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Yahoo! Inc. (NASDAQ:YHOO)

Q1 2007 Earnings Call

April 17, 2007 5:00 pm ET

Executives

Marta Nichols - Investor Relations

Terry Semel - Chairman, Chief Executive Officer

Susan Decker - Executive Vice President; Head of Advertiser and Publisher Group and Acting Chief Financial Officer

Analysts

Jeetil Patel - Deutsche Bank

Jordan Rohan - RBC Capital Markets

Imran Khan - JP Morgan

Anthony Noto - Goldman Sachs

Christa S. Quarles - Thomas Weisel Partners

Benjamin Schachter - UBS

Justin Post - Merrill Lynch

Heath Terry - Credit Suisse

David Joseph - Morgan Stanley

Scott H. Kessler - Standard & Poor’s

Mark S. Mahaney - Citigroup Smith Barney

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Yahoo! Q1 2007 earnings conference call. (Operator Instructions) I will now turn the call over to Ms. Marta Nichols. Ms. Nichols, you may begin.

Marta Nichols

Good afternoon and welcome to Yahoo!'s first quarter earnings conference call. On the call today are members of our executive team: Terry Semel, Sue Decker, and Jerry Yang. Before we begin, I would like to remind you that matters discussed on this call contain forward-looking statements that involve risks and uncertainties concerning Yahoo!'s expected financial performance as well as Yahoo!'s strategic and operational plans. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance.

The potential risks and uncertainties include, among others: the successful implementation and acceptance by advertisers of the company’s new search advertising system; the company’s ability to compete with new or existing competitors; the implementation and results of the company’s announced reorganization; the reduction in spending by our loss of marketing services customers; the demand by customers for Yahoo!'s premium services; the acceptance by users of new products and services; and the risks related to joint ventures and the integration of acquisitions.

Other potential factors that could affect the company’s business and financial results are included in the company’s annual and quarterly reports, which are on file with the SEC.

All information discussed on this call is as of today, April 17th, and Yahoo! does not intend and undertakes no duty to update this information to reflect future events or circumstances.

On the call today, we will discuss some non-GAAP financial measures in talking about the company’s performance, including operating income before depreciation, amortization and stock-based compensation expense, which will be referred to as operating cash flow, revenue excluding traffic acquisition costs, free cash flow, non-GAAP net income and non-GAAP net income per share.

Reconciliations of those non-GAAP measures to GAAP measures can also be found on our website under investor relations.

Terry and Sue have prepared remarks that should last about 30 minutes and then we will have a brief Q&A session. With that, I would like to turn the call over to Terry.

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Terry Semel

Good afternoon, everyone. Let me begin by reminding you of our strategy, designed to enable us to capture the future growth of the Internet. We intend to leverage our deep audience insights to create full-fledged advertising networks with a marketplace that meets supply and demand both on Yahoo!'s valuable owned and operated network and across the entire Internet.

Over the past six months, we have made clear our intention to sharpen Yahoo!'s focus on our key customer segments and our strategic priorities. We began to reorganize our company around the audience, advertiser and publisher and technology groups back in December.

We have been executing aggressively against our plans to improve our search monetization, strengthen our display advertising business, and seize the opportunities we see in emerging areas like social media, mobile and video.

We continued to make good progress on all of those efforts during the first quarter of this year and delivered a solid financial performance as a result. We know there is still much more to do and room for more continued growth across our business.

We are confident that our hard work and focus will help us in our efforts to capture the major growth opportunities we see ahead and thereby improve our financial performance and continue to build shareholder value.

Let me begin by talking about the progress we have made in our advertising business, as well as some of the initiatives we are focused on in the months ahead.

Our vision for our global advertising network is to revolutionize how advertisers connect with their target customers across the Internet. Our goal is to drive more value for more advertisers and publishers than any other company. We are executing against this mission in a number of ways.

First, I will review our progress on our new search marketing system known as Panama. To remind you, this is the first step in a broader company priority to create next generation ad platforms. Over the past few months, we have been focused squarely on launching our new search marketing ranking model and our plan to migrate our active U.S. advertisers to the new search marketing system.

Our teams have now achieved both of those goals and I could not be more pleased with the early results that we are seeing. On February 5th, we turned on the new search market ranking model in the U.S. and on March 30th, we successfully completed our Panama migration plan for active U.S. advertisers.

While we are still in the early days, we have already seen significant increases in the relevance of our most prominent sponsored search ads and have heard from our advertisers that they are seeing meaningful improvements in ad performance.

Given the early success of Panama in the U.S., we are now well-positioned to succeed in the international markets, including the ad interface first and then launching our new ranking model, as we did in the U.S. In fact, I am pleased to announce that we launched the system interface to a select group of customers in Japan yesterday and we will begin sending upgrade invitations to our broader advertiser base in Japan over the course of the next week.

We plan to rollout Panama to remaining international markets in the months ahead, beginning with the advertiser migration in Korea and Europe later this quarter. We believe the Panama ad system will help significantly improve our search monetization.

As we have said previously, we expect to see financial impact beginning this quarter, Q2, and gain momentum throughout ’07 and beyond. We also believe we can use Panama’s flexible platform to introduce more features in the future and integrate with other next-generation advertising, targeting and monetization capabilities we are developing both on and off the Yahoo! network.

Turning to some broader dynamics in our advertising business, we have been talking about the changing mix of available inventory on the web for the past few months. The market is going through a significant transition with new forms of inventory becoming available from a range of new and established competitors. This market shift represents great opportunity for Yahoo!. We believe that we are well-positioned to take advantage of this shift because of our position as the largest display advertising network, our improving monetization abilities through Panama, and our proven ability to deliver results for multi-objective advertisers.

At the same time, we are continuing to make some adjustments in our business that I have discussed previously, including aligning our sales force, broadening our advertiser tools, and expanding our ad network.

As the market undergoes this natural transition, we expect that this year our growth will be broadly consistent with the U.S. display market. Importantly, that is from a much higher base and we continue to be the largest display network. Longer term, we intend to outpace the growth of the market.

I would like to spend some more time discussing some of the key steps we have taken to expand our ad network in order to address this changing landscape. Our goal is to assemble a formidable network of partners that incorporates many forms of online advertising and a greater variety of inventory so advertisers have the ability to connect with their target customers wherever they are on the Internet.

Last week, we renewed and expanded a multi-year partnership with Viacom through which Yahoo! will serve as the exclusive provider of sponsored search and contextual ads to all 33 of Viacom’s world-leading broadband sites, including MTV, VH1, Nickelodeon, Comedy Central, and BET. This agreement allows us to align Yahoo!'s search advertising network with Viacom’s popular brands and large audience worldwide.

Yesterday, we announced the addition of five new partners to our newspaper consortium, including McClatchy, the nation’s third-largest newspaper group. We now have a total of 12 partners with more than 260 newspapers across 44 states. This relationship highlights Yahoo!'s ability to provide an unparalleled solution for local and national advertisers and a superior local experience for consumers.

The newspapers will have the ability to leverage Yahoo!'s display advertising technology to enhance their own online revenue. We will leverage each other’s sales teams, giving Yahoo! more access to local capability and the newspapers access to national coverage, as well as integrate Yahoo!'s leading search technology across newspaper sites and distribute high quality local newspaper content throughout Yahoo!.

Since we announced our initial newspaper consortium relationship, we have also made strong progress to create a powerful online recruitment network. Advertisers who list with any of the participating consortium newspapers have the ability to also post their listings on Yahoo! HotJobs. In the markets where we have already launched co-branded recruitment sites, Yahoo! HotJobs traffic has increased well above the national trends, making it the fastest growing online recruitment site in the U.S.

Today, we are announcing that we have expanded our relationship with eBay with the introduction of the Yahoo! PayPal checkout program. This will improve the shopping experience for consumers by providing our merchants and advertisers a streamlined checkout process and improve lead conversion from a large base of active shoppers. Our core partnership with eBay has also continued to move forward with both display advertising and sponsored search ramping up across their network.

I am also pleased to announce that we have renewed our exclusive distribution relationship with United Online, a leading provider of consumer Internet and media services, with high quality online brands like Net Zero, Juno and Blue Light. United Online has been a longtime partner to Yahoo! and a very valuable part of our search advertising network.

Additionally, we continue to take initiatives to improve the quality of our ad inventory, both on and off the Yahoo! network, something that is critical to helping advertisers make meaningful connections with consumers. We recently appointed a Vice President of Marketplace Quality to drive our quality initiatives forward.

In summary, we continue to make significant progress in our advertising business. We are executing aggressively against our strategy to connect advertisers with their target customers, both on our network and across the Internet, and to offer the most effective, integrated solutions across all formats.

Now, let me turn to the progress we have made on some of our user initiatives. Due to our continued focus on creating engaging user experiences, Yahoo! remained the number one visited site online, with nearly 4 billion visits and an average of 30 visits per user per month in the U.S. -- quite remarkable.

We led in many areas, such as mail, finance, and news. We also continue to build our strengths in the emerging opportunities of social media, video, and the mobile web, which I will now review in a bit more detail.

In the first quarter, we made significant progress on our strategy to further Yahoo!'s position as a leading force in social media. Yahoo!'s social media properties now have 115 million unique visitors worldwide. Nearly half, or 56 million of those unique visitors, are under the age of 35, which makes Yahoo! the leading site on the web for this important demographic.

We are continuing to actively weave more social experiences throughout the Yahoo! network. For example, we established an election 2008 platform with social media sites such as Answers, Flick’r, groups, video, Upcoming.org, MyBlogLog, and news, which enables candidates and voters to interact, debate, and participate in next year’s election. In January, Senator Hilary Clinton posted a question on Yahoo! Answers about improving healthcare in the U.S. and received 38,000 answers.

We have also taken some initial steps to monetize Yahoo! Answers, which continues to grow at an outstanding pace and now has more than 90 million users around the world. These steps include introducing sponsored search, content match, display ads, sponsored questions, and a beta knowledge partner program, for which we have a strong pipeline of interested advertisers.

We are also participating in an interactive partnership with MTV to develop a site that will enable users to submit their own movie shorts, creating the first ever Best Movie Spoof User-generated category at this year’s MTV movie awards.

Our ultimate goal is to encourage every user on Yahoo! to participate in the consumption and publishing of information and knowledge through tagging, reviewing, sharing and other social media activities.

On the video front, we are focused on seamlessly integrating video into the communications, community, information and media experiences across Yahoo! and creating high-value entertainment experiences for our consumers.

During the first quarter, we reached a significant milestone with our distribution deal with News Corp and NBC Universal. As many of your know, this distribution agreement will enable us to deliver hours of full-length programming, movies and clips and premium content from at least a dozen networks and two major film studios debuting this summer.

With the addition of the NBC/News Corp relationship, we now have video partnerships with all five of the major networks in the United States and we look forward to expanding upon these relationships in the months to come.

We also recently completed a video deal with the NBA that delivers basketball highlights from all of the 2007 play-offs and final games. In addition to the NBA, we provide our fans with compelling sports action from the MLB, NASCAR, and the NHL.

So let me now turn to mobile, which continues to be a major focus for Yahoo!. With the launch of several key new products and strategic partnerships, we are making progress on our goal of being the leading player in mobile, mobile search, and mobile monetization.

We launched Yahoo! Go for Mobile 2.0 and Yahoo! oneSearch back in January, both game-changing services for the mobile space that received strong positive receptions across the board. Yahoo! is already the number one mobile web destination in the U.S. and we are building on that leadership.

On the deal front, we secured a large set of partnerships, providing us with extremely broad distribution. We formed relationships with device makers, including Nokia, Motorola, Samsung, RIM, HTC and LG, and with major mobile players, including Opera, Vodafone, 3Group, as well as a number of other regional mobile operators.

We also extended our leadership in the mobile advertising by being the first to push display ads on Yahoo! mobile web in 20 countries. Major global advertisers, including Infinity, Intel, Nissan, Pepsi and Proctor & Gamble have been working with us since that launch. Mobile is a high priority for us. We have made some really exciting progress and I believe we are well-positioned to lead in this area.

As we continued to execute against our priorities during the first quarter, we also continued to reorganize our business to focus more effectively on the changing demands of our customers and capture the major growth opportunities we see ahead. We have already begun to see the benefits of our new structure and focus with more clearly defined strategy and priorities for each group, greater accountability, better coordination across the company, and stronger execution against our priorities.

We continued to round out our leadership team and we filled many key positions with strong, seasoned internal candidates, such as the three key international appointments we made last week. I am excited about the caliber of some of the external candidates I have met that will complement our strong team. I look forward to making more announcements about key organizational roles in the weeks ahead, so stay tuned.

In conclusion, as we look ahead to the rest of 2007 and beyond, I continue to believe there are tremendous opportunities for Yahoo! and the industry as a whole. We are moving aggressively to capitalize on those opportunities. I am pleased with the tangible progress we have made in sharpening Yahoo!'s focus and addressing the company’s challenges and opportunities. While there is still much more to do, all of us at Yahoo! are committed to continuing to build our positive momentum to deliver long-term value for our advertisers, our publishers and of course our users, and most importantly, our shareholders.

With that, I will turn it to Sue.

Susan Decker

Thanks, Terry, and thanks to all of you for joining us today. It is a very exciting time for Yahoo! and for the industry right now. Our Q1 financial results are right in line with the business outlook we provided three months ago, yet the regularity implied by that financial performance belies some invigorating transformational changes underway, benefiting both users and marketers.

For users, there are more and more opportunities for them to drive inventory creation on the Internet, and Yahoo! is proud to be providing the tools and platforms to facilitate that freedom of expression.

For marketers, it is becoming easier to connect with the most relevant consumers, wherever they are on the Internet, due to a convergence that is facilitating one-stop shopping for tools, serving, targeting and optimization. This provides inspiring opportunities for all publishers, whether they be large companies or individual users.

Yahoo! is aggressively expanding and integrating our ad platforms while simultaneously adding new publishing and sales channel partners. By doing so, we think Yahoo! will be in a stronger position to deliver increased value ahead to our advertisers and publishers.

Let’s turn to our first quarter results and begin with a look at free cash flow, which we view as our most important financial metric as it relates to value creation. As a reminder, we define free cash flow as cash generated form operations, which includes cash costs for taxes, tax benefits from stock-based compensation, and changes in working capital less capital expenditures and dividends received.

Free cash flow was $369 million in the first quarter, reflecting solid P&L performance and an improvement in collections. Our DSOs dropped from 50 in Q406 to 48 days in Q107, as collections were consummated on receivables that were built through strong revenue growth late in the fourth quarter, a trend we noted on our last call.

For the quarter, free cash flow represented 80% of operating cash flow, a little higher than our longer term target expectation of 50% to 70%, due to the timing of working capital changes.

In addition to our free cash flow this quarter, we received $72 million of proceeds from the exercise of employee stock options.

Turning to how we invested our cash, we invested close to $850 million in direct and structured share repurchases during Q1 that we believe will yield substantial returns to investors. We invested $595 million in open stock market repurchases at an average price of below $30 per share. In addition, we entered into a $250 million structured stock repurchase transaction which matures in August of 2007.

Netting out those sources and uses of cash, our cash and marketable securities balance ended at a healthy $3.1 billion and we continue to have significant financial capacity beyond that. In addition to this cash balance, we have several other important sources of incremental balance sheet value. Our interest in Yahoo! Japan, Alibaba in China, and Gmarket in Korea collectively amount to $8.6 billion in the aggregate, or over $5.75 per share, an important complement to the underlying values of our operating assets.

Moving now to the P&L, the overall summary is that we maintained strong profitability and cash flow while remaining focused on building innovative products and services for our very large and growing base of users, advertisers and publishers. Specifically, first quarter revenue ex-TAC came in at $1.18 billion, advancing 9% over year-ago figures, a tad better than the midpoint of the outlook range we provided in January.

Drilling down on global marketing services, our largest revenue line, we generated $980 million of revenue ex-TAC for the quarter, up 9% versus the prior year.

Let’s look now at our O&O, or owned and operated businesses, across all of marketing services, including both our core branding and performance marketing services. As expected, our revenue continued to grow faster on our O&O sites than on our off-network sites in Q1, yielding about mid-teens percentage growth year over year, led by our top 200 U.S. display advertisers, which grew roughly 20% against a very strong year-ago quarter growth comparison.

The breakdown in growth between volume and monetization was fairly comparable to what we saw last quarter. Page views, our best overall volume measure, grew 22% to over 4.6 billion per day in March, implying rising page views per user, a strong measure of growing engagement. This page view growth was strong across all three major content and service areas -- communications, media and search.

Monetization of those global O&O page views in the first quarter was about 7% lower than a year ago, broadly consistent with the trends in the last two quarters. In search specifically, as Terry noted, we are very pleased with the initial progress of Panama. While we hadn’t expected revenue per search to improve year over year in Q1, we were pleased to see a diminished RPS decline in Q1 versus the trends that we saw in Q3 and Q4. After we introduced a new ranking algorithm on February 5th, we saw expected improvements in the run-rate year over year of click-through rates versus how they were tracking in January.

Turning to price per click, the other variable most affected by the new algorithm, there was a modest erosion initially due to the multi-variable algorithm replacing a price-only ranking model but this gradually reversed itself as the quarter progressed to pre-February 5th levels. The net effect to RPS was modestly positive financially versus the earlier quarter trends and that was a little better than we anticipated.

This gives us confidence that we will see a more material positive impact RPS performance in the rest of the year, with double digit improvements likely in our U.S. O&O inventory in the back-half.

For the rest of our inventory, we experienced a continuation of the trend that we highlighted to you in Q3 and Q4 of last year. There is an exciting industry-wide trend that is creating a renaissance in inventory creation in various social media products, video and mobile. Most of this new inventory is priced at lower levels than premium or reserved inventory because it is in the early days and more difficult to identify and target relevant consumers, or to guarantee placement against specific content.

As this unfolds, we expect continued double digit growth in page views and modest dimunition in yield, or revenue per page view. In 2007 as this plays out, the mix shifts are likely to temper our non-search growth rates from what they were a year ago, a factor that was contemplated in the 2007 business outlook that we introduced in January. Longer term, we believe Yahoo!'s strong internal inventory generation, along with our sales capabilities across multiple forms of advertising, and our growing network of partners will collectively combine to allow us to derive incremental growth opportunities from this much larger base of inventory.

Turning now to our off-network affiliate partners, as expected, revenue dropped by a roughly mid-teens percentage year over year in Q1, and this was due to three primary reasons: the final tough comparison quarter of MSN migrating its U.S. search business in-house; ongoing increases in TAC rates, which we flagged to you in the past; and our efforts to continue to take advantage of pushing the quality of our traffic even higher with the introduction of Panama.

Let me expand on that last point. As we mentioned to you last quarter, we expect to see variable changes in performance across the network with Panama’s introduction, driven by two primary factors. First, the impact of the new ranking algorithm will affect affiliates differently based on their implementations, business models, and current monetization levels. Second, we plan to continue our substantive investments in driving network quality. Current and future releases of Panama give our advertisers more explicit targeting controls. These targeting controls will have different impact on affiliates depending on their traffic mix.

We have factored into our business outlook some revenue reductions for certain affiliates negatively affected by the above factors. We think these actions will create a higher quality network for our advertisers, ultimately benefiting both our high quality affiliates and our O&O traffic. However, we think there may be a lag effect between the costs and the benefits, so we are not modeling the benefits in the 2007 outlook. We believe this represents an important investment in the quality of our network and in the future growth of Yahoo!.

Now let’s look at our other revenue line. Fees -- we produced $203 million of revenue, up 9% from the year-ago quarter. Normalizing for a small one-time legal settlement, year-over-year revenue growth would have been in the low double digits for the quarter. The primary driver of this revenue line is premium offerings, in which consumers and businesses pay us for our services.

We exited the quarter with $16.5 million paid relationships, up 24% year over year and up 200,000 from Q4 levels, despite the normal seasonal loss of our fantasy football subscribers from Q4 to Q1.

Turning to profitability, operating cash flow came in at $460 million, up 6% year over year, producing global operating cash flow margins of 39% for the quarter, a little stronger than we had forecast.

Let’s turn now to our business outlook for 2007. For the second quarter, we expect revenue ex-TAC to be in the range of $1.2 billion to $1.3 billion, up 11% from a year ago at the midpoint. At these revenue levels, we expect to operate within an operating cash flow range of $440 million to $500 million in Q2, up 3% at the midpoint of the range.

Q2 operating cash flow margins are expected to be approximately 37% to 39%, about 100 basis points lower than in Q1 due to the timing of a planned marketing campaign, the bulk of which will fall in Q2.

This campaign targets both our consumers and our advertisers, highlighting the Panama launch, building on the momentum of Yahoo! Answers, and featuring some of our industry-leading mobile offerings. In aggregate, our overall marketing expenditures are expected to be broadly consistent in 2007 versus 2006, but the timing is more Q2 weighted in 2007 versus Q4 weighted in 2006.

Our outlook for the full year of 2007 remains unchanged. We expect revenue ex-TAC to range from $4.95 billion to $5.45 billion, up about 14% from the year-ago levels at the midpoint.

Importantly inherent in this forecast, our core O&O advertising revenue is expected to grow close to 20% in 2007, very similar to the growth trends we realized in 2006. However, different from 2006 where we experienced deceleration with each quarter. In 2007, we expect acceleration as the year progresses.

Full year operating cash flow for 2007 is expected to be in the range of $1.95 billion to $2.2 billion, yielding a full-year margin of approximately 39% to 40%, and in line with what we told you three months ago.

Moving to free cash flow, we continue to anticipate a full-year 2007 range of $1.2 billion to $1.4 billion, reflecting capital spending for ’07 of approximately $650 million to $750 million. In that figure, we are assuming cash taxes in the range of 12% to 14%, versus approximately 6% in 2006.

Before I close, would like to take a moment to discuss Yahoo!'s recently formed advertiser and publisher group, or APG. Terry discussed its core mission, which is all about connecting advertisers with their target customers in order to drive the most value. To accomplish this, we are focused on three strategic imperatives. Let me detail each of these and highlight specifically how they apply to one of our most exciting new relationships, the newspaper consortium deal that we announced yesterday.

The APG’s first imperative is that we must generate the greatest advertising demand by offering marketing solutions the way that advertisers and agencies want to buy them by increasing transparency, openness, and decreasing buyer friction. With the newspaper consortium deal, we offer customers a one buy, one bill experience, whether they come through Yahoo! and would like local newspaper site distribution, or whether they come through a local newspaper site seeking local distribution in multiple markets and properties through Yahoo!.

Another example of how this strategy applies is that ours is an open platform. We are embracing an open approach to the purchase and sale of inventory and to sales channels other than our own. Many local market advertisers want to buy through their newspaper channels, but they also want the serving, targeting and optimization benefit of the Yahoo! graphical platform.

Our group’s second strategic imperative is to provide advertisers with access to the highest quality, most relevant inventory and audiences, wherever they are on the Internet. Building such a network of high quality consumers for advertisers requires forging many partnerships. Because of the nature of our core business, we are very sensitive to the need to protect valuable content, and our partners cite this as a core advantage of partnering with Yahoo!.

We are committed to being the industry partner of choice. This commitment and reputation was essential in enabling Yahoo! to make significant progress in Q1 with a number of key partners, including eBay, United Online, and Viacom. We are very excited about the potential of the newspaper consortium deal to support this imperative by creating an enormous database of additional job listings, giving local newspapers a dramatically larger audience for their local content and adding significant local ad growth opportunities for Yahoo!'s customers.

The third strategic imperative is that we must deliver next generation unified ad platforms and products that combine uniquely broad and deep consumer insights with the most advanced algorithms to create the perfect match between advertisers and their target customers. On the search side, Panama’s launch was the first major accomplishment under this strategic initiative.

In display, we began selling display business off our network earlier this year in partnership with eBay. The newspaper consortium deal takes that to a new level as it relates to extending our ad platforms. In the same way that the eBay deal allowed us to extend our display ad sales and serving capabilities off our network to a third-party partner, this new deal now commits to a flexible platform model in which we allow other sales channels to use our targeting, serving and optimization technology and also to sell our valuable inventory to their audiences.

Look for more to come in terms of both extending Yahoo!'s core capabilities to demand and supply channels and to further integration of all these components.

To close, we are excited about the transformation that is taking place for both users and marketers on the Internet. We are also enthusiastic about Yahoo!'s ability to evolve and extend its leading assets, strong sales channels, the insights from the world’s largest audience, and leading advertising platforms across all forms of online advertising to high quality external partners.

As you know and as you can clearly tell from this recent activity, we at Yahoo! take partnering very seriously. We believe that by aligning with companies that are also interested in creating a level playing field that makes the entire industry more efficient and transparent, we will be able to drive the most value for advertisers, publishers and audiences. It is this philosophy and commitment that underscores why we believe we are the industry partner of choice.

With that, I would like to turn it back to Terry.

Terry Semel

Thanks, Sue. Yahoo! has tremendous strengths and I am confident in our ability to capture major new opportunities ahead for the Internet and maintain our industry leadership over the long term.

I would like now to open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Jeetil Patel from Deutsche Bank Securities. Please go ahead.

Jeetil Patel - Deutsche Bank

Thanks, a couple of questions. Can you talk about any sort of impact on the display side of the business from financial services advertisers maybe slowing down from a mortgage standpoint? And a quick housekeeping question; can you talk about how the HotJobs and newspaper consortium deal will be picked up in terms of the P&L? Will that be a gross revenue and then a TAC number? Did you see any contribution from that in Q1, given some of the local markets that you have launched already?

Susan Decker

I think those are mine. Let me start with the first question on the mortgage side. Advertising activity among lenders and aggregators remained solid across the Yahoo! network. Overall, the way we are increasingly selling is across audiences, and that tends to mitigate the effect from any one industry category, but we in general have relatively limited exposure to sub-prime challenges for Internet advertising relative to potentially other forms of media.

On the newspaper deal, as far as the HotJobs component goes, we deferred recognition of any revenue incrementally in Q1 because the revenue recognition is tied to completion of part two of the deal, which we signed on Sunday, so we will be recognizing that revenue in the back part of this year that did not come into the Q1 results.

As far as going forward, the way the deal is structured is a revenue share across a variety of different activities that we will be providing for each other. As you know, there is a content sharing arrangement in which they will be distributing our algorithmic search and our search advertising. We will be distributing some of their local news content. We will also be moving into the important ad network component of this as we move into 2008.

The point is that there are multiple elements to this deal. There is a phased introduction. It is not really structured as a TAC arrangement. The portions of the deal are structured as a TAC arrangement where we sell advertising on each other’s sites and other elements are structured in different ways, such as revenue share.

Operator

Our next question comes from Jordan Rohan with RBC Capital Markets. Please go ahead.

Jordan Rohan - RBC Capital Markets

Sue, in your commentary about off-network partners, you commented on traffic quality initiatives. Can you give me a little bit more detail there? What kind of opt-out will be allowed there? Something based on geographies? Will advertisers be able to opt out of the Yahoo! publishing network and advertise only on the Yahoo! platform itself? Is there something specific to the domain channel as well?

Susan Decker

Jordan, thank you. We have a number of initiatives that we are likely to introduce as the year goes on. I would say that in the first introduction of Panama, we already offered geographic opt-out, which was different than what we had before. In subsequent releases, we will be moving toward giving advertisers greater control, including quality-based pricing and domain blocking. So you will see that as the year moves on.

Jordan Rohan - RBC Capital Markets

Which is the largest of those three drivers for a mid-teen decline in off-net revenues?

Susan Decker

Jordan, I would say the more significant impact for a mid-teen decline in revenues -- in fact, virtually all of it in the first quarter was the last quarter rolling off of the MSN business that we did not have in this quarter, whereas we did have it in the last quarter, and also rising TAC rates, which we flagged to you last quarter and quantified what we thought the impact would be. This is really more as we look forward into the future as opposed to something that was effective in the quarter.

Operator

Our next question comes from Imran Khan from JP Morgan. Please go ahead.

Imran Khan - JP Morgan

Thank you for taking my question. Two questions; first question is if I look at your page views growth rate of 22% and growth for your display advertisement from top 200 customers is 20%, I was trying to better understand how much of that -- it seems like you are growing slower than the page views growth. How much is the difference of mix shift versus whether you are seeing pricing pressure on a same-store basis on the premium inventory?

The second question is we are getting into a seasonally strong quarter for graphic advertisement, and I think Terry, you talked about how you will see improvement in revenue per search, but if I look at the guidance, on the low end you are only guiding 1.4% sequential growth. If you could help us to understand the guidance. Thank you.

Susan Decker

I will start here with the relationship between page views and revenue. The issue here is entirely a mix issue. It is not a pricing issue. If you were to look at the same types of formats in advertising, apples-to-apples quarter over quarter a year ago, we are seeing pricing increases in all of them.

I think the issue is really more the one that we flagged two quarters ago, which is that we are seeing very significant growth and exciting growth in a lot of new content areas, and many of those are in a nascent stage in terms of their ability to be targeted or to be integrated with context, and the opportunity longer term is that the things that have made us so successful in many of the premium categories are things that we can actually apply to this inventory as time passes.

But in any kind of evolution like this, which is significant, we think it will take a few quarters to roll out. It is our expectation in our guidance, and it was as we talked about last quarter, that we expect this to be an evolution that happens throughout 2007. As we look forward, we do have a number of very attractive assets to take advantage of that, including our industry-leading sales force, the algorithms that are really industry leading in terms of being able to understand user intent, both across behavior demographics and geographic dimensions.

So as we think about all the tools that we have to take advantage of this, we are excited about it and it is actually a very, very high priority of the company. We are in the midst of that transition right now.

Operator

As a reminder, please limit yourself to one question. Our next question comes from Anthony Noto from Goldman Sachs. Please go head.

Anthony Noto - Goldman Sachs

Thank you very much. Sue, I think on the call it was mentioned that the top 200 display grew 20%. I just want to confirm that is comparable to the high 20% rate that you saw in the fourth quarter and 33% rate in the third quarter, just making sure those numbers are all comparable.

Then, as we take a step back and think longer term, you are growing revenue 9% right now. You are looking for mid-20s by the end of the year. How do we bridge that gap? If you could help us with both volume and monetization, and what do you think about the longer term revenue growth opportunity beyond that over the next three or five years? Thanks.

Susan Decker

Okay, Anthony, let’s see -- starting with the top 200 numbers, yes. Well, I would say that the roughly 20% figure that we gave is comparable to the 25% to 30% last quarter. One difference is that in the last quarter, the top 200 outgrew everything else, whereas this number in this quarter is broadly representative of the growth overall in the display business.

To your second question, the revenue growth being 9% and accelerating as the year goes on, I would say the primary factor is search. We do expect that based on what we have seen so far, it was sort of a hypothesis before and we are seeing some validation of how the marketplace is unfolding, that we do think that we will see double digit RPS gains in the back half of the year. That was consistent with our guidance back in January and that is where we are seeing that improvement. I would say a smaller element is that we will have cycled through the MSN loss and a couple of other factors as the year goes on.

As we move to long term, I think it is probably premature for me to put out a growth forecast beyond 2007 at this point, but I appreciate the question.

Operator

Our next question comes from Christa Quarles with Thomas Weisel Partners. Please go ahead.

Christa S. Quarles - Thomas Weisel Partners

Just to follow up, if I look at the revenue growth in the first quarter, is it not quite the 20% or is that 20% sort of above everything? It sounded like you were lumping in the top 200 with the remnant.

Then, on the monetization being down 7%, but it looks like RPS was positive roughly or flat, I was just wondering if you could highlight whether the top 200 was up or down in terms of monetization.

Longer term again, can you discuss the phasing of rolling out Panama into the display context? Is it about getting the newspapers signed on and getting eBay signed on and increasing the distribution, if you will? Just discuss the phasing of that piece. Thanks.

Susan Decker

Let me start and you jump in if you want to help. Starting with Q1 top 200 growth, I think you asked whether that included both premium and some of this new social media inventory, yes, absolutely. The top 200 advertisers are both very aggressively using our premium forms of inventory and also are experimenting with other inventory on the Yahoo! network that is growing quickly and is of a little bit lower price. So we are seeing strong growth in both from the top 200.

In terms of monetization of the top 200, I’m not sure I got your second question totally. Are you still on there, Christa? Let me go to your third and then you can come back and you can tell me what your second one means.

In terms of Panama phasing, actually it really is not related to the newspaper deal or eBay. It really has more to do with wanting to have a very phased and deliberate rollout, given the hundreds of thousands of customers and partners that are involved in this. So the phasing of Panama has been very much consistent. What Terry outlined in his comments is very consistent with what we said a few months ago, except we gave a little bit more detail on the specific markets with Japan and Korea and Europe being launched very shortly.

Sorry, on the second question -- I’m getting a note. The monetization down 7% with RPS, RPS in search was still off modestly in the quarter. It was down less than in the last two quarters. We absolutely expected and mentioned to you last quarter, we thought it would be down the same, though we did not think we would see much immediate improvement from Panama until it had a chance to be operational and the marketplace had a chance to learn and we could recognize second order effects from advertisers, so it is fair to say that particularly on the PPC variable, we saw a faster improvement than we might have originally anticipated.

But it is fair to say that in both search and in all other inventory, yield is down a little bit. In the other inventory, it is all about the mix issues we talked about. In search, it is about the historical issues that we have discussed in the past.

Operator

Our next question comes from Ben Schachter from UBS Securities. Please go ahead.

Benjamin Schachter - UBS

Could you give a little more detail on how the actual eBay, PayPal product will work? Will we see graphical representations of PayPal on the Yahoo! network? Also, any initial thoughts on how having a competitor own Double Click may impact how you would work with advertisers using Double Click? Thanks.

Susan Decker

I am going to take the first one and then pass it to Terry for the second one. We are real excited about the new Yahoo! PayPal checkout deal. It is going to be live, starting today. We will have 2500 merchants lit up with the new icon, shopping cart icon today, which is a pretty big start out of the gates. It is representative of Yahoo! bringing a number of small businesses into the fold, and also the very significant number of merchants that eBay already has up and running.

I think there are a lot of other very strong benefits to both. It really combines the strength of both partners. The merchant promotion program is extremely compelling. The payment flows are extremely compelling to the merchant, in that they allow the user to go back to the merchant site, which allows merchant upsell, which is a little different from the competitive market’s offering.

We are really excited about it. It is launching today and we also think it offers an opportunity for a closed loop insight into transactions, which will be helpful to both parties.

Terry Semel

I think the second question went to the Double Click acquisition. I would say for starters, it certainly does validate Yahoo!'s strategy for these past few years. We always saw it as a very important aspect of advertising and happy to see others now finally coming to that table.

As to how the individual advertisers will feel about working with Double Click, I think you will see my guess is there will be some who are fine and there will be many who perhaps are not fine. That is up to them and that is up to their decisions.

I think there has also been a lot of comment about concerns from either advertisers and/or advertising agencies, perhaps consumers in general. We understand all those concerns and we fundamentally think that competition benefits consumers and the whole industry for that matter.

It is good and it is a good validation of our strategy for the last few years.

Operator

Our next question comes from Justin Post from Merrill Lynch. Please go ahead.

Justin Post - Merrill Lynch

Can you revisit your expectations for revenue per search for the second quarter of the year? When you look at the back half, do you really see growth for Panama really coming from a lot of smaller advertisers getting on board and using the new system, or do you think your larger customers will see an improvement in ROI and really move more budgets over to your system going forward? How do you see the second half playing out?

Susan Decker

Thank you, Justin. I would say that with first quarter, we would probably see modest RPS increases and in the second half, we think we will be at double digit increases.

In terms of where the growth will come from, we are seeing it really across the board and we expect that to continue and to actually accelerate.

Operator

Our next question comes from Heath Terry from Credit Suisse. Please go ahead.

Heath Terry - Credit Suisse

I was wondering if you could talk a little bit about the branded advertising side of the business, expectations going forward for growth in both pricing and volume, and if there is a dramatic difference in what is embedded in your guidance for the U.S. business versus the international?

Susan Decker

I think I will take that. The expectations going forward are relatively consistent with what wireless saw early this year. We would expect to see continued strong growth in page views and modest dimunition in yield as this industry transition continues to take hold.

Display business internationally is doing very well and becoming a little more material to our operations. We expect that to continue as well, so pretty much in line with our expectations.

Operator

Our next question comes from David Joseph from Morgan Stanley. Please go ahead.

David Joseph - Morgan Stanley

I am actually here with Mary and we will keep it to one and just a really quick one; can you give us a little bit of an update on the CFO and the head of audience search?

Terry Semel

I mentioned a little earlier that we have been meeting with some fabulous executives and have been very, very pleased about that. As you know, we started the process I guess somewhere in mid-January or thereafter. Very, very excited about it and as I mentioned before, I think in the next number of weeks, I think we should have some newer people aboard. We have had fabulous opportunities to meet some very talented people and very thrilled with many of the candidates who raised their hand throughout our company for various openings that became possible.

Operator

Our next question comes from Scott H. Kessler from Standard & Poor’s. Please go ahead.

Scott H. Kessler - Standard & Poor’s

Thanks a lot. How important would you say search market share is to your company and what are you doing to contribute to related gains? Thanks a lot.

Susan Decker

I will take that one. I would say it is extraordinarily important to our company. We have been very pleased with our ability to maintain our position over the last couple of years, in light of the fact a portion of our page was not as relevant as it could be. That is the sponsored listings that is pre-Panama. We actually have been able to widen the gap between the top two companies and everyone else. There has been a pretty significant trend there. So as we look at the past and some of the limitations we had, we are really excited we were able to do that.

Looking forward, it is certainly our ambition to try to increase that market share. We are hopeful and expect that over time with the page being much more relevant and certainly the click-through rates that we are beginning to see would indicate that, on the sponsored component, that we will see increased relevance and ultimately market share.

As well, we feel really good about the quality of the product. If you compare the product to any competitive product, it is very, very strong.

Finally, in terms of distribution and marketing, we have been actively pursuing a number of partners -- the HP deal, the Acer deal late last year, the original eBay deal that we announced last May had a component of toolbar distribution. In fact, the deal that we announced today also has incremental toolbar distribution. In fact, the newspaper deal that we announced has web search distribution.

So we continue to be focusing on high quality distribution partners, investments in the product and improvement in the relevance of the sponsored search part.

Terry Semel

Could we have one more question, please?

Operator

Our next question comes from Mark Mahaney from Citigroup Smith Barney. Please go ahead.

Mark S. Mahaney - Citigroup Smith Barney

Just one question -- you mentioned the planned marketing campaign in the June quarter, and just keying off the last question, does it make sense for you to try to increase consumer awareness or user awareness of some of the improvements through a branding or an advertising campaign? Is that part of the strategy for the June quarter or are you focused on other marketing goals? Thank you.

Terry Semel

I will start with that -- yes, so you can imagine that our campaign will touch on two or three very important opportunities to Yahoo! consumers, one of which will be Panama, if you will, and our new search opportunities. We will also talk about our wireless opportunities that we are offering many, many of our consumers now, and probably go back to the success of Yahoo! Answers.

I think you are going to see the campaign is an exciting campaign and it is going to help feature not one but three different aspects of Yahoo! going forward, so we are excited about that.

I just want to thank everyone for joining us today and have a good afternoon or evening, depending upon where you are. Thank you.

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