Good afternoon, ladies and gentlemen, and welcome to the Yahoo! First Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to June Ha [ph]. Mr. Ha [ph], you may begin.
Thank you, Chanel. Good afternoon, and welcome to Yahoo!’s First Quarter 2012 Earnings Conference Call. My name is June Ha [ph], and the new leader of the Investor Relations team here at Yahoo!. On the call today will be Scott Thompson, Chief Executive Officer; and Tim Morse, Chief Financial Officer.
Before we begin, I would like to remind you that today's call may contain forward-looking statements concerning matters such as our expected financial and operational performance and our long-term financial model; as well as our expectations for the economy in general and online advertising in particular; our Search Alliance with Microsoft; our capital allocation decisions; our restructuring costs and benefits; and our strategic, operational and product plans. Actual results may differ materially from the results predicted in our statements, and the 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 the Form 10-K with the SEC, February 29, 2012, as well as in the earnings release included in Exhibit 99.1 to the Form 8-K we furnished today to the SEC. All information discussed on this call is as of today, April 17, 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 operating expenses, less traffic acquisition costs or TAC, revenue excluding TAC or revenue ex-TAC and operating margin ex-TAC. Reconciliations of these 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 will have a brief Q&A session. And with that, I'd like to turn the call over to Scott.
Thanks, June. Good afternoon, everyone, and thank you all for joining us today. We've been moving very quickly on a number of initiatives since we last spoke. During that time, I've become more convinced than ever of the value of our assets, the potential of this business and what we can do to make the most of Yahoo!'s huge market opportunity. I'll have a lot to share on that, but we'll start today with a discussion of our first quarter results. Then we'll talk about what we're doing to refocus Yahoo! on its core business and our renewed focus on our customers, the users and advertisers that are vital to Yahoo!'s future.
First, on Q1, we're pleased that revenue and profits were higher than we expected, costs were lower than expected and we beat consensus across the board. And we're encouraged that revenue grew year-over-year for the first time since the third quarter of 2008. But I want to be very clear. I'm not satisfied with the pace of top line growth and I won't be satisfied until we're growing at least in line with the market.
Taking a brief look at our performance in Search and Display, Search came in ahead of our expectations, driven by higher RPS. The majority of our Q1 gains were driven by changes Yahoo! made to the Search experience that drove higher click-through on our Search ads. While Microsoft has continued to enhance its algo in paid search technology, the Search Alliance is not yet delivering what we expected. I'm personally working with Microsoft to ensure the alliance does deliver going forward and meets our high expectations for user experience, advertiser ROI and revenue for Yahoo!.
Turning to Display, revenue was down versus last year and a bit lower than our expectations. We've got a few wins on engagement Display, like the growing engagement on Yahoo! News, driven by our partnership with ABC News, and by Yahoo!'s social bar. We also see some positive signs on monetization, with the stabilization of our U.S. sales force and renewed partnerships with some important advertisers. But let me be very clear that our Display business is no way close to where it needs to be in any of our 3 regions. Hundreds of millions of people engage on Yahoo!'s homepage, Mail and other marquee media properties, and we must improve monetization and achieve higher returns from that engagement.
Looking at overall growth by region, Americas and APAC drove the top line in Q1, up 2% and 5%, respectively. Our smallest region, EMEA, felt the impact of macro dislocations in the region, with revenue down 9% year-over-year. Costs [ph] came in much lower than we expected, so overall operating income was above the range we gave you in January. EPS were up 38% year-over-year due mostly to improvements and our equity interest line. I have more to share about the actions we took in Q1 and our future plans, but first I'd like Tim to provide more detail on our Q1 results, our Q2 guidance, as well as the financial framework we're using to manage the business going forward.
Timothy R. Morse
Thanks, Scott. Good afternoon, everyone. Today, I'll cover our first quarter 2012 results, set up our second quarter guidance and update our longer-term financial model.
Let's start with our headlines for first quarter. As Scott mentioned a few moments ago, revenue ex-TAC of $1,077,000,000 finished in the top half of our guidance range and, more importantly, grew on a year-over-year basis for the first time since third quarter 2008. That's a long way from the growth we aspire to, but it's an important milestone nonetheless. Operating income landed at $169 million, exceeding the top end of our guidance range by a combination of revenue and cost favorability. With respect to operating margin rate, first quarter was nearly 16% on an ex-TAC basis, up 3.5 points from guidance midpoint. Earnings per diluted share increased by 38% from prior year on improvements in our equity interest line.
In cash flow, we're similarly strong in the first quarter with cash flow from operating activities up 45% from 2011 and free cash flow up more than 245% as we continue to optimize capital spending.
Finally, we recently announced actions to further streamline our cost structure with steady state annual savings of roughly $375 million. More on the financial model implications of that action in just a few minutes.
Turning to first quarter ex-TAC revenue results, our 1% improvement versus prior year was driven by 8% growth in Search, 1% growth in our other revenue category and a 4% decline in Display. Starting with Search, query volume generated by our properties was up slightly in the Americas region and roughly flat globally. Revenue per search, therefore, drove the bulk of the 8% ex-TAC revenue improvement compared to last year. Breaking down the RPS strength, Americas click-through rates improved by high single digits, implying that users are finding more relevant results and clicking on them more often. At the same time, we're absorbing some weakness in the Search marketplace itself that's being offset by the Search Alliance RPS guarantee. This quarter, we're not able to report significant progress by Microsoft on their effort to close the gap in marketplace RPS, but we are actively working with them to improve those results, as well as to achieve more consistent progress in closing the RPS gap in the future.
Moving to Display, an ex-TAC revenue decline of 4% year-over-year obviously isn't acceptable. By geography, Americas declined 5%, EMEA declined 4% and APAC grew 6%. The Americas' turnaround effort remains our primary focus, so let me provide a bit more detail there. First, audience metrics continue to grow with media property page views improving by 10% year-over-year. However, total graphical supply including Mail was down roughly 10% from a year ago and guaranteed placement sell-through rates remained well below first quarter 2011 levels. On a more positive note, we did generate strong yield improvements in the quarter, especially in guaranteed placements, thereby, partially offsetting the impact of supply in sell-through. Rounding out Display, our recent acquisition of Interclick performed in line with expectations, generating roughly $10 million incremental revenue. That's my first quarter overview for today.
Now let's turn to second quarter guidance. Given the uncertainties that typically accompany both a large reduction in force and a business unit reorganization, our guidance ranges this quarter will be wider than those we usually provide. In short, this quarter has more potential for variability than other quarters. The most effective way to deal with additional variability is to provide as much transparency as we can with regard to our underlying dynamics.
First, on revenue ex-TAC, we expect a range of $1,030,000,000 to $1,140,000,000 or $1,085,000,000 midpoint of this range equates to roughly 1% growth versus 2011. By revenue category on a year-over-year basis, we expect Search to be flat to up, other to be down slightly and Display to return to mid-single digits growth. Early bookings indications in Display are encouraging for consumer packaged goods, automotive and Finance. We also expect sequential revenue contributions from our Interclick acquisition and improvements in guaranteed placement sell-through rates.
Moving to ex-TAC costs, it will take about a year to reach substantially all of the $375 million steady state cost savings associated with the reduction in force we recently announced. During the interim period, we'll incur transition-related costs for works such as property rationalization, data center consolidation, improved cloud infrastructure utilization and the elimination or right sourcing of support functions. At the end of the transition period, those costs will obviously go away completely.
In order to facilitate tracking and communication of our progress towards steady state, we'll provide cost guidance and reporting throughout this transition period in 3 pieces. Those are: one, ongoing costs; two, transition-related expenses; and three, restructuring charges.
Let me take a moment to ensure each of these 3 pieces is clear. The first of the 3 is ongoing or look-through costs. Those are the costs involved in running our business on a go-forward basis. The second of the 3 is transition-related expense. Now as I noted just a moment ago, we expect those costs will be reduced to 0 by roughly mid-2013. And finally, we'll have restructuring charges for severance, facilities' exits and asset write-downs. By nature, these costs will vary from quarter-to-quarter with some quarters, potentially like this present quarter, containing a sizable charge and others with little or no charge at all. Providing this transparency should facilitate everyone's ability to clearly track the operational progress of the business by focusing on ex-TAC revenue and ongoing costs. Resulting pro forma ongoing operating income and ex-TAC operating margin rate are the best indication of our longer-term financial model. However, it's worth emphasizing that we will continue to provide and explain our full GAAP picture of cost and profits, including all transitional costs and restructuring charges in addition to the look-through of the core business I just described.
With that construct in mind, our second quarter ex-TAC cost guidance is as follows. We expect costs on a look-through or ongoing basis to be $875 million to $895 million. This range includes normal seasonal increases related to our annual wage and stock-based comp cycles, as well as marketing costs related to upcoming events such as the Olympics. Our transition-related costs are expected to be $40 million to $50 million. The majority of this cost is related to employees who are impacted by the April 4 actions, but who will continue employment through a set date over the next year. These employees, in other words, are in roles that will require transition work in order to reach steady state.
Finally, with respect to restructuring charges, while we expect to incur roughly $135 million in total severance related to our recent reduction in force, we'll undoubtedly add to that charge as a result of the associated efforts to streamline, rationalize and simplify our offerings and infrastructure. It's too early to put a range on the all-in charge and similarly too early to quantify it for this quarter. So we're going to guide on an ex-restructuring basis, but we'll plan to discuss it during our July earnings call.
To sum up, the $1,085,000,000 midpoint of ex-TAC revenue and the $885 million midpoint of look-through ex-TAC cost implies $200 million of ongoing pro forma operating income, an improvement of 5% from prior year, and roughly an 18.5% ex-TAC operating margin rate.
That brings us to a discussion of the longer-term financial model we're targeting. Scott will provide more detail in a moment regarding our go-forward operating objectives, but the overarching financial theme is to streamline our current business in order to create investment capacity for future growth. Ultimately, we believe a reported ex-TAC operating margin rate of 20% is the proper target level. Let me take a few moments to walk you through that.
First, at steady state, the actions we've already announced should bring us to an ex-TAC margin range of 20% to 25%. Over the next few quarters, we'll be working to improve that range to a minimum 25% rate by driving both higher revenue and a more optimal cost structure. Ultimately, our goal was to create a business that's capable of growing revenue at or above market rates. By necessity, this will require us to improve our current operations, but more importantly, it will mean diversifying our revenue streams, both geographically and beyond the traditional scope of Search and Display. Our newly created commerce business unit is an early indication of the focus we'll bring to generating additional revenue sources. Commerce and transaction-related services are a natural opportunity to add value to our users while providing better monetization for Yahoo!.
As we expand in our current marketplaces and simultaneously work to develop new business models, investment will be required. Preliminarily, we view our investment capacity as being roughly 5 points of ex-TAC operating margin. In order to deliver 20% on a reported basis for the company, we must, therefore, lift margins in our existing business to make room for the investments we'll make in the future. Given the dynamic nature of our industry, investment in the future is absolutely critical to longer-term success. As our business model evolves, we'll provide clarity on core margins, investments and returns on investment. The entire equation must work together to produce the kind of long-term revenue growth we know we're capable of.
With that, I'll turn the call back to Scott.
Thanks, Tim. And as Tim said, our model assumes this business can and will grow going forward. When I joined Yahoo! in February, I knew Yahoo!'s brands, assets and data provided a unique opportunity for this business. The foundation we have today is still extremely valuable. Any company that starts with nearly 700 million users, relationships with thousands of advertisers, hundreds of millions of dollars in cash flow and long-standing strategic relationships and investments has a significant opportunity to create value. Among other things, we deliver content that matters to millions of users who visit us every day, and many of our offerings, especially in the U.S., have been #1 in their categories for many years. As you also know the challenges we face, even as we've maintained our leadership position and distanced ourselves from competitors in certain key media categories, we've lost share of time spent online in the recent years. Below a strong tide of consumer engagement and ad spend continues to come online, Yahoo!'s engagement and revenue has not been rising with that tide.
So one of my first actions when I arrived at Yahoo! was to gather our leaders and ask them to change their thinking. I specifically asked what would it take to refine Yahoo!'s focus to get us back to doing our best for our users and advertisers, to grow this business and to move fast. We started with a clean slate and asked: How would we build Yahoo! from the ground up if we were building it from scratch today? We took a comprehensive look at everything, all of the media, communication, Search, social and commerce experiences that we offer our users. We also looked at the major platforms, systems and technologies we use to operate those properties for us and our partners, including the data center footprint and other corporate services required to make it all run, every part of the business. And here was the simple answer: Yahoo! had been doing way too much for too long and was only doing a few things really well. The power of Yahoo!'s distribution network gave us the ability to provide hundreds of offerings for users and advertisers all around the world. Each of our products and services may individually generate more engagement than most startups or even midsized companies in certain markets, but that does not mean that we should continue to do everything we currently do. In fact, dispersing the efforts of our best designers, developers, content producers and other dedicated Yahoo!s across every one of the markets and niches we serve initially put us in a great position, but that position isn't sustainable. I'm certain we need to be clearer going forward about what we won't do. In fact, with all the growth opportunities we have, one of the most important pieces of our strategy and that of any business in a fast-growing market isn't regularly defining what we won't do. What we will do is get clear on our core business, dedicate some of our best people in the most resources there and put our customers first.
So let's talk about how we do that. We've completed the detail and diligent review in an accelerated time frame and the team working on this really delivered. We produced a comprehensive strategic framework that will change what we do and, most importantly, how we do it. During this process, the point I came back to over and over again is that we need to put our customers first in everything that we do. The restructuring we announced 2 weeks ago, the organization structure we announced last week and yesterday's leadership announcement for our newly formed commerce group are just the first steps. We are now cascading the rest of the plan through Yahoo!.
Let me outline several essential elements of that plan. First, we're consolidating technology platforms and shutting down on transitioning roughly 50 properties that don't contribute meaningfully to engagement of revenue. Second, we're clearly defining our core media connections and commerce businesses, including News, Finance, Sports, Entertainment, Mail and a handful of others. Those properties that generate the majority of our engagement and revenue. Third, we're moving engineers into our commerce businesses to put them closer to our user and dedicating some of our best and brightest Yahoo!s to meaningful innovation in those core businesses. Fourth, we're accelerating the deployment of the platforms and technologies we've built to make each of our properties more scalable, nimble and flexible, and therefore, less costly and time consuming to run. Fifth, we're making better use of Yahoo!'s vast data to personalize user experiences and dramatically improve advertiser ROI. Sixth, we're refocusing our R&D on Owned and Operated properties and stopping development of a number of initiatives, including platforms for outside publishers and theoretical science that were outside of our core. All of this puts us in a position to achieve the most important objective, which is to produce clear, measurable results for our advertisers, including genuine insights from our vast data so that they can feel -- see real ROI. Really understanding our advertisers' needs will position Yahoo! to better monetize all of our traffic globally.
In addition to the 6 points I've outlined here, we've also identified execution issues that we are taking swift action to change. A key example is the complexity of Yahoo!'s development and delivery process. That is what it takes to get an idea from concept to launch. Yahoo! has built processes that were originally intended to help us scale, but they've become way too complex and has stifled innovation. We've made some strides here, but not enough. Some of our processes continued to degrade the user experience, limit our ability to deliver for advertisers and frustrate Yahoo!s who really want to produce for our customers. We simply must change that.
The announcements we've made over the last several weeks represent the first steps in executing on our plans to get back to our core businesses, execute and move faster. We're putting in place a more focused organizational structure and decreasing the size of our footprint, including reducing our workforce. I don't take decisions to eliminate jobs lightly as we have thousands of hard working and loyal people here at Yahoo!. But I also believe we have way too many people for the amount of output from this business. A streamlined structure and less bureaucracy will help Yahoo! get stuff done at the pace our customers and our industry require.
As we've defined our core businesses and move to optimize our allocation of resources, we look closely at user engagement and market potential, as well as current revenue and margins. As Tim discussed a moment ago, our recent actions and our plan are fully aligned with a very clear target financial model for this business. We believe there may be some modest revenue implications from the actions we've taken recently, but the result will be higher margins and more flexibility to invest more aggressively in our core businesses and in adjacent opportunities over time.
In addition to all the work on Yahoo!s core business that we've discussed with you today, we've been moving very quickly and deliberately on a number of other fronts as well. I'll touch briefly on 3. First, our board. After a thorough review of a broad range of highly qualified candidates by our nominating and corporate governance committee, our board has appointed 5 new members, all with impressive records of significant accomplishments at high levels of media, advertising, marketing, technology, the Internet and finance.
Second, on our intellectual property. After attempting to resolve the matter, we took action to protect our patented innovations and addressed Facebook's unauthorized use of our intellectual property. Yahoo!'s intellectual property is one of the foundations of our business and our future growth. Other leading companies licensed our patented technologies and Facebook must do the same or change the way it operates.
Third, on our Asian assets, we are continuing to pursue active discussions with Alibaba. We are currently exploring a simplified transaction structure which, if executed, would provide greater certainty of closing to monetize a portion of our Alibaba stake. While we also plan to continue exploring alternatives to unlock the value of our Yahoo! Japan stake for shareholders, any transaction has to be at a value that makes sense for Yahoo! and its shareholders. We currently have a valuation gap with respect to the Yahoo! Japan stake that we have not been able to bridge. Given that, we are focusing on our discussions with Alibaba and we are not in a position to provide further details or certainty on today's call.
So to summarize, we have a clear near-term focus. We intend to win in our core and put our customers first. We will get that core business right and bring innovation and excitement back into Yahoo!. That's our top priority right now. Over time, we will earn the right to pursue new growth opportunities and we look forward to more discussion about those opportunities with you in future quarters.
I am convinced that we don't need to reinvent who we are. We're one of the leading media and communications companies in the world. But I'm equally convinced we absolutely do need to reinvent the experiences our users have with the marquee properties that bring them to Yahoo! every day. We continually engage today's online users. Yahoo!'s experiences must always be fresh, highly personalized, enhanced with great video content and offer exceptional experiences on any screen. Our goal is to have the #1 properties in our core businesses in every way our users choose to interact with us, on the PC, through tablets, on their phones or whatever comes next.
The Q1 progress I've shared with you should make clear that we intend to move fast. In our industry, unbelievable innovation happens at a lightning fast pace. We must get back to moving at that pace, and Q1 was just the beginning. Yahoo! must be nimble, responsive and act with a real sense of urgency. We have to think and to move like a growth company. Yahoo! moving forward will be centered around delivering for our customers. I am determined that our leadership team and organization will make that happen.
With that, I'd like to turn the call over to you so we can answer any questions you have this afternoon.
[Operator Instructions] Our first question comes from Ross Sandler with RBC Capital Markets.
Ross Sandler - RBC Capital Markets, LLC, Research Division
Great. Scott, just 2 quick ones. Can you talk about some of the new strategies that Yahoo! could embark on in the new commerce division, I guess, different from what the company's been doing in the past? And then the second one is, the recent AOL patent agreement with Microsoft shed some light on the potential value of these assets broadly on the Internet. Clearly, Yahoo! has a lot of them there. Are there any other strategy in place that Yahoo! could do to monetize its vast IP?
The strategies around our new commerce business unit, first, I hesitate to call it new because we have a number of businesses that we've had for some time that we're consolidating and moving into that business unit. That said, we're going to start with the core properties of auto, travel, shopping and et cetera. And our goal is to use the data, the traffic, the advertisers and the next generation of experiences that we can build up those properties to more seamlessly connect what users are looking for with what advertisers are trying to sell to them. You will hear a lot more of the details on this from Sam and Molly in the next 90 days, in terms of what we plan to do. I'm very excited about this, though and I think we have a very unique way of getting after the opportunity here. And I would say just hold on a little bit, Ross, and we'll be able to fill you in on details on that.
Timothy R. Morse
Ross, this is Tim. On IP, obviously, it's very core to our business. There's been a lot of effort that's going into building a very rich IP portfolio. So #1, obviously, we want to defend our portfolio. Scott talked about that in his script. But we obviously recognize it very valuable where it makes sense. We're happy to license the over 1,000 U.S. patents we have here in a variety of different areas. And we'll just continue to look for opportunities to make sure that we're realizing all the value we can, but making sure again that they are core part of us ongoing because they're really key to being successful.
Our next question comes from Brian Pitz from UBS.
Brian J. Pitz - UBS Investment Bank, Research Division
Can you give us a sense for how the sales force is doing given some of the recent departures? I think last July, you attributed some of the softness in Display to gaps on account coverage. I just wanted to get an update there. And then, what's your level of confidence in terms of closing that RPS gap before the guarantee expires in March of 2013? I know both you and Microsoft are working hard to address the problem, but can you give us a sense for what's actually being done?
Timothy R. Morse
Sure. So first on sales force, we do continue to make progress. I'd give you a couple of stats. As I said -- this is Tim. As I said in my script, yield, especially in the guaranteed side of the business, was up very strong double digits versus prior year, so that was a very good indication, obviously one of the objectives for our sales force. Scott touched on that in terms of monetization in his script. Sell-through rate, frankly, was a little mixed, better in some properties, a little worse than we'd expected and others, so we need to keep working through that and do expect that to improve into second quarter. And then finally, another one of the big metrics that we talk about in terms of sales force effectiveness is the front page and the days sold on the front page. And that, in first quarter, is actually flat with fourth quarter, which is quite an accomplishment given the seasonalness of 4Q. So flat with 4Q and well above 2Q and 3Q of last year. Finally, I guess the best indication of sales force progress almost one year into this transformation is we do see, as I noted in my script, Display revenue regaining growth year-over-year in the second quarter. So feel good about that. The second question you had was on RPS gap. So we're working hard with Microsoft, working hard on our own initiatives and Microsoft certainly working hard on the platform for our marketplace RPS. And it didn't make as much progress, frankly, as we wanted to or envisioned for first quarter, and that is concerning. But we're covered for another year here of the RPS guarantee, and I still firmly believe we'll get there by the time that the RPS guarantee runs out. So it's an important thing for both of us, and they're certainly working hard and we're helping right along with them.
Hey, Brian, I would just add a couple of thoughts to the 2 questions you asked. First is Tim gave you some metrics that would indicate improvement and the execution of our sales force, particularly in the U.S. I agree with those numbers, I agree with those metrics. They obviously reflect progress, but we're not going to be and I'm not going to be satisfied until we're taking share in that Display market. And at the meeting, not all of our customers of course, but a very large number in the first 90 days. One of the things that I didn't mention in the script, but I am certain of, is that we just have to be better business partners. Easy to say, difficult to do. We need to understand their business, what they're trying to accomplish and how best to use all of our properties, all of the audience we have, all of our capabilities to give them the best return on their advertising spend. And we've got a long way, frankly, to go on that, to the point where we're viewed as a strategic partner and integral to their businesses. But we're not going to stop until we've gotten to that point, and we see the results of that as growing at or above the market rate. And on the RPS guarantee, Tim mentioned it. I just want to echo his final thought and comment which was, Search is a really important part of our business and obviously an important business for Microsoft. And we will invest and have been investing a lot of time to make sure that the relationship we have is strong and that we have really forward-looking ways of doing business together that make sense for both of these businesses. Early days of the discussion, early days of revisiting it, the relationship, but something we have to get right because, as I said, this is important to both of us.
Our next question comes from Mark Mahaney from Citi.
Mark S. Mahaney - Citigroup Inc, Research Division
Great. I just got one long-term strategy question. You talked about kind of recover some of your engagement market share. How do you think about the challenge as you try to do that and still you have success? But one of those missing goals for you seems still to be Mobile. Do you think about that as a missing area for you? How do you recover that engagement share, particularly in Mobile over the next 3 to 5 years?
Yes. So first thing I would say, as it relates to engagement of our consumers, our users, we are in the process now of redefining inside the organization what we mean by engagement. And we are going to measure this at a much finer level of detail than I think anything that we've done before. The kind of the top line metrics on this are interesting. They are big numbers, of course, but they don't actually measure engagement at the level we need to understand it and be able to predict based on actions we've taken what's going to happen to that relationship over time. And we need to understand it down at that fine level of detail. In addition to that, Mark, very, very consistent with your question, we need to get good, real fast in Mobile, and I would say we need to get good real fast in devices overall and that includes Mobile, of course. And we're not there today. And I think you should expect, let me see, if we have a #1 property, a #1 site through a browser, we just won't stop until we have a #1 position for that same content on mobile devices, really, any device that the user wants to come at us. So we have a really heightened focus on this and have some of our top people working on how we get after the new experience we need for mobile devices. So thank you for the question.
[Operator Instructions] Our next question comes from Spencer Wang from Credit Suisse.
Spencer Wang - Crédit Suisse AG, Research Division
Just 2 quick ones. Scott, I think in your remarks, you talked about R&D spending and perhaps deemphasizing some of the spending on platforms. So I was wondering if -- how you think about Right Media and the ad exchange initiative and how that fits into your plans for Display? And then secondly, for Tim, the pace of the buyback slowed a bit in the quarter. Any color you could provide there?
Timothy R. Morse
Spencer, thank you for the question. We've done a number of things in this last 3 months period of time to look at all of our platforms and to understand exactly where we are, what we're investing in, how many people are working on them, how competitive that platform is by comparison to others in the market, what features we need going forward that includes our core ad serving technology, but also includes RMX and other things. I would say we've made good progress there, but we haven't come to a conclusion on what the steps are that we need to employ moving forward, and it's premature, Spencer, to imagine we can give you that answer today. So that remains top of mind. It is a very important priority for us and we will be able to articulate for the entire ads staff what our position in going forward strategy is going to be across the business.
Timothy R. Morse
And Spencer, on the buyback, given a number of the initiatives that we're working on here, we actually did not have an open trading window for most of the first quarter, so that's why you'd have a lesser buyback here in 1Q.
Our next question comes from Anthony DiClemente with Barclays.
Anthony J. DiClemente - Barclays Capital, Research Division
Just a couple for Tim on the model, please. I noticed in the quarter that your earnings from equity interest were actually higher than your income from ops, and I just wondering if you could give us a little bit more granularity there. And then also wanted to know the contribution of Interclick on Display in 2012 and anything on the, clearly, progression of Interclick revenues that implicitly place into your Display guidance. And then finally for Scott, just wondering if you've given any more thought to paying out a dividend, any incremental color on use of cash will be great for us too.
Timothy R. Morse
Anthony, this is Tim. On earnings and equity interest, obviously, 2 pieces to that, the wide RP so the YJ earnings and RPs of Alibaba's earnings. You'll all recall that we actually report one quarter in arrears for both of those. So on the Alibaba side, big quarter, they've got operational momentum, very proud of it and happy with the terrific job that the management team there is doing. So they had a great quarter, far ahead of where they were fourth quarter the prior year. So again, we report fourth quarter in our first quarter earnings. It's a one-quarter lag, so reporting their fourth quarter of 2011 and they have a terrific operating momentum. On YJ, we saw some nice operating increases, but also if you recall, we had booked our share of an impairment of one of their investments first quarter last year. And the absence of that level of impairment this year, obviously, turns into more year-over-year growth. So you have both components, YJ that's doing well and Alibaba that has some really great operational momentum to it. On Interclick, I had talked briefly in my prepared comments that we will have revenue contributions in second quarter sequentially, contributing to the growth sequentially from Interclick. That will continue to ramp throughout the year. We'll have some investments to go along with it, but I still view, as I think I have said back on the January call, that 1Q, the first quarter that we have fully consolidated for Interclick would be the low point and it would rise dramatically in both revenue and operating income increments to us. So I'm not going to lay out the numbers. It doesn't make sense to give specific guidance for Interclick, but we can start to see that to ramp throughout the year. That's what our objective is.
And Anthony, regarding your question to potentially pay dividends, as you'd expect, we regularly look at all the possible uses of our capital. And to this point in time, share buybacks have been the preferred method to return that cash to shareholders. And I would say, we will continue to think about things that way and we don't really have anything further to announce than just what we've done historically.
Our next question comes from Doug Anmuth from JPMorgan.
Bo Nam - JP Morgan Chase & Co, Research Division
This is Bo Nam on behalf of Doug Anmuth. Just quick question on the Microsoft transition. Can you give us a quick update on the Search transition to Microsoft in terms of the major markets and how we should think about the shift for modeling purposes?
Timothy R. Morse
I don't think a lot has changed since the last time we updated. We’ll -- I think it's the U.K. and France that are being transitioned this quarter, the second quarter of 2012, and we'll do more of the EU markets, I believe, later on in the year and I think start some of the Asian markets, say, midyear or third quarter and move those forward into 2013. So nothing much changed at all in the schedules we've talked about previously.
Our next question comes from Ron Josey from ThinkEquity.
Ronald Josey - ThinkEquity LLC, Research Division
Two quick questions. First is on Search. I think, Scott, you mentioned some improvements this quarter came from changes that Yahoo! made on the search experience. Wondering if you can provide some more details there. And just on Display, if you can provide some info just on premium pricing. It came in lower -- if it came in lower again this quarter or what drove sort of a decline there.
Timothy R. Morse
Ron, this is Tim. Actually, I'll take these. So obviously, when we split Search into 2, the back end versus the front end and partnered with Microsoft on the back end, we kept the front end in a team here to be working on the Search results page, how it looks, how people interact with it, how it integrates with the rest of the network. And a lot of that work that, that team does has implications on RPS and it has implications on RPS in a number of different ways. But probably, the most direct way is through this click-through rate that both Scott and I referenced in our prepared remarks. And that is, how do you design that page such that more people will click on it, and that's exactly the kind of improvement we saw. We have more people being attracted to those page search links and more people clicking through them. I don't want to shortchange Microsoft obviously. Their work on making sure that there's good coverage there and a good model for PPC, price-per-click, is important as well and the relevancy of their algo, et cetera, all very important. So we really are working very much together, but I do want to make sure we give credit to the team here that has done a very nice job in starting to deliver on their charter, which is to improve the front-end experience which you'd expect would translate into things like better click-through. Then on premium pricing, I did talk about this in my script and in one of these Q&As. And the answer is, the yield was up strongly, double digit, in fact, on premium. So that's one of the places I've cited as actually some positive news. Supply and sell-through were down a little bit, but we had at least a partial offset in better yield, better CPMs, and was on the premium or guaranteed side. So a nice piece of news there.
Our next question comes from Ben Schachter from Macquarie.
Benjamin A. Schachter - Macquarie Research
A couple of things on acquisitions, maybe one on Search. Scott, you mentioned that you don't need to reinvent who we are. Does that mean we should not expect meaningful investments in noncore areas or major acquisitions? And then assuming that you do monetize part of Alibaba, how do you decide what percentage of that cash is going to go back to shareholders versus what's made it for the business? And then quickly on the Search share, you continue to lose share as measured by comScore. I'm just wondering regardless of RPS, could you talk about how you're thinking about where Search share might be a year from now or 3 years from now?
Ben, thanks for the question. On the first part, we are going to be very focused on defining in each of the consumer businesses what it means to win, so in media and connections and in commerce. And you can rest assure that we won't use capital through M&A, to buy things that we haven't articulated are absolutely necessary to win in those businesses. So that process is underway, but we are going to be disciplined, very deliberate. And before we spend any shareholder money that way, we will know what the outcome of any M&A would be and we'll be signed up for that outcome to make sure we can deliver on it. But I want to make certain, and I'd say again as I did in my prepared remarks, in the very near term, this is all about the core first, having our best and brightest people focused on their core business and get it to the place that it needs to be to give us the flexibility, so then it does for the future. As it relates to your second question on if our transaction with Alibaba gets done, there's really nothing more to share on that today. What I said in my remarks is all that we can actually say at this point in time. But the way you should think about this is, a really high priority -- yes, a transaction would have happened. A really high priority for us would be to return capital to shareholders and that would just be the top of the list of what we would think of as the priority if a transaction would have get done.
Timothy R. Morse
And then, Ben, on Search share, this is Tim. Obviously, really, what we're focused on is revenue growth, not share. I mean, what we want to do is focus on things that we can control, and that is generating more queries to our properties, generating better click-through, other ways for us independently to improve RPS. We need to work with Microsoft and the Search Alliance to make sure that the platform or marketplace RPS also helps, but that's really our focus. It's very tough to estimate what other people are going to do. We need to focus on what we can control. And if you think back to the motto we put out there on Search, it was like 3% to 6% growth we thought after taking into account the Microsoft rev share on an annual basis. And you look at first quarter, and that's only one data point, but we did exceed that range slightly, feel good about that, and we'll continue to drive that going forward. So we just got to focus on what we can control.
Our next question comes from Carlos Kirjner from Bernstein.
Carlos Kirjner - Sanford C. Bernstein & Co., LLC., Research Division
Can you please help us understand in a more complete way the opportunity for using data to customize end-user experience? Specifically, are the data that you have on consumers and this data can be easily used by advertisers for targeting purposes? And related to that, can you talk about the effort to stimulate user log-ins so that you can associate page views with specific demographics?
Okay. As it relates to the data question, there's 3 main places where we are really going to focus on leveraging our data assets to its fullest extent. The first is on what we're calling personalization. What I -- from the minute I walked in the door, Carlos said, what I really want is uniquely relevant content surfaced to me immediately. And of course, you're not here to enjoy all of my remarks about I'll never read an article about the New York Yankees. I only care about the Boston Red Sox. So when I visit Yahoo! Sports today, the only thing I actually want to see is Bruins, Celtics and Red Sox. And that's uniquely relevant to me, personalized for me and we ought to be able to do much, much more of that than we've done to this point in time. The second use of the data that we have is targeting for our advertisers, helping them understand to a much greater degree who are our entire customer base is, what the segments that live in that base are, what properties they frequent, what they do when they frequent those properties, what's the context of that experience and use that data in conjunction with them to get the right advertisers, right advertising in the right context in front of our users. We're going to be much better at doing that as we look forward to. And then finally, Carlos, on the back end, to provide data and insight and analytics almost real time to allow the advertisers to understand, I spent money with you guys, I did something, what were the results of that. And to allow them to get that kind of immediate response of is my most recent spend productive for my business. Is it generating the result that I expected? If it is, to do more of it, if it isn't, to change the segment, to change the context, to really get after spend that has an ROI. So that's how we're looking at this, Carlos.
Our next question comes from Lloyd Walmsley, Deutsche Bank.
Lloyd Walmsley - Deutsche Bank AG, Research Division
You touched on what you're doing on the front end in Search to improve CTRs. Are there things that you're doing or you think you can do to actually drive base query volumes higher? And then kind of following up on the comments on RPS, higher CTR in a vacuum should drive RPS higher, but you mentioned seeing no improvement in RPS. When you say that, is that because the CPC is going down, offsetting the improvement in CTR or is that just in terms of what Microsoft is doing to monetize on their end, is still below the guarantees Search that you're not seeing the benefits of that improvement?
Timothy R. Morse
So Lloyd, what I said was, volumes were roughly flat year-over-year in the first quarter, and therefore, if you have revenue growth of 8%, it was all RPS. It's just that the RPS was, by and large, driven by click-through rates. There was a little bit of PPC growth in there. Coverage I think was just about flat. Click-through was up in the high single digits and there was a little bit of PPC growth. So RPS was the bulk of it is what I had said if you go back to the script. And then reverse order, the Search query question that you had, I think we are doing a decent job of that. Given some of the secular declines that we're all aware of in homepage and in Mail, that obviously eats into your ability to grow the volume of searches. But despite that, we actually did grow mildly in the Americas year-over-year in the first quarter. So I think, again, how we set up those pages, the experience that users have, the freshness of the algo results that Microsoft generates all are part of that, but we do influence that and we continue to endeavor to influence that and to drive better experiences for our users. So that's very much part of what the charter of is of that front-end team that we have.
Your next question comes from James Lee, CLSA.
James Lee - Credit Agricole Securities (USA) Inc., Research Division
Scott, can you just help us maybe understand how do you plan to get the paid click capability to analyze data better? Is it through organically or you're looking for outside help to get that process faster?
Yes. James, everything that we're doing with data right now is inside of this business. It's all the activities we have underway, you called it organically. I think that's the right way to describe it. That said, that said, if there is a company or a group of people that have unique ways, unique science, unique technology that allow us to really leverage up of the insights we can get them all this data and help our advertisers or help the experience, that would certainly be something that we would be interested in exploring and understanding and may get after at some point in the future. But we don't have anything to announce today on that. And as I said, the vast majority of everything we're doing right now is organically inside of the business to get after this with a real sense of urgency.
So we'll leave it at that. Operator, I want to thank everyone for joining us, and I appreciate all your time this afternoon. Thanks, Mart. After 7 great years in IR, she's moving onto a great new role here. Congratulations. You've done a wonderful job.
Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for participating. You may all now disconnect. Have a great day.
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