth in EMEA and APAC, and once again, exceeded expectations for operating income and margin expansion. I'd like to say a sincere thank you to all our teams across the globe for a job well done.
Now let's pan out to full year 2011 and walk through our key financial metrics. Revenue ex-TAC for the year declined nearly 5% to $4,381,000,000. A little more than half of the decline was related to the first full year of our Search Alliance revenue share to Microsoft. As a result of the rev share and the impact of the transition on our Search Affiliate network, ex-TAC Search revenue was down 13% from 2010.
Turning to Display revenue, this is the key shortfall versus our expectations this year, with 2% growth on an ex-TAC basis compared to prior year. Both our EMEA and APAC regions grew Display more than 20% in 2011, but flattish performance in our Americas region muted the global result. In contrast, our other revenue category performed as expected in 2011, down 4% year-over-year, but flat, excluding the 2010 divestitures of HotJobs and Zimbra.
Despite the overall revenue decline for 2011, operating income of $800 million improved by nearly 4% versus 2010 and operating margin expanded by roughly 1.5 points to 18.3% for the year. During 2011, we continue to reshape our cost structure. With a reduction of $235 million or 6% year-over-year, our costs are now roughly $1.3 billion or 27% lower than normalized 2008 levels. It's important to note, however, that within that net $1.3 billion reduction, we have actually invested roughly $250 million in developing new products, platforms and experiences. We have also absorbed the rise in infrastructure costs associated with the growth in our user base of almost 30% over the 3-year period.
Moving to EPS, $0.82 per diluted share for full year 2011 was down 9% on a reported basis, compared to $0.90 in 2010. However, you'll recall that 2010 included roughly $0.20 per share in onetime gains related to the Search Alliance and the divestitures of HotJobs and Zimbra. Adjusting for these items, EPS grew roughly 16%. Return on invested capital was 11% for full year 2011, down 2 points compared to 2010. On a constant tax rate basis, ROIC was roughly flat. In terms of cash generation, cash flow from operating activities grew by 7% year-over-year, and free cash flow grew by 22% compared to 2010. Much of the free cash flow improvement was driven by a 17% reduction in capital spending, in line with our original guidance for the year.
Finally, we ended 2011 with approximately $2.5 billion in cash and marketable debt securities. And throughout the year, we repurchased roughly $1.6 billion of Yahoo! stock at an average price of approximately $14.75.
Let's return now to fourth quarter operating dynamics and begin with Display revenue. In total, ex-TAC Display revenue missed our expectations by roughly $15 million. About $10 million of that total was attributable to macroeconomic weakness, primarily in Europe. The other $5 million was in U.S. Display and was split evenly between guaranteed volume and yield. Our non-guaranteed placement revenue performed in line with expectations, and we believe should benefit significantly in 2012 from our acquisition of Interclick.
Over the past couple of quarters, we've discussed with you the effort under way to transform our U.S.-based sales force. We're now roughly 9 months into that process, and we continue to make good progress. Two key measures of sales force effectiveness are sell-through rate and front page days sold. And although both declined versus prior year, each improved substantially on a sequential basis in the fourth quarter. We're pleased that several major advertisers that had reduced or eliminated spending with Yahoo! in 2011 see the promise in our new approach to content and solutions selling, and it made meaningful upfront commitments for 2012.
Turning now to Search, fourth quarter results landed slightly ahead of expectation. Having passed the anniversary of the paid Search transition in the U.S., our year-over-year rev share comparisons are cleaner and global Owned and Operated revenue ex-TAC grew 4% year-over-year, the first Search growth we've achieved since fourth quarter 2008. Revenue for Search improved globally by mid-single digits compared to last year, partially offset by slightly lower query volume. Although our U.S. results still benefited from the Search Alliance RPS guarantee, operational RPS in the U.S. improved by mid- to high-single digits compared to both prior quarter and prior year. U.S. queries also grew on a year-over-year basis for the fifth consecutive quarter.
As a reminder, to create more financial certainty, Microsoft and Yahoo! agreed in 4Q to extend the RPS guarantee in the U.S. and Canada through March 2013. Both companies remain hard at work to improve RPS in the joint marketplace as quickly as possible. In fourth quarter, Microsoft implemented several improvements that generated greater clicks for advertisers, especially on critical dates like Black Friday and Cyber Monday. Yahoo!'s sales teams also executed well on account optimization, delivering strong results for many key Search advertisers. In fact, last quarter, we saw some of the best execution to date from the alliance, from algo performance to technology enhancements to sales optimization. With the transition of all algorithmic markets now complete, next on the Search Alliance agenda is to roll out adCenter in the U.K. and France in first half. Customer outreach is well underway, and testing commenced this month.
Before moving to first quarter 2012 guidance, I'd like to take a few moments to wrap up the key operational initiatives from 2011 that we've been tracking throughout the year. Beginning with audience, we grew our unique visitors by 11% and our media property page views by 8% for full year 2011, largely through a combination of content and product rollouts. On the content side of the house, we launched our TENTPOLES and ANCHORS strategy with aggressive programming around the Super Bowl, Oscars, Royal Wedding and several other major events. And in 2012, we're building on that momentum with a major TENTPOLE event of the U.S. elections and the Olympics.
During 2011, we also built out our editorial voice, most notably in news and sports, and we struck new partnerships, including Yahoo!'s alliance with ABC news. For video, we launched Yahoo! Screen as our destination site and introduced 14 new shows into our Web-leading collection of short form original programming. One in 6 Americans online watched a Yahoo! original video in December. Many of these advances were made possible by underlying improvements in our platforms and products. We've extended the Yahoo! Publishing platform to more than 130 sites, improved click-through in key properties with our core personalization engine, introduced innovations like the SocialGuard and News, omg! and Shine, expanded our new Mail platform to 80% of our global users, including 27 new markets and 22 new languages and created new experiences on the iPad, like Livestand.
Finally, we continue to innovate and Search with new front-end user experiences like Search Direct, App Search, QuickApps and a revamped image search, while meaningfully improving algo relevance with the transition of Microsoft's algo platform in 60-plus markets around the world. In short, we made progress on many fronts, but that's obviously not the whole story. In the larger context, despite those foundational improvements, revenue isn't growing. In fact, we've lost share in Display advertising. Given the investments we've made over the last couple of years, we expected better. And as Scott said earlier, we believe this business should and will achieve better.
Turning now to first quarter guidance, we expect ex-TAC revenue to be in the range of $1,025,000,000 to $1,105,000,000. For ex-TAC expense, we expect a range of $920 million to $950 million, excluding any costs related to potential restructuring charges or other transactions currently under consideration. At the midpoint of these ranges, operating income would be $130 million or an ex-TAC margin rate of approximately 12%. Guidance that shows flat year-over-year revenue and a 6-point decline in margin rate is not reflective of our long-term financial objectives for the company.
Breaking that guidance down a bit, the midpoint of the cost is up $60 million or 7% compared to first quarter 2011. Roughly $25 million of the increase is associated with our recent acquisition of Interclick, and it accounts for almost 1.5 points of the margin rate decline. The remaining $35 million of the cost increase is related to our previously discussed investments in content and editorial, sales force expansion, tech stack build out and new Product Development. These investments are intended to generate meaningful revenue growth, but we're obviously not at that point yet.
The key message I'd leave you with is that a low to mid-teens operating margin rate is not what you should expect from us in the future. We are committed to continuing our efforts to expand margins via revenue growth, as well as through continued improvements to our cost structure. We're not in a position today to provide you with a roadmap or timetable for that effort, but we will be aggressive and plan to update you on our next earnings call.
Finally, our efforts to reposition Yahoo! are not limited to reshaping the core business. We have engaged in a variety of discussions with potential partners to enhance shareholder value. We're in active discussions with our Asian partners to significantly restructure our holdings in Alibaba Group and Yahoo! Japan in order to unlock value for our shareholders. While we're pursuing these discussions with enthusiasm, given the complex, unproven and multifaceted nature of the restructuring, we're not in a position to provide further detail or certainty on today's call.
With that, I'll turn things back over to Scott
Thanks, Tim. While I know Tim agrees that our results need to improve, he's done a remarkable job, especially over the last several months in the dual role. The board and all of us at Yahoo! are really grateful to Tim for leading through this transition.
Now let me come back to this idea of a balanced approach to operating the business. What does that really mean? Well, there are 4 obvious areas where I see the need to focus intensely on balance here at Yahoo!. First, our customers. Our focus will be on the needs and experiences of our customers. When I refer to our customers, I mean both our users, the consumers of our products and our advertisers. We want both our users and our advertisers to get real value from us, and we will focus equally on both. I believe that creating the best experiences for all our customers will drive revenue and, ultimately, the financial outcomes we want and you want. Our users really need to see the value in stopping by Yahoo! to consume content and use our services more frequently. And advertisers need to know that we see our success as being defined by their success. We have to reflect customer balance in our decision-making, in our prioritization and in our execution. So that's my first point about balance with our customers.
Second is balance in who we are. Yahoo! is fundamentally both a media company and a technology company. We need to be great at both. Our media leadership is imperative, and we have and will continue to develop best-in-class product, engineering and technology expertise. So we end the debate about which is more important. We are both a media company and a tech company. We must do both, end of the discussion.
The third point about balance is that we need to balance a thoughtful, analytical and detailed approach with speed. By nature, I want to go fast. Those of you who know me, understand that I want to hear all the options. I'll always ask a lot of questions, and I'll immerse myself in the details. But when it comes to making decisions, I make them quickly and then push to move fast, fast, fast. We will get speed back into the equation and move aggressively. To me, that's how we get to play in offense rather than defense.
Finally, and this is really, really important, we will focus on balancing our investment resources and our allocation of capital on the products of today, of tomorrow and of the long term. Being a leading company in any industry requires intense focus on the right allocation of capital. To strike the right investment balance, I believe the majority of our resources should be dedicated to our current core business, that is, the products that are driving results today. But I also believe that we must dedicate a very significant percentage of our capital to investments in the businesses of tomorrow, the products that we'll launch over the next year.
And on top of that, we'll also need to invest a small, but meaningful, percentage against product initiatives that will play out longer than 12 months from now. Discipline comes not from investing every dollar that we have in the current core business. It comes from optimizing the core and then investing for the future. Our plan is to invest in a disciplined way to create a vibrant, long-term product pipeline. And importantly, we'll consider revenue streams that look different from what we're doing today.
Now we could put everything we have into the core business, focus solely on maximizing today's profits and invest nothing in the future. But I won't spend any time on that approach because that's just not the way to build a business for the long term. But I really need to be clear when I talk about investing. This isn't about starting from scratch on a new investment cycle. We will concentrate on our strengths by re-purposing existing investment dollars. As a result, there will be some things that we stop doing.
Going forward, our processes will be relatively straightforward, prioritize and allocate capital to what matters and do more than just protect our current revenue streams. We need to innovate and disrupt, and not just in the areas where we've always been. We will consider new business models and revenue sources, and we will build on our core technology and platform expertise.
I, along with the rest of Yahoo!'s leadership, have some very clear ideas about the specifics of what we'll do, and we're already deeply engaged in this. I'm not prepared to share those details today with you, but I will point out at least 2 fundamental building blocks of what we'll do. The first is focusing on customer experiences, as I've noted; and the second is data.
First, on the customer experiences. There have been many questions around Yahoo!, but one thing you can't question is our scale. We have 702 million unique visitors that come to our site every month. That’s 702 million people right in front of us, who come to us to look at their email, news, sports, to be entertained and much, much more. But the sheer number of users will not get us where we need to be. We need to improve the quality of our relationship with these customers and their experiences with Yahoo!.
We want our users to spend more time with Yahoo! because they love what we do for them. There are many ways to make that happen, better interfaces, faster speed, deeper and much more relevant content. We'll focus on all of those things with the goal of making the experiences so good that the users we really want come back to visit Yahoo! more and more often to get whatever they want, whenever they want it on the devices that they choose. And for our advertisers, we need them to give better results and spend more money with Yahoo!. We intend to make it easier for them to do business with us by giving them better tools to improve the effectiveness and the ROI of their advertising spend with us versus their other options.
One of the most important ways we will focus on optimizing the customer experience and advertising performance is by using data. We can use data to render the experience exactly the way you want it, to create uniquely relevant experiences and everything from content to the layout of the page, to the flows between pages, and then, of course, the advertising. Nobody's done that yet on the Web. And why you've heard me mention data from day 1, it's important to note that Yahoo! has made some real progress in this area. But there's a long way to go to get to that uniquely relevant experience that really differentiate us. I know lots of companies talk about using data. If there's one thing I want you to take away from today, it's that our data may be Yahoo!'s single most underrated, underappreciated and underused asset. And we intend to leverage that data. We're getting after this with a real sense of urgency. I believe that data will be the key component for driving innovation at Yahoo! and it will be the cornerstone of the next generation of Yahoo! products and customer experiences. I've worked in the past with talented teams to create great customer experiences, and we have the talent, the technology and the energy to make that happen here at Yahoo!.
So that's some insight into how I'm thinking about the opportunity here after 2 short weeks. Let me turn now briefly to the strategic review process. Roy said on our last call that very significant work was done by the board over the last several months, with a wide range of opportunities considered. In September, the board initiated a process to examine many options for Yahoo! and has worked systematically to narrow down the alternatives. It's important for you to know that the company remains open to anything that's good for our shareholders.
But as you'd expect, after evaluating multiple options, we're focusing on what appears most promising. I arrived with strong and well-informed opinions about the current and future value of Yahoo!'s core business, including our Asian assets. I was clear about those opinions with the board when we discussed my role here. My plan was to quickly get up to speed on the comprehensive review process, and I have. The work is ongoing, and I won't say more about that today, but I am absolutely confident that the steps we take will be in the best interest for our shareholders.
Before we turn to your questions, I want to say again that I'm here because I believe the big potential at Yahoo!, much bigger than the outside world imagines for us today. I've led customer-facing Internet businesses for a long time. I've operated successfully in fast-paced global technology companies with big deep-pocketed competitors. I also have a proven track record of executing ambitious plans and generating growth through investment in technology, great products and great customer experiences. And I'm here because I believe this company can do much more to innovate and disrupt, to build great products and to also leverage data and technology in ways the world hasn't yet conceived. I firmly believe that getting back to these core principles will grow this business.
Maybe the most important thing to know about me is that I define success by the success of my customers. I want our users to have the best possible experiences we can give them. I want our advertisers to know that we are focused on how we can help them grow their businesses. Our actions will tell our customers and our partners exactly who we intend to be going forward.
Thanks for your attention today. And now let's open it up to your questions. Operator?
[Operator Instructions] Your first question comes from the line of Doug Anmuth from JP Morgan.
Douglas Anmuth - JP Morgan Chase & Co, Research Division
Two things. First, can you guys talk a little bit about the Interclick contribution that you're looking for, for 1Q, just in terms of revenue? And then also operating income? And then also maybe provide some color on how you're thinking about it for 2012? And then just a question on Search RPS improvements. Can you give some sense of where you currently are? Microsoft made some comments about improvements there during the quarter and perhaps relative to the guarantee levels which you have in place?
Timothy R. Morse
Sure, Doug. This is Tim. So on Interclick impact on Q1, as I noted in the script, there's about $25 million of cost in there, so a little bit more than $10 million of revenue in there. And so therefore, there's a little bit of a loss and 1.5-point impact on our operating margin rate. But that, we expect to continue to ramp and ramp healthily throughout the year. We've got big plans for that acquisition. And as I noted back on the October call, it really fills in a piece of our market presence in the non-guaranteed space that's important to our growth. On your second question, RPS gains in the fourth quarter, nice job. I would say, by Microsoft. I also noted, our sales force, I think, is starting to now get into the swing of things and be able to go on the offense just a little bit there. On the technology side, with Microsoft's implementations, we saw some good RPS improvements, as I said in the script, mid- to high-single digits versus last year and versus last quarter. So we're definitely closing the gap. The guarantee is getting smaller, obviously. I don't think it makes a whole lot of sense to go into kind of play-by-play improvements there because the guarantee covers us through March 2013. But as I did note, I think the progress we've made across a wide variety of areas for the Search Alliance in the fourth quarter was definitely the best we've seen.
Your next question comes from the line of Spencer Wang from Credit Suisse.
Spencer Wang - Crédit Suisse AG, Research Division
Scott, I just wanted to come back to your comment about operating the business in a balanced fashion. How significant of a role do you see M&A in terms of the go-forward strategy? Do you see the need for any sort of transformative acquisitions? And then secondly, if I could, for Tim, Tim, can you just give us a little bit more color on what you're seeing with respect to the macro environment in the first quarter, especially in Western Europe?
So regarding M&A, as we define our forward-looking strategy for the business, I suspect that there will be places where we don't have the technology today or the capabilities today. And if we want to push this agenda forward quickly, we'll have to be fairly aggressive in the market. Now as with any acquisition, we'll be very, very disciplined to make certain that we're getting the right pieces to fill in. But I'm relatively certain here that there will be things that will interest us and, as I said, we'll fill in technology gaps that we might have today.
Timothy R. Morse
And then, Spencer, on the 1Q macro, really very early to tell. As you heard me say earlier, Europe was a chief driver of probably $10 million or so of macroeconomic weakness we saw in the fourth quarter. Early indications are it's no better, off to a little bit of a slow start in the first quarter. But maybe over the last week, again, it's early -- maybe ramping up a little bit, but still tough to look out. There are so many factors at play, especially with the European Union, tough to look out and extrapolate too much, but I would say we're not expecting much of a pick-up in the first quarter and anywhere, really. I think probably a continuation of the environment that we saw everywhere in fourth quarter.
Your next question comes from the line of Mark Mahaney from Citi.
Mark S. Mahaney - Citigroup Inc, Research Division
Scott, 2 questions. First, could you just comment on your thoughts on paying out of a dividend? And secondly, any specific thoughts in turning around the Display ad business? I know you laid out a lot of frameworks there. Would you apply some of those directly to turning around the Display ad business?
Yes. Too early, on your first question regarding the potential for dividends. Lots of things that we need to consider before we would make that decision. So I would just say nothing to announce today and really kind of too early to imagine what we might do on that going forward. Regarding turn around -- turning around the Display business, this won't be surprising to you. A lot of my time and attention has gone into understanding exactly what that business is, exactly what's been affecting that business, meeting with customers to understand why they don't give us more of their spend, and we are after that with a real sense of urgency. That is the very highest priority I have in the core business today, to get that thing going in the right direction. And, again, too early to talk about steps and actions we might take, but our full intention -- Tim and I and the executive team -- our full intention is to get that business back and growing at a very healthy rate.
Your next question comes from the line of Brian Pitz from UBS.
Brian J. Pitz - UBS Investment Bank, Research Division
This is for Scott, just a follow-on to that Display question. Can we assume that there are no sacred cows going forward, whether it's talking about the Yahoo! brand or mobile or other things? Maybe if you could just give a little more color on that? And then looking at the premium video initiatives, can you give us some color on how your original series are performing in terms of monetization and views? And any color on new deals, such as the one with the ABC News?
Brian, I could interpret the first question a variety of ways. And so I don't -- I can't really guess what you're referring to there. As part of the work that we're doing, as part of the work that I'm doing, we are understanding and evaluating all options for the business going forward: things we want to focus on, things we will stop, places where we want to re-purpose existing resources and existing spend and additional monetization strategies. I don't know whether what I just said fits into no sacred cows, but we're being aggressive. And personally, I'm being very aggressive, asking all the questions that will position us for making the best possible decisions going forward.
Timothy R. Morse
And then, Brian, on the video performance of our original short-form programming, it's -- in the last month, we had, I think, it was 9 out of the top 10 shows in terms of original programming on the Web in the U.S. So doing quite well from the engagement standpoint. We don't disclose the revenue numbers in the page views numbers or the streaming numbers. But I think it's safe to assume a healthy growth there, but we need to do more, we need to see more, big focus of ours. And I think the teams had really probably over the last 6 months or so, really co-exist around that. But again, more work to go there, great opportunity for us.
Comes from the line of Anthony DiClemente from Barclays Capital.
Anthony J. DiClemente - Barclays Capital, Research Division
Great. I have one for Tim and one for Scott. Tim, just wondering if you could give us a little more detail on what you're seeing currently in terms of pricing for premium Display? And if you could help us on that, just sequentially and even relative to last year, that would be great. And then, Scott, just to follow up on Brian's question about content. You guys made -- carried a lot of buzz at CES on Electric City. I think that's your first real try at scripted original programing. Just wondering about the economics of that deal, if you'd be willing to share a little bit more with us about that. And then also, just wondering, is that more of an experiment for Yahoo!, or do you think it really is a prelude to more content deals going forward?
Timothy R. Morse
So, Anthony, on the first one, on C1 pricing, as I said in the script, it was a little bit below yield on Class 1 or guaranteed was a little bit below where we had planned it to be in the quarter, and it was a little bit down year-over-year, off a strong quarter this time last year, but kind of within the range. Not -- wasn't exaggerated effect either way. On Class 2, it was actually up a little bit year-over-year. And, of course, again, a lot of our strategic efforts here and the acquisition of Interclick will help point us even more strongly in the right direction. I think it's too early to talk about yields, otherwise, going into 2012.
And Anthony, regarding CES and the buzz around Electric City, I was there. I was fascinated by the buzz. And it was more than the event itself, but seemingly, everybody who I met and everybody I've talked to had something positive, if not, kind of over-the-top positive to say. So I was pleasantly surprised. We don't have details that we're going to provide today regarding how that is likely to affect the business, very consistent with what Tim described. And, as you know, we've had a bit of a focus now for some time on original programming, and the company’s had reasonably good success with that. And so that's factoring into the decision-making that's going on about what's our strategic direction, where are we going to focus our energies and investments and what's the business going to look like over the next few years. But nothing really to say to update you in terms of directionally on that, other than what I've just said about the buzz around the event and the success that I believe the company's had at this point.
Your next question comes from the line of Ben Schachter from Macquarie.
Benjamin A. Schachter - Macquarie Research
Scott, you made some intriguing comments alluding to Yahoo! doing some things it hasn't done before. So at a high level, what products or broad themes do you see unfolding that might be appropriate for Yahoo! to pursue? And then, Tim, maybe specifically on Search, do you expect Search to grow again? And how concerned should we be about Yahoo!'s Search share on mobile devices versus traditional Search?
So, Ben, I'll take the first one. Given that we're 2 weeks into this now, I think it's probably a little early for me to articulate on this call directionally where we're going and what the strategic framework is for the future and for our investments. As I said in my remarks, we're considering a number of options, and we are certainly considering ways in which we can increase the monetization of all the users and all of the traffic that we get. And I hesitate to say that we have picked, at this point in time, what strategy we're going to invest in, but we're after this with a real sense of urgency.
Timothy R. Morse
And then, Ben, on Search, well, yes. I mean, we're absolutely intending to grow Search. I think it's a nice step forward for O&O to grow for the first time since 4Q '08. We did introduce a number of nice new experiences that I think are helping us. And again, Microsoft is starting to ramp up too, with the RPS. So, yes that's clearly our intent, to grow that piece of revenue. In terms of mobile share concern, it is still early on in how you monetize anything on the mobile device. I think it's very intriguing of how we're going to play going forward in mobile. I think it's -- there's a lot yet left to evolve, both in Search and Display, somewhat, but it just -- in pioneering some new revenue streams through mobile, I think, is going to be the critical thing. So – am I concerned? No. I'm actually kind of optimistic about how mobile and local, it all converges and the opportunities that Yahoo! has with its unique reach of data sets.
And then just to add to that, no winner has shown themselves visible yet at this time, as it relates to mobile and Search and Display and local, and everything that's going to change with mobility. I couldn't agree more, Tim, with what you just said. And I do believe that's a big opportunity for us, if we choose to go that way. Ben, the only thing I would add to my first remarks here is that I said this now a couple of times, and I really genuinely mean it, the data that this company has is -- it's more than I would've imagined coming in the door. It's very, very impressive. The -- kind of the history and the data that they have against lots and lots and lots of that 702 million users that we have. And if you believe -- and I don't know whether you do or not, Ben, but it you believe data and great technology and great technologists can begin to predict what is in a user's mind and what they want to do next, having that base of data to start from is a big, big, big advantage. So I think you -- I'm certain you will see some interesting data-oriented products and experiences coming out from us, sooner versus later. So I hope that narrows it a little bit for you.
Next question comes from the line of Heath Terry from Goldman Sachs.
Heath P. Terry - Goldman Sachs Group Inc., Research Division
Great. So Scott, I was wondering, Zhao [ph] described when she took the job, described Yahoo! as a communications company. Terry, when he took the job, described Yahoo! as a media company. I'm curious how you would describe Yahoo! in your first day? And then, Tim, just curious, the 48 million payment from Microsoft, how much of an indicator is that of the gap between where revenue -- the revenue for Search guarantee is and the actual Search business is right now?
Let me share with you what I said up on stage for a global all hands that we did the second day I was here, and that is -- and I said it again today on the call, this debate is apparently a long-standing debate inside the company between a media company and a technology company in which are we, and which we aspire to be. I would only reiterate my comments, and that is, we better be darn good at both. In fact, I think we need to be great at both when it's all said and done. And I was up on stage and I said then, we are going to stop this debate, and I said it again today. And I appreciate the question. I think what you really have to do going forward is evaluate how good are we in each of those spaces because I am 100% certain that we won't be the business we want to be and we aspire to be if we aren't great in both. Great at media, while at the same time being a terrifically talented disruptive get-it-done technology company.
Timothy R. Morse
And then, Heath, on your question on the 48 million payment, I think you're reading the press release wrong. That's the operating cost reimbursement from Microsoft. That's -- the deal we struck was that they would effectively pay for the cost of running these businesses while we transition. And then as we transition, our costs go down and that the reimbursements go away. That's what that is. It has nothing to do whatsoever with the RPS guarantee, which we don't disclose. But as you imagine, that is getting smaller. And it's a far smaller number than $48 million. But thanks for the question.
Next question comes from the line of Youssef Squali from Jefferies & Company.
Youssef H. Squali - Jefferies & Company, Inc., Research Division
Youssef Squali. So, Scott, I want to go back to something. You said in the press release, which is basically you'll be aligning resources behind key areas of focus. I want to understand a little bit what you mean by that, because my understanding there is that you would be focusing on key verticals that Yahoo! has already kind of been trying to focus on, anything that you'd be doing differently there from, I guess, verticals perspective, if that is what you really mean? And second, Tim, how does this jive because what I'm hearing here potentially is increased investment. So how does this jive with operating margin goals that you've shared with us for Search and et cetera?
So here's what I would say. We're working really hard to evaluate the options, understand what those options mean in terms of opportunity, by consequence and really bring forward a strategy that allows us to focus on a few key things, be really great in those things and build great products for the future for our customers. I -- providing more detail to you today on what that might mean and how we might do it and what things we're going to double down on and which things we're going to stop doing, it's a little bit premature. So I understand the question. I understand the external need for us to be very specific on this at a point in the near future. And I actually feel a little bit bad that I'm 2 weeks and 2 days into it and can't tell you more. But please accept that getting our Display business headed on the right course and articulating our strategy for the future of the business is what I spend all my waking moments thinking about. And the team here is really engaged on that discussion with me. So just a little bit longer, if you will, before we get really specific on that.
Timothy R. Morse
And, Youssef, on your question on reinvestments and margins and long-term guidance on margins, similarly, a little bit too early to talk through that with you. So we don't have an update. I'd note a few things from my script that, obviously, as I said, mid to teens -- mid to low teens operating margin rate is not what we're after. We want margin expansion. We want revenue growth. We're going to continue to invest in the business, but we're also going to continue to re-purpose investments, as Scott said in his script. So there's a lot of things that you're going to see from us that are very similar to what you've seen from us in the past. As I noted, it would take $1.3 billion out of the company on a net basis here, cost-wise over the last few years. And that's with absorbing rising infrastructure costs. We have 30% more users. It's with investing about $250 million more in new products and platforms and experiences. So constantly, kind of evolving our cost structure to match the opportunity set that we have, continuing to become a better business, more able to grow in a sustainable way. That's what we're after. And we'll get back to you certainly on the timetable and the roadmap of where we're going on that. But a little bit too early to talk through that with you today.
Comes from the line of Ross Sandler from RBC Capital Markets.
Ross Sandler - RBC Capital Markets, LLC, Research Division
Scott, I just had one question about Display. So one of the kind of Holy Grails, the untapped opportunities for Yahoo! has been doing a better job of monetizing some of your Class 2 inventory. And now that you've got Interclick and you mentioned data a number of times on the call, can you talk about maybe what the growth rate over the next year or 2 years you expect to see in your Owned and Operated Class 2 inventory and how that compares to the Class 1?
Timothy R. Morse
Ross, this is Tim. I would say, you're right. We've noted before that we didn't have enough focus on that non-guaranteed segment. One of the things we're doing about that is the Interclick acquisition. There's some great techs at work going on within the company also in our platforms group. I wouldn't throw out numbers for you there, but we've made these moves and are investing in this area in order to really meaningfully improve the growth rates and especially the CPMs in that area and the returns for our investor -- our advertisers, very importantly. So that's clearly a big focus area for us. I think we're building momentum in that area.
And – there’s no sense in echoing the same thing. You said it perfectly, and I agree with everything that Tim just said.
Another question comes from the line of Jordan Rohan from Stifel, Nicolaus.
Jordan Rohan - Stifel, Nicolaus & Co., Inc., Research Division
I was hoping we could discuss the Interclick contribution. I think I heard you say $10 million in revenues. I'm assuming that's revenue ex-TAC and $25 million in costs, I'm assuming that's per quarter. But when I look at the last publicly released Interclick numbers, it looks like they were running about -- closer to $15 million a quarter of gross profit revenue ex-TAC, which might be the same thing here, and running about $2 million of EBITDA per quarter. What exactly has changed so much given that one would expect the contribution from Yahoo! -- or with Yahoo! to go up since it wouldn't have to pay Yahoo! for some of the inventory it was paying Yahoo! before?
Timothy R. Morse
I think there are a few things going on. It's a little more than $10 million of revenue, but not appreciably more. But in any case, what I would say is, first of all, a lot of what their activities were previously were related to Yahoo!. Obviously, that gets kind of eliminated now. In intercompany, you can't report revenue, kind of selling to yourself or for yourself. So that's part of it. I would say some of our investments in continuing to build out their ability to take on more volume is part of it. And I would say, lastly, part of this is that when you purchase a company, you have to take the intangibles and start amortizing the intangibles. And that's a good $8 million, $9 million here for the quarter. I'd stress, too, though, that this is the first quarter result right out of the gate, and we're expecting to be able to ramp up Interclick and to have it help out not only its traditional business, but our O&O non-guaranteed business. So we do expect a significant and meaningful ramping throughout the year. I think the team is off to a good start, but that's how you kind of reconcile all those pieces from a financial perspective.
The next question comes from the line of Jeetil Patel from Deutsche Bank Securities.
Jeetil J. Patel - Deutsche Bank AG, Research Division
Two questions for Scott. I guess, first of all, I know you highlighted this on the initial call a couple of weeks ago, this theme of growth, and I think you're kind of alluding to here. But, Scott, as you get -- you look at the kind of mix of kind of growth going forward, can you discuss, I guess, growth through acquisition as in Interclick and new products and business models versus kind of core business growth? How do you kind of think about where the avenues of growth will come from in terms of percentages allocated between those 2 kind of buckets? Second, I guess, as it relates to just kind of the kind of shift in the industry as a whole, I'm just curious as to what your data shows today around percentage of traffic for mobile and tablets for Yahoo!, page views or consumption of Yahoo! in general, what that looked like maybe a year ago? Really helpful to understand kind of the thematic of the industry and how you're participating against it.
So a couple of things. First is, I have had a terrific opportunity to this point to meet a number -- seemingly all of our biggest customers. Now it's a preliminary interaction, of course, early days. And I would tell you, the conversations were fascinating, fascinating because of a number of reasons. One, these are businesses that really want us to be successful. They really do. And for all kinds of reasons, there's no real need to get into it. And two, they’re are businesses and people who are willing to share with us, and did through my first interactions, exactly what we have to do to get more of this spend today. And that encouraged me. It encouraged me a lot because it tells me that we have, really, wealth of opportunity to grow the core business. And we don't have to get growth by M&A as the only channel available to us. And now that said, as I was asking questions and taking notes, there were a list of things that we need to do better. And we need to do better almost immediately on those things if we want to see incremental revenue growth. But the good news is, the really good news is, the customers are there. They're cheering for us. They will spend all kinds of time with us. They will tell us what we need to do, and that is a healthy relationship to start from. And I'm encouraged by that, as I said. On your second question, Jeetil, I have not seen this data. Tim is sitting right next to me. I have to imagine though that the growth that we see in mobile is exactly consistent with the business I left and other businesses today, and that is enormous growth in a relatively short period of time, and that will continue. But you might have better data...
Timothy R. Morse
Yes, it more than doubled for the quarter. It more than doubled for the quarter, so no surprise. It's growing rapidly.
Okay, thank you very much, everyone. We appreciate you tuning in today. Appreciate your questions and we'll talk to you on our next call in April. Thank you very much.
Yes. Thanks, everyone.
Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!