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Yahoo! (NASDAQ:YHOO)

Q2 2012 Earnings Call

July 17, 2012 5:00 pm ET

Executives

Joon Huh

Timothy R. Morse - Chief Financial Officer and Executive Vice President

Analysts

Mark S. Mahaney - Citigroup Inc, Research Division

Anthony J. DiClemente - Barclays Capital, Research Division

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Benjamin A. Schachter - Macquarie Research

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Herman Leung - Susquehanna Financial Group, LLLP, Research Division

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

So Young Lee - SunTrust Robinson Humphrey, Inc., Research Division

Martin Pyykkonen - Wedge Partners Corporation

A. Justin Post - BofA Merrill Lynch, Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Scott H. Kessler - S&P Equity Research

Kenneth Sena - Evercore Partners Inc., Research Division

Laura A. Martin - Needham & Company, LLC, Research Division

Daniel Salmon - BMO Capital Markets U.S.

Brian Nowak - Nomura Securities Co. Ltd., Research Division

Ronald V. Josey - ThinkEquity LLC, Research Division

Operator

Good afternoon, ladies and gentlemen, and welcome to the Yahoo! Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Joon Huh. Mr. Huh, you may begin.

Joon Huh

Thank you. Good afternoon, and welcome to Yahoo!'s second quarter 2012 earnings conference call. On the call today will be Tim Morse, Chief Financial Officer. Before we begin, I'd like to remind you that today's call may contain forward-looking statements concerning matters such as our expected financial and operational performance and 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 agreement with Alibaba; the effects of our restructuring; and our strategic, operational and product plans. Actual results may differ materially from the results predicted in our statements, and reported results should not be considered indicative of future performance. Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are described in our Form 10-Q filed with the SEC, May 9, 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 on this call is as of today, July 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; revenues excluding TAC, or revenue ex-TAC; ongoing operating performance; and operating margin ex-TAC. Reconciliations of those non-GAAP measures on 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 15 minutes, then we'll have a brief Q&A session. And now I'd like to turn the call over to Tim.

Timothy R. Morse

Thanks, Joon. Good afternoon, and thank you all for joining us today. Obviously, this is a very exciting and dynamic day to have our earnings call given yesterday's announcement of the hiring of Marissa Mayer as CEO. Since this is Marissa's first day on the job, she will not be joining us on the call today. However, she is very mindful of the importance of the investor community, and I'm sure that you'll be hearing from her soon. Suffice to say that everyone at Yahoo! is incredibly energized today and looking forward to working with our new CEO.

While I recognize you all have a lot of questions for her about Yahoo!'s future plans, I obviously won't be able to address those questions for you today on the earnings call. I will spend some time providing an overview of our results and progress in the quarter and also give you a brief update on the status of our planned sale of part of our stake in Alibaba Group, after which we'll have a brief Q&A session. I'm happy to answer what questions I can, but I ask for your patience on those questions we can't address today.

So let's start with the second quarter financial results. In 2Q, Yahoo!'s revenue ex-TAC grew slightly year-over-year with both Search and Display up. 2Q operating income on an ongoing basis was well ahead of the guidance midpoint provided on last quarter's call.

Back in April, we initiated a restructuring plan intended to consolidate technology platforms, transition dozens of properties and free up investment dollars for growth opportunities. As a result, we guided you to think of our expenses and operating income in 3 distinct parts: ongoing operating income, transition-related expenses and restructuring charges. The sum of those parts, of course, is equal to our reported numbers in total. To help visualize this framework, please access our Investor Relations site and see Page 6 of our earnings presentation entitled, 2Q Operating Income Detail.

With that overview format to guide us, our more detailed second quarter financial commentary is as follows: Revenue ex-TAC of $1,081,000,000 was fractionally under the guidance midpoint and grew about 0.5% year-over-year. On our April earnings call, we discussed the potential for a number of uncertainties in 2Q related to our reduction in force and business unit reorganization. As it turns out, there are many other dynamics that also played out over these past 3 months. And in that context, we're pleased to be so close to the midpoint.

Turning to ongoing operating income, excluding unusual costs such as restructuring charges and transition-related expense, in the second quarter, we generated $228 million or $28 million above the guidance midpoint. On an apples-to-apples basis with last year, ongoing operating income grew 19%.

With regard to margin rates, we guided a midpoint of roughly 18.5% on an ongoing basis and exceeded that expectation by a full 2.5 points, landing at 21%. While a low 20% margin rate is representative of our longer-term aspirations, at this time it's a bit ahead of schedule primarily as a result of lower costs related to the uncertainty we've been experiencing.

Rounding out the income statement, earnings per diluted share were $0.18 for second quarter, up slightly from the prior year. However, that reported result included restructuring and Alibaba deal-related charges of $0.08 that were specifically unguided on our last earnings call. Excluding those charges, EPS was $0.27 this quarter or 47% above last year primarily as a result of growth in our equity investments and share repurchases.

Finally, within the quarter, we made a substantial down payment on returning the expected proceeds from our Alibaba sale. Share repurchases for 2Q were $456 million or roughly 30 million shares at an average price of $15.34 per share. This brings the total capital return to shareholders via share repurchases since 2009 to over $4 billion at an average price of $14.81 per share.

Let's move now to a deeper discussion of second quarter ex-TAC revenue results. By revenue category, year-over-year Display grew 1%, reversing declines in the past 2 consecutive quarters, while Search grew 4% and other revenue declined 7% on the final material step-down in broadband fee amortization that we've previously noted.

Within Display, this quarter, our Americas region crossed into positive growth territory, and APAC grew double digits. EMEA, on the other hand, declined 7% [ph] as demand continued to be weak as a result of the macroeconomic climate.

As I did last quarter, let me focus on our Americas turnaround with more detail. First, media property page views grew mid-single digits. Second, total graphical supply, including Mail, declined in the high single digits, a slight improvement in year-over-year trends compared to prior quarters. Third, sell-through rates of guaranteed or premium ads improved substantially year-over-year and quarter-over-quarter, a good indication that our sales force continues to become more effective. Pricing was a little softer than expected, but yield did rise slightly year-over-year as premium ad mix improved. Finally, our interclick acquisition continued to ramp with strong, double-digit year-over-year growth and a positive quarter-over-quarter contribution to our top line, albeit at a slower pace than planned.

Moving now to Search, ex-TAC revenue grew by 4% year-over-year driven by 7% improvement on our Owned and Operated sites. O&O search query volume registered slight growth on a global basis, and Yahoo!-generated RPS gains represented the remainder of the improvement versus last year. Unfortunately, similar to last quarter, we're unable to report progress by Microsoft on closing the gap in marketplace RPS. The Search Alliance marketplace RPS continues to be below our goal and, therefore, we are still benefiting from the RPS guarantee from Microsoft. Both companies continue to work hard to materially improve the performance, and we plan to provide an update on our joint efforts at our next earnings call.

Panning back out, let's spend a few moments on how transition-related expenses and restructuring charges impacted our total reported operating income. Here, I once again refer you to Page 6 of the earnings presentation on our IR site. To the right of our ongoing operating income column, you'll see transition expenses of $37 million and restructuring charges of $129 million. You'll also see an additional column labeled Deal-Related. This refers to the initial expense incurred in preparation for the Alibaba sale transaction. We'll continue to break out transaction fees going forward as they're nonoperational in nature. The majority of these fees will be recognized when the initial sale is closed.

As I explained back in April, we're providing this insight to maximize transparency and thereby facilitate your ability to track the operational performance of the company. We fully realize that the multiple views also create the potential for confusion, however. To help achieve clarity, the following is a step-by-step walk from ongoing to reported operating income. Beginning with $228 million ongoing operating income, we deduct $37 million for transition-related expense. That brings operating income down to roughly $190 million. Back in April, we did provide a guidance midpoint of $155 million on this basis, and it's also the same basis as the current $170 million consensus in Wall Street models. Therefore, we exceeded the midpoint of our own guidance by $35 million and consensus by $20 million. From that consensus basis, we deduct the 2 unguided cost elements of restructuring for $129 million and deal-related costs for $7 million to arrive at the final reported GAAP operating income of $55 million.

With respect to the $37 million transition cost bucket, we landed $8 million below the midpoint we communicated back in April. As a reminder, these are the costs that we've refinanced [ph] for property rationalization, data center consolidation, improved cloud infrastructure utilization and the elimination or right-sourcing of support functions. Without those efforts, we wouldn't be able to operate on the lower cost basis we're targeting in our ongoing model. At the end of the transition period, therefore, those costs will obviously go away completely.

For the sake of completeness, let me provide a bit more color on the restructuring charge this quarter. It breaks down into the following components: $88 million for severance, $23 million for facilities exits and $18 million for asset write-downs. As we continue to execute the reduction in force and operational transformation over the next year, we will incur additional restructuring charges. Given the inherent variability of these kinds of charges, however, we'll continue to report and explain actual charges but not provide explicit guidance on them.

That's my second quarter overview for today. Typically, we'd also provide guidance for the upcoming quarter. In light of the announcement we made yesterday, however, we believe it's best to give our new CEO time to get acclimated to Yahoo! before providing any future guidance.

With that, let me share some highlights of the recent progress we've made on content relationships and technology solutions. Starting with content, this quarter, we continued to develop and expand key relationships with premier media companies, including ABC News, CNBC, Eurosport, Spotify and Clear Channel.

Briefly on each. In news, our ABC News deal combines their world-class television content with Yahoo!'s massive online audience and targeting capabilities. We're seeing very promising results from the partnership, particularly in online news video viewership. In June, Yahoo! News and ABC News accounted for nearly 50% of all PC-based online news videos viewed in the United States, according to comScore.

In finance, the CNBC agreement expands the ability of Yahoo! Finance to create and deliver premium finance content and strengthens our position as the most viewed and utilized finance site in the world.

In sports, we extended our agreement with Eurosport to allow Yahoo! to continue to bring exclusive, high-quality sports content online in key international markets.

In music and entertainment, our recently announced deals with Spotify and Clear Channel provide us with new ways to build audiences and distribute premium music and entertainment content and experiences.

In addition to these new and enhanced content partnerships, we've also made progress on several key technology innovations, including Social Bar, Search Axis and Genome. Social Bar was launched in September to enable users on Yahoo! and Facebook to share content with their friends and has since become one of the top overall applications on the Facebook platform, steadily increasing to approximately 90 million installations today.

Search Axis, which launched in May, serves as a mobile browser or a desktop browser plug-in, providing instant answers using an intuitive interface that expands the display thumbnail previews as a user types in a search.

We're not just innovating for consumers but also for our advertisers. We recently launched Genome for marketers. Genome combines an expansive audience data set, leading data analytics and a premier media footprint with Yahoo!'s unique technology at scale.

We feel good about all these signs of progress. And I'd also like to highlight 2 important upcoming events for Yahoo! that are right around the corner: the Summer Olympics and the 2012 elections. In Olympics, we expect Yahoo! will once again be the most viewed site in the category and take a leading position for online coverage with original video programs, breaking news and expert analysis. And the upcoming U.S. elections will allow us another opportunity to demonstrate our leadership in online coverage and audience engagement for major events with help from some outstanding new talent and leadership in our Washington bureau.

Before we proceed to Q&A, let me also provide a quick update on the progress of our Alibaba sale transaction. In May, we announced a transaction in which we intend to sell up to half of our current ownership in Alibaba Group at an attractive valuation. Alibaba management reports that the financing efforts for this transaction are well on track and the closing date should be well within the 6 months we've previously communicated.

Thank you for your time today. And as a reminder, I appreciate your understanding that my answers to your questions may be somewhat limited on this call, but I'll be happy to address all I can. Operator, let's begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mark Mahaney representing Citi.

Mark S. Mahaney - Citigroup Inc, Research Division

Tim, could you talk about what macro pressures you're seeing in the U.S. market, if any? And any other color at what would be causing that Display pricing weakness?

Timothy R. Morse

Yes, thanks, Mark. The -- actually, the macro weakness we're seeing is primarily in Europe. What we saw in the U.S. was, as you said, pricing was a little soft, volume actually was a little better, interclick was a little bit below expectations. So those were the major factors that were involved in Display this quarter. I don't know that I'd say we saw anything overwhelming in terms of demand in the U.S. I mean, obviously, the Fed's comments today were a little bit cool on the economy, and that probably colors things perhaps going into the second half. But with pricing specifically, we've had a few strong quarters of pricing in a row, so it wasn't -- again, it wasn't bad, but it was a little bit less than we expected, a little bit softer. I wouldn't draw any conclusions necessarily just yet, though.

Operator

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

Anthony J. DiClemente - Barclays Capital, Research Division

I have 2. I guess you repurchased just about $450 million in the quarter, can you talk about the pace of that in the current quarter and the next quarter? Can you give us anything on how the pace of repurchases should go through the end of the year?

Timothy R. Morse

Anthony, no, I'm sorry, I won't do that. It's just -- it's not good policy to kind of tip our hand on what our plans are. We want to buy back as effectively as possible, get as much value for our shareholders as possible. I reiterate the board's commitment to returning the proceeds of the Alibaba transaction back to shareholders. We're very pleased to have made a nice down payment on that. Still quite a bit to go and we still have to decide as a board and management team the best form to return that to shareholders. But we're very pleased with the buyback program in second quarter. Thanks, again.

Operator

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

Douglas Anmuth - JP Morgan Chase & Co, Research Division

I had couple of things, Tim. First, if you could just talk a little bit more about the softness that you saw in other revenues. I think it was down 7%. I know you mentioned the broadband deals, but can you just give us some more clarity there on the step-downs and anything else we should be aware of to think about over the next few quarters there? And then secondly, your comments on Search suggest that the shortfalls you're seeing in RPS are purely on the Affiliate side of the business and perhaps not really on the O&O side. Is that accurate? And what's the outlook here for closing that gap?

Timothy R. Morse

Sure. Thanks, Doug. So on the first, other revenue, we had talked -- if you recall last year, we talked about this definition of our headwinds that included these broadband step-downs, primarily AT&T. A little bit of, I think, Rogers and BT in there also, but AT&T was the biggest number. And that, from first quarter to second quarter, had its final step-down. And if you were to add back AT&T and these other couple of other small things to the broad -- to the other number this year -- this quarter, I should say, of $222 million you get back to flat year-over-year, which is, we think, on an ongoing basis kind of more representative of where we're going there. So it really is the same thing we've been talking about for over a year, and I'm happy to say it's taken the last sequential step-down. So we'll have to live through it this year for the year-over-year comparisons, but we're getting out of the woods there. Then on Search, we know it was up 7%. So that was pretty nice. It was gratifying. I think the teams are doing some great job -- a great job there. The Affiliates were down a couple of percent therefore if you're doing the math. And the biggest factor there is really, again, one of these headwinds we've talked about before, which is the Yahoo! Japan search fee. So the fee rate actually. It's not expressed in dollars but in fee rate. There was one more step-down that happened to -- down to this year. So that step-down has taken its final step. If you would have excluded that, then actually our Affiliates would have been up kind of low -- mid, actually, mid-single digits. So things, again, seem to be steadying out. We're getting a little bit of growth. Thanks for the question.

Operator

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

Benjamin A. Schachter - Macquarie Research

Tim, I actually have a few questions for you. First one, on the leading metric that you provided, the search page views. They're declining and then it's accelerating. And I was wondering if you could talk about what's happening there, what do you can do to stop that. And then also, if you look at the Search TAC as a percentage of Search revenue and the Display TAC as a percentage of Display revenue, you'll see that they're trending in an opposite direction where Display was going up fairly meaningfully and Search was going down. Could you kind of explain that? And then finally, on the Microsoft RPS guarantee, can you remind us just how the contract worked? What has to happen there to allow you to potentially entertain working with another partner if Microsoft cannot get the RPS up?

Timothy R. Morse

Ben, thanks. First of all, on Search PVs [ph], the actual -- each query doesn't necessarily trigger a PV [ph]. So in keeping with our answers not links strategy, if you get better at giving results on that search [ph] page, then PVs [ph] will be much farther down than queries. As I noted in my script, we're actually up slightly in queries, and that's truly what the financials are kind of hooked off of. So that is an exaggerated number there, not necessarily representative of either user experience or where our financials are hooked off of. On that page also, just to get to this, the U.S. core search number, that -- down 17%, first of all that's comScore number, but it also includes the contextual searches and there's a huge problem with the comp against last year with the bin Laden death. I think it was in May of last year. Your second question was on Display. And the TAC is really interclick. So the interclick acquisition, because of the way the accounting works on that, drives up our Display TAC. And then the Search is really coming down as E-M-E-A, our EMEA region, transitions markets from Panama, our monetization system to adCenter, Microsoft's monetization system. And then finally, on the RPS guarantee, so we are covered under this guarantee until the end of first quarter next year. So we still have 9 months or so to go. Again, we'll, as we get closer to that time, we'll see where our GAAP looks to be. We'll see what, well, Microsoft are going to be doing about it. And we'll make sure that we're transparent on that. The -- in terms of ultimately the outs for the deals in the agreement that we've made public for a while now, I think it -- well, I know, not I think. It is after 5 years, there was an RPS threshold versus the market leader that we must be at. And if we are not at that, then there is an out.

Operator

Your next question comes from the line of Heath Terry representing Goldman Sachs.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

[Indiscernible] EBay or it's largely around eBay.

Operator

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

Herman Leung - Susquehanna Financial Group, LLLP, Research Division

Two quick questions really. I think [indiscernible] on this call, I think you mentioned the Alibaba financing is pretty well on track, well within 6 months. Is there any more color, I guess, you can give us in terms of how far along we are? It sounds like it could have potential to close even earlier than expected based on your kind of brief comments there. And secondly, on the RPS gain, I guess the -- if you can kind of give us a sense in terms of how much that gap has closed? I guess this quarter relative to last quarter, if there's any type of improvement that we can kind of think about that, that would be great.

Timothy R. Morse

Sure. Thanks, Herman. So first, on Alibaba, no. Really, I don't have a whole lot to add. To be honest, again, the process is going very well. We're on track. They're on track. That's what they report. And we do believe, based on their reports, that it will close much earlier than the 6 months. But still, it's a tough environment out there. We're very glad that it's going well. We're happy with the incentive structure that's out there to ensure that we get the best price. So just positive, positive report there. But I don't really have any more detail to provide at this point. And then on the RPS performance quarter-over-quarter, nothing material. I mean, all year, I would say, from where we were in fourth quarter to first and then first to second quarter, not an encouraging amount of progress to be reported, unfortunately. Continue to work hard, and there are a lot of things that are going very well. In Search, as I said, growth of 7% on an O&O basis with some query growth. That is encouraging. And again, I'll give credit to our internal team here who works on the other things that impact RPS outside of what's going on in the marketplace that is obviously run by Microsoft. We do a lot of things in terms of the page layout and the design in terms of getting people to click through. And our sales force does a great job in helping customers maintain or optimize their campaign. So a lot of good work going on, but we need to get that marketplace RPS. That really should be a big benefit to us from the combined volume of both us and Microsoft. We need to get that where it needs to be. So we'll continue to work that very diligently. Thanks, Herman.

Operator

Your next question comes from the line of Jason Helfstein representing Oppenheimer.

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

On the engagement metrics, we saw media properties minutes decline 10%. And can you just talk about it? What's behind that? And then -- because it does look like monetization improved. Is that foreshadowing perhaps a weaker Display growth if you cannot get that engagement back up?

Timothy R. Morse

Sure, Jason. No. As I described in my script, we have a number of programs in place, deepening relationships and strategic partnerships with media companies, with Facebook, for instance, that are all about getting engagement. And we have great product rollout plans. They continue to do that. A lot of our technology I talked about as well with Social Bar, all aiming on improving engagement. In second quarter, it was a really tough comp, to be frank. We had record levels in 2Q, the bin Laden death, as I said, was in May. The royal wedding was in April. So there were a lot of tough comps in there. So we're in mid-single digits, not really where we want to be. But in context, not overly bad. We do not think it's a harbinger of things to come because again, we're all geared on improving that engagement via both deep, rich experiences that are content based and technology based. Thanks, Jason.

Operator

Your next question comes from the line of So Young Lee representing SunTrust.

So Young Lee - SunTrust Robinson Humphrey, Inc., Research Division

I know your mobile strategy could be evolving with Marissa's arrival. But can you discuss what your current mobile strategy is and how you're addressing this opportunity and what kind of traction you're seeing here?

Timothy R. Morse

Sure, I'm happy to. Yes, so mobile, actually, you've got a new product out there that is geared toward mobile, Search Axis. I talked about that in the script. It was launched in May. It was particularly popular in the iPad. I think it's got 4.5 stars. It's driving up queries. That's terrific. We continue to have great mobile reach. Our mobile revenue also continues to leap up, now off a small base, but I think it was up something like 50% this quarter. And finally, I would say that we just promoted 2 fantastic leaders in the company to the post of leading our mobile strategy and efforts there, Mike Curtis [ph] and Kevin Durro [ph]. They've been with us for a little bit now. They're terrific executives, and we're very excited about having them be the leaders of this initiative. And again, our product strategy here is to have a seamless experience across all screens and premium experiences across all screens. So there are a lot of pieces to it, but we very much recognize that we need to bring all those pieces, all those threads together in a very coherent and impactful strategy. So that is absolutely a big priority of ours. Thanks for the question.

Operator

Your next question comes from the line of Martin Pyykkonen representing Wedge Partners.

Martin Pyykkonen - Wedge Partners Corporation

Tim, 2 questions on Alibaba. One, I don't know if you can -- how you can answer this directly, but I'm not asking for prediction of the interest income, equity income level in terms of Alibaba. But given the time frame you've laid out, it's on track assuming nothing earlier. As you look into 2013, can you provide any kind of summary view as to how much equity income would peel off as you go through the year as a result of that on Alibaba? And then secondly, I know you've laid out in May pretty clearly that the bulk of the liquidation would be used for buyback. You've obviously been buying back. Is that still -- should we still assume that the bulk of that would be buyback? Or is there any thought to funneling some of that towards any organic or M&A investment without putting any kind of levels or targets on that, obviously, just in terms of approach.

Timothy R. Morse

Sure, Martin. No problem. So on the equity income impact, I -- just qualitatively, I would think about it this way. Our 30-point stake goes down to 20. So the numbers would be cut in half. Of course, a bunch of the shares that we sell back are going to be retired. So then, we'll accrete up to probably 22% or 23%, somewhere in that area. So we'll gain a little bit back that way. And then, of course, you'll have the growth in the Alibaba underlying results, the operating results. That'll help offset that, too. So where all that nets out, I don't know. But as I said earlier, most of our EPS growth here was driven by our equity investments. And within that number, the majority of it was Alibaba. So it's really on a nice trend. They're doing a great job of not only growing their markets, growing their revenue but also growing their earnings. Secondly, on the buyback, we haven't decided on a form yet of the buyback, but I think, again, the Board is committed to returning all -- or substantially all of those proceeds to shareholders with a form to be determined. In terms of using it for organic purposes, we've got a good cash balance. Actually, currently, we have debt capacity. We have some opportunities to do what I think we need to do organically. I don't see where we necessarily need to tap into that $4-plus billion of proceeds to do anything organically. We do have our own flexibility there. Thanks, Martin.

Operator

Your next question comes from the line of Justin Post representing Bank of America Merrill Lynch.

A. Justin Post - BofA Merrill Lynch, Research Division

Tim, we get that you're not guiding 3Q. Could -- is there any unusual or items we should think about in 3Q that might drive results, such as the Olympics or any other comps or items that we should just be aware of as we're modeling 3Q?

Timothy R. Morse

That's a great question. First, again, I appreciate everyone understanding that all I'm trying to do was help -- Marissa was named in the last 24 hours, needs time to just get in, get acclimated, review the business. We obviously have a very clear operating plan, a very clear financial plan, but we haven't discussed guidance with her yet. We've been pretty much heads down preparing for the call. I would say in terms of 3Q, I can tell you a few things. Again, the Fed comments today were a little bit cool, and that gives me a little bit of pause. Currencies are not with us. I can see at this point about $7 million quarter-over-quarter of adverse impact from currencies. But on the upside, interclick should still continue to move forward. And we do have the Olympics. The Olympics, we feel good about. I mean, that's not only an engagement driver, but also it has real revenue attached to it. We have some great big-name partners. And then the elections. I also mentioned that in the script, the elections, that the spending on elections obviously starts early here in the third quarter and will go through November, obviously. And then the -- I guess the only other thing I'd mention is seasonally, it's kind of a flattish quarter for us if you look back over the last couple of years. So those are the general dynamics I see out there. We'll have to see how things go forward. And again, I appreciate everyone's patience that it's just not a time for us to guide. Thanks for the question, again, Justin.

Operator

Your next question comes from the line of Peter Stabler representing Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

I had 2 quick ones. Getting back to mobile, can we assume that the new initiatives with ABC, CNBC, Eurosport, Clear Channel, et cetera, all include mobile elements just out of the gate? And then secondly, wondering if you could tell us whether we will be hearing from Marissa before next earnings call.

Timothy R. Morse

Sure, Peter. As far as those agreements, it's a little bit of a mixed bag. For the most part, these are, right now, PC-based experiences, but we're obviously working to make all of our content kind of seamless across all the screens, as I said earlier. So that's -- we very, very much believe that, that's where the future is going. We want to work with all of our partners in that direction. So I think you can expect that to be a priority. But right out of the gate, I think you'll feel it much more on PC as we transition to this more mobile-first development philosophy. And then on Marissa, I honestly just don't know. We will see. She and I have not talked about that yet. But again, she's very mindful that this is an important part of what we do. So we'll have to get back to you on that. Thanks, again, Peter.

Operator

Your next question comes from the line of Scott Kessler representing S&P Capital IQ.

Scott H. Kessler - S&P Equity Research

Tim, you've addressed over the last number of quarters Yahoo! Japan and efforts to monetize that stake. I don't believe we heard any further details on your efforts or progress along those lines. So perhaps you could refresh our recollection as to where we stand at this point and whether the company is still trying to come up with a way to unlock value from that current investment.

Timothy R. Morse

Sure, Scott. There really is no update. The last official update, I believe, was we had a valuation gap and it was too tough to bridge. We do remain interested in finding a way to both work better with Yahoo! Japan and potentially find growth opportunities together. They've got a great new management team there that's very, very geared toward growth, and there are a number of different ways that we can participate together in growth. And if there's an opportunity also to unlock more value there through some sort of transaction, we're interested there, too. But again, all the elements have to work. We want to make sure we do a smart deal that's right for our shareholders. And at this point, I really don't have an update to provide. Thanks, though.

Operator

Your next question comes from the line of Ken Sena representing Evercore Partners.

Kenneth Sena - Evercore Partners Inc., Research Division

Tim, you mentioned the release of Genome and the use of better audience targeting for marketers. But can you provide us more of a sense of the basic exchange platform and how much there is really first-party versus third-party inventory at this point?

Timothy R. Morse

Sure. So the -- our -- I assume you're talking about our RMX platform. I don't have the specifics off the top of my head on exactly how much of the, I mean, of the volume is ours. It is the majority, but I do not know if it's the -- a really large majority or just a majority. I think the last I saw it was in the upper single digits, maybe low double digits of volume that we're generating there. And again, I know that it's a majority of ours. I just don't know the number. But Ken, we can have someone follow up with you on that number. Thanks for the question.

Operator

Your next question comes from the line of Andre Sequen [ph] Representing RBC Capital Markets.

Unknown Analyst

I actually have 2 questions that you may not be able to comment on, but I'm going to go ahead and take a shot here. I was wondering if you could give us any color on how the expanded arrangement with Facebook is going to work, whether it is going to be use of their user data or in order to better target advertising or something along those lines. And then while you obviously can't comment on her plans, I was wondering if you can give us any insight around the choice of Ms. Mayer. It seems that Scott was a technical- and product-focused person, and I might put Marissa in that category as well. After Ross was more media leaning. Is there a particular direction you're looking to drive the company with her selection? Or will that remain to be seen?

Timothy R. Morse

Sure, Andre. Let me take the second one first. Listen, it does remain to be seen. I don't have a whole lot of color. I mean, obviously, Marissa is a high-caliber, well-respected leader. She knows the industry well. She does have strong tech and engineering and product expertise, as you noted. I mean, her resume really speaks for itself. And we are very happy to have such a top-notch CEO in place, excited to have her join the team. And we're just going to have to take a little bit of time to work through exactly what that means in terms of the direction. But I think it's safe to say we need to be really good at certain technologies and we need to be great at content. And both of those are imperative to our success. So it's finding the right mix and balance and spending our money in a way that most effectively drives returns. So our new CEO, Marissa, brings strong tech background, but we also have exceptional and deepening media expertise here as well. So we got to combine them and it's a powerful combination when you get it right. In terms of Facebook, what it is, is it's going to be a closer collaboration between the companies, and it's going to extend and expand our distribution arrangements, settles all of the outstanding claims between the companies. And we feel good to be on, again, a steady footing there. It's a big result. If you look at Social Bar that we're doing with Facebook, I said there are 90 million installations so far, that's been very successful. It's a great way to turn these engagement trends in the right direction. And we expect that this relationship, a deeper relationship, is going to be good for both companies. Thanks for the question, Andre [ph], or the questions.

Operator

Your next question comes from the line of Laura Martin representing Needham.

Laura A. Martin - Needham & Company, LLC, Research Division

Tim, so I wanted to go back to your -- early in your prepared remarks, you were talking about margins. You said that your margin guidance had been 18.5%. You'd over-delivered by about 2.5 percentage points to hit 21%. And that while you're long-term estimates was 20%, you've gotten there too early. These margins were too early. So if you could remind us that -- could you remind us kind of what were you expecting? And could you tell us about kind of what the long-term margin and what were the slide factors here that got us the extra 250 basis points in the current quarter that maybe will fall off in the next couple of quarters?

Timothy R. Morse

Sure. I mean, I reference back to my script because I went through this in some detail. But look at Page 6 on our earnings presentation on the IR site, and you can see there, especially on the bottom, we came in at $1.081 billion in revenue against the outlook of business -- our business outlook, midpoint, I should say, of $1.085 billion. Our ongoing expenses, so this is zeroing in on the business, excluding transition costs and excluding restructuring charges, we guided about $885 million. And therefore, on the midpoint, $1.085 billion less $885 million was $200 million of ongoing operating income. That is, to be exact, 18.4% margin. So roughly 18.5%, as I said, in my script. We came in substantially lower on ongoing costs, $32 million lower. And that, as I noted in my script, was really the result of the uncertainty that we've been seeing. It's a time of extraordinary change here. And given what we've been through, it's tough to get traction on the spending and investments that we're trying to make that we described back on the April call. So the majority of the reason that we were able to overachieve, ending at $228 million ongoing operating income instead of $200 million, is really that cost variability. Not a great reason to beat the number, and that's why I say it's a little bit ahead of schedule. We have things that we need to invest in, again, apart from the dollars we're spending to get to that end state, where this ongoing operating model is all you'll see of Yahoo!, you won't have the transition, you won't have the restructuring. Apart from the efforts to get to there, there are things we need to invest in, in order to win. And we've talked about mobile on this call, we've talked about video on this call, we've talked about other engagement drivers, from content and content partnerships. Those are great examples. And there are other technologies when you widen the scope in terms of personalization technologies and targeting technologies for our advertisers. Again, on the script, I mentioned Genome. So we have more that we need to do to transform this company and get it operating in the kind of robust growth range that we're looking for in terms of revenue growth. And as a reminder, in the long-term model, we're trying to drive the existing business up to something like 25% operating margin to provide room, call it, 5 points of operating margin to invest in the business in new areas of growth such that we have a reported number of operating margin of 20%. So we're just so early in that process that I say we're just ahead of schedule. This is just the beginning, there's a lot -- and a lot more pieces to play out here. But that's generally where we're going. Thanks, Laura.

Operator

Your next question comes from the line of Dan Salmon representing BMO Capital Markets.

Daniel Salmon - BMO Capital Markets U.S.

Can -- Tim, can you give us any update on the Microsoft-AOL non-guaranteed display consortium?

Timothy R. Morse

Sure. That's -- thanks, Dan. That's all part of, we kind of collapsed [ph] them together, all of our class 2 or non-guaranteed efforts together, interclick and the Microsoft and AOL partnership. And generally, I think, under the Summit [ph] name there. We -- well, we've made some progress this quarter. It's continuing to roll out. It's still a very small part of that total equation. But again, making progress. I think those results, it was very purposeful. As we talked about, about this time last year, we knew that we needed to do something different in the market on the class 2 or non-guaranteed side. The strategy we came up with was better targeting through especially interclick and that acquisition and opening up the marketplace with Microsoft and AOL inventory. We feel good about allowing advertisers to access much more premium inventory and have better targeting. That, we see, is the wave we want to ride. And we're making progress. Thanks, Dan.

Operator

Your next question comes from the line of Brian Nowak representing Nomura.

Brian Nowak - Nomura Securities Co. Ltd., Research Division

I have 2. The first one, you have said that marketing was one of the sources of expense release. What can you say about kind of the progress on the sales force rebuild and the retraining in particular around kind of sellout rates on the homepage? And then secondly, kind of stepping back to more general trends, I wonder if you can talk about any specific ad categories in Display or Search that were particularly strong or weak in the quarter.

Timothy R. Morse

Sure, Brian. The -- in terms of the sales force, I did touch on this in my script, the year-over-year sell-through rates -- so you picture our total supply impressions that can either be sold guaranteed or non-guaranteed. And of course, guaranteed is the premium side, you want to sell more of that. We saw the initial dip really in the second quarter last year. That's when we did the big [indiscernible] and replace of the sales force and embarked on this current course. And we've seen basically quarter-by-quarter the sell-through rates improve. We are now above the sell-through rates we were at second quarter last year, approaching kind of where we want them to be. Not quite there yet but approaching where we want them to be. So that has all gotten better. And the front page, I've often used that as kind of a gauge of how we're improving. The front page days sold was up year-over-year substantially as well. So that has recovered, too. So a couple of encouraging signs there. So in terms of your second question, the ad categories, I didn't really look. It didn't look to me like anything outstanding one way or another. We'll -- we're -- we saw some good renewals of some original video sponsors in auto and finance and retail. But aside from that, there was really nothing that notable that I saw.

Operator

Your next question comes from the line of Heath Terry representing Goldman Sachs.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Tim, really just kind of curious. You mentioned the single-digit media growth that you saw over the course of the quarter. Are there specific channels or segments that are driving that? Or is it more broad based?

Timothy R. Morse

Like I said, the biggest driver, Heath, is news because we had the bin Laden death and the royal wedding impact the news. Royal wedding also impacted our lifestyle site. So those were the biggest. I think I had said earlier 2Q was kind of a record for us, record level, and not having those 2 big events was a tough comp for us. Thanks.

Operator

Your next question comes from the line of Ron Josey representing ThinkEquity.

Ronald V. Josey - ThinkEquity LLC, Research Division

So 2 quick questions for you. One is sort of housekeeping on interclick. I think in the last quarter, you were saying something around -- revenue contributions was around $10 million. I wonder if you can sort of talk about that, maybe what you're expecting here for 2Q. And then sort of higher level, if you could just talk a little bit about the new front that was held the end of April. Can you call it a success based on ad sale that you've seen to date, based on your video strategy and the sell-through rate around there?

Timothy R. Morse

Sure. On interclick, I noted in the script that it did move forward positively quarter-over-quarter. A little bit less than we're actually looking for, but it did move forward and will move forward again in 3Q. It gets -- as I said earlier in the Q&A here, it's going to get a little bit tougher to talk about it as interclick alone as we package in the whole Summit [ph] initiative with Microsoft and AOL and as we start just molding that into our total class 2 business. So we keep track of it on both bases obviously internally here. But going forward, it's really -- as we start to see our class 2 or non-guaranteed business start to grow more and especially not just in volume but more so in monetization through targeting, that's going to -- those are going to be the big, big determinants of our success there. Then in terms of new front, we had great turnout and a lot of great engagement with top advertisers. We're seeing a lot more traction with them and a very positive response to our original programming in general. There are over 20 original video programs each month. And we're continuing to drive engagement. And the more we can focus -- as we've said too on our last call, the more we could focus on advertiser ROI and continue to do better with our sales force and do better with our technology in terms of helping advertiser ROI, the more business that we're going to bring back. And this is all on the back of the premium content experiences that drives user engagement. So it all kind of clicks together nicely there. Thanks, Ron, appreciate the question.

Operator

At this time, there are no further questions. I would now like to turn it back over to management for closing remarks.

Timothy R. Morse

Great. Well, again, I want to thank everyone for their time today. We appreciate your patience with the questions that I was able to answer here, and we look forward to being in touch with you sometime in the near future. Please do not hesitate to reach out to our Investor Relations team for more clarity. And again, have a good day. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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