Yahoo! Management Discusses Q3 2012 Results - Earnings Call Transcript

 |  About: Yahoo! Inc. (YHOO)
by: SA Transcripts


Good afternoon, ladies and gentlemen, and welcome to Yahoo! Third 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, Regina. Good afternoon, and welcome to Yahoo!'s Third Quarter 2012 Earnings Conference Call. On the call today will be Marissa Mayer, Chief Executive Officer; and Ken Goldman, 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 strategy and product plans and our expected financial and operational performance, as well as our investment priorities, expectations for industry growth and the Yahoo! Bing Network. 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 on August 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 discussed on this call is as of today, October 22, 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 non-GAAP financial measures as we talk about the company's performance. Reconciliations of these non-GAAP measures to the GAAP measures we consider most comparable can be found on our corporate website at under Investor Relations. We have prepared remarks that will last about 30 minutes, then we'll have a brief Q&A session. And now I'd like to turn the call over to Marissa.

Marissa A. Mayer

Thank you, Joon. Good afternoon, everyone. I'd like to start by saying that I'm thrilled to be here at Yahoo!, and I'm happy to give all of you an update on the business today. My first nearly 100 days have been incredibly energizing and, honestly, a lot of fun.

Yahoo! is a truly iconic company, one that I've had great respect for since I first discovered it as a Stanford student back in 1994. At that time, Yahoo! was called Jerry and Dave's Guide to the World Wide Web. Even then, it was obvious what an essential tool it was and the incredible potential.

Beyond that potential and its storied history, some of you might ask, "Why did I in particular come to Yahoo!?" In short, this job is tailor-made for me. The core components of Yahoo!'s business, Search, Mail, ads, Mobile, News and the home page are also the core products that I've built my career upon. So my answer is simple. I came to Yahoo! to grow and to help redefine one of the Internet's most beloved companies.

This afternoon, I'd like to discuss my priorities over the past quarter, including our efforts around people and products. Then, following Ken Goldman's review of the third quarter financials, I'll discuss the vision and direction for Yahoo! moving forward.

Let's begin with our people. Companies are all about people, and the companies with the best talent win. It's no secret that our team has experienced numerous changes this past year. From my very first day in July, we've been zeroing in on the efficiency, well-being and accountability of our 12,000 employees. We have a close-knit culture, establishing an open dialogue with employees as well as a commitment to transparency. We've put in place feedback tools, systems that remove bureaucracy, new performance measurements for Yahoo! and clearly laid out quarterly goals for the company. These new systems are working to improve our execution. As of today, 93% of our employees have quarterly individual goals that map to company goals. And of course, one of our company goals is that we will soon be at 100%.

True cultural change can't be bought, so the vast majority of what we've done has cost nothing. That said, we have made smart and thoughtful investments in new mobile phones for our employees so they can test our products and provide feedback. We've also begun to offer what is a standard here in Silicon Valley at top companies and start-ups: free food for our hard-working employees.

Our goals are simple: execute faster, return value to our shareholders, attract the best talent and make Yahoo! the absolute best place to work. In an incredibly short period of time, we have built a stellar, world-class leadership team across all the core functions of the business: finance, sales, human resources, development, marketing and legal. In a moment, you'll hear from Ken Goldman, our new Chief Financial Officer, who brings more than 25 years of experience as a public company CFO to his role. Ken will help lead our financial fitness moving forward.

Henrique de Castro will be joining as Yahoo!'s Chief Operating Officer. Henrique is one of the most respected and accomplished businesspeople in the realm of Internet advertising. With his rigorous and analytical approach, he'll lead our strategy and execution in enhancing our advertising solutions and the value that we provide to our advertisers.

Ron Bell, a Yahoo! veteran with a rich 13-year history at the company and an incredibly deep set of perspectives on the company's products and policies, has been promoted to be our General Counsel.

We've also brought on Jackie Reses as head of people and development. With a background in private equity and a reputation for doing smart and savvy deals in integration, Jackie is focused on hiring, acquiring and retaining the smartest minds in our industry. I'm already impressed with the change in talent pool of our candidates. It's increased in quality and volume.

Finally, Kathy Savitt has brought her infectious energy and extensive consumer marketing experience as our new CMO, and she'll help us reimagine the Yahoo! brand.

In Yahoo! fantasy sports, I would draft this exact group as my dream team. I'm positively thrilled to be working with them. That we were able to attract such well-known and capable leaders and so quickly is a testimony to Yahoo!'s potential. They joined a capable and qualified management team that is already in place here at Yahoo!.

In addition to focusing on our people and empowering them to execute, we've also focused on our products. Over the past 3 months, I dedicated significant time to product and business reviews with hundreds of our employees. We started with Search. While our Search area's challenged, we're working closely with Microsoft to define the future of Search. Many people are surprised to learn that our alliance with Microsoft affords Yahoo! significant control over our Search user experience and the ability to innovate therein. We're also thinking aggressively about how to grow share from the market and not just trade Search share with each other.

On the economics front, as we've said in the past, our alliance has fallen below our expectations. So we are benefiting from a revenue guarantee. Ken will talk more about this in a moment.

Turning to Mobile, our offerings and their usage have been growing nicely. As part of our Mobile efforts this quarter, we've redesigned our Mobile search page across 23 countries, resulting in increased usage. We released an updated version of Flickr for Android, which has been getting rave reviews from our end users, including thousands of 5-star ratings. And we've also launched IntoNow 3.0, a fun way to connect with friends and get more from your TV watching.

Looking at content, our high-quality content products differentiate Yahoo! and drive impressive user engagement. For example, in Q3, our global coverage around the 2012 London Olympic Games resulted in more traffic than we received for Vancouver and Beijing Games combined. Our users spent 3.5 billion minutes watching our Olympics programming, reading articles and viewing photos.

Turning to advertising. In September, we announced that we will continue to own and invest in our Display ad technology, including guaranteed, non-guaranteed, Genome and the Right Media Display marketplace. We're deeply committed to our core technologies and platforms to ensure we continue to be leaders in this space. The advertising partners that I've talked to love the audience-based buying that Yahoo! enables. They would buy more if they could. Our opportunity in advertising is around making the ad platform and tools more efficient but also increasing usage of our consumer products and, therefore, impressions, so we have more to sell.

I'm very pleased with our people and product progress in Q3. It was an active and solid quarter with some nice achievements. In addition, as you know, in September, we reviewed our capital allocation strategy, and we committed to return $3 billion of additional capital to our investors from the Alibaba transaction. At the current price levels, we think it's economically attractive to repurchase stock. However, we will continually monitor the best method of returning capital to drive the most shareholder value.

Finally, third quarter revenue was once again stable. We've now had 3 quarters of modest revenue growth and encouraging numbers in Search and Display. On that note, let me pass it over to Ken Goldman to walk through our Q3 financials in-depth. Ken?

Ken Goldman

Great, and thank you, Marissa. Good afternoon, all, and thank you for joining us today. I am excited to be joining Yahoo! and speaking to you all on my first official day as CFO. This is a proud company, and I am proud to be here. Yahoo! is a well-respected global brand. Everyone that I have talked to wants this company to succeed. Interestingly, I have received literally several hundred congratulatory messages, and all of them note how they use Yahoo! Properties in their daily lives. As you will hear, I am a firm believer in Marissa's vision for the company and furthering Yahoo! as a great place to work. On the call today, I'll walk through the 3Q financial results and then provide detail on the impact to our financial statements from the Alibaba transaction.

So relative to the 3Q highlights, we'll start off with some of the third quarter financials. As I refer to these metrics, please view the slides available on our IR website to follow along, starting along -- starting with Slide 5, financials and key metrics at a glance.

Revenue ex-TAC of $1.89 billion grew 2% over last year and marked the third quarter in a row of modest revenue growth for the company. Global Display revenue ex-TAC was roughly flat in the quarter versus prior year as 4% growth in the Americas was offset by weakness in EMEA. Global Search revenue ex-TAC grew 11% over 3Q 2011, driven once again by improvements on Yahoo! sites as well as a higher guaranteed payment from Microsoft in the prior year.

Operating income, excluding restructuring charges of $25 million, was $177 million 3Q, a modest increase versus third quarter 2011. Non-GAAP EPS, excluding restructuring charges and the impact of the Alibaba transaction, was $0.35 in the quarter, 66% higher than 3Q 2011. We repurchased $190 million worth of stock in the quarter. And finally, we ended the quarter with approximately $9.4 billion in cash and investments.

Now before I dive into details behind these numbers, I want to first give a brief, high-level overview of the opportunity I see here and why I joined the company. Overall, I believe this company has tremendous assets through its massive loyal audience and very promising products and properties in virtually every major category. Also clear to me that a lot of great work has been done over the last few years to strengthen the underlying fundamentals of the operating business. And real success has been achieved. We have much work to do, and this will take some time, but the evidence of stabilized financial results is beginning to show in this quarter.

Revenue was stable with 3Q representing the third quarter in a row of modest growth in total revenue ex-TAC and second quarter in a row of Display revenue ex-TAC with growth in the Americas region. Operating margins are healthy, so we also have room for upside once we're able to grow the top line and scale the business.

We will also ensure we spend our resources with discipline, wisely and prudently based on investing for growth and efficiency. And we have a very strong balance sheet with abundant liquidity. Our primary objective as a new management team is to leverage our assets, competitive strengths and available resources to transition this company from financial stability to a growth business, serving our customers with a distinct Yahoo! identity. We are very mindful of shareholder value creation.

So let me walk through the financial results in more detail, and you can see these turning to Slide 7 and 8. Display revenue ex-TAC was $452 million, roughly flat with the prior year. Breaking down Display by region, Americas region grew 4%, driven primarily by favorable pricing mix. Sell-through rates on Class 1 inventory improved once again, but we continue to face headwinds from declining available impressions in Class 2, particularly in Mail. Campaigns around the Olympics sold well in the quarter but proved to be somewhat cannibalistic to other spending as few advertisers increased their overall budgets.

In EMEA, trends were once again weak due primarily to the economy, which negatively impacted Display revenue by approximately $9 million in the quarter. APAC Display ex-TAC was down slightly in U.S. dollar terms but roughly flat on a local currency basis. Going forward, we will endeavor to better understand margin contributions in each geographic region and how we can improve. Search revenues ex-TAC once again performed well in the third quarter, growing 11% versus prior year and 7% on a sequential basis. Both Yahoo!-driven RPS improvements as well as our higher guaranteed payment accounted for the upside in Search.

Looking at price and volume dynamics, the upside was driven by both quick yield at PPC, including the RPS guarantee, as total eligible searches were flat in the quarter on a global basis.

From a regional perspective, similar trends prevailed within Display, with positive results in the Americas segment offset by weakness in EMEA and a slight decline at APAC in U.S. dollar terms.

And as it relates to Microsoft guaranteed payment, a number of factors go into calculating the amount, including variables like economic growth, which resulted in a higher year-over-year payment. Looking to next year, as you all know, the current guarantee is set to expire in April of 2013. If the revenue guarantee is not renewed, we view the total risk to our financials to be less than $100 million on an annualized basis.

In terms of other revenue ex-TAC of $223 million, it declined 10% versus the prior year but was flat sequentially. As was highlighted on 2Q call, we will continue to feel the impact of the final broadband step-down when viewed on a year-over-year basis for 2 more quarters. But sequentially, there'll be no material additional impact. Also, going forward, other revenue will be boosted by amortization of the $550 million upfront payment related to the TIPLA with the Alibaba Group. This payment will be amortized over 48 months and recognized in other revenue. In -- at 3Q, this amount was just $4.5 million. However, in 4Q and beyond, we will recognize approximately $34 million of additional revenue per quarter.

I'm now talking about operating expenses and operating income, and you can see this on Slide 10. Total operating expenses less TAC and adjusted for restructuring charges of $25 million were $912 million in third quarter, resulting in an adjusted operating margin ex-TAC of 16%, in line with that of 3Q '11. Adjusted operating income ex-TAC modestly increased to $177 million versus the prior year.

Stepping down the income statement, the company was able to realize certain foreign tax credits in 3Q that improved net income by $135 million. This resulted in a negative effective tax rate in the quarter, excluding the Alibaba gain.

I'm now going to turn to balance sheet and cash flow, and you can see the key balance sheet and cash flow statement highlights on Slides 12 and 13. Capital expenditures was $140 million in the quarter, up from levels experienced the prior 2 quarters. They related primarily to our data center investments.

Free cash flow was $920 million in the quarter. Excluding the $500 million TIPLA payment, free cash flow was $370 million in the quarter, which was up 50% from the prior year. As noted, our cash and investments balance at the end of the quarter was $9.4 billion. However, approximately $2.5 billion of this is reserved for payment for taxes on the Alibaba transaction. In addition, we have included the $800 million preferred equity received from Alibaba as a separate item in the balance sheet, which is not included in the $9.4 billion figure just mentioned.

At the end of the quarter, the market value of our stakes in Yahoo! Japan and Alibaba Group was $7.7 billion and $8.1 billion, using the quarter end closing price per share and the price per share in the most recent transaction, respectively.

So let me go through a few other activities and updates. Before I walk through the Alibaba impact, I am pleased to announce today we're entering into an revolving credit facility with capacity of $750 million. The facility is currently undrawn and is expected to be used for general corporate purposes. With regards to the form and timing of churn of the proceeds from the Alibaba transaction, as Marissa discussed in her remarks, we think it's both in our best economic interest as well as shareholder interest to repurchase Yahoo! stock at these levels.

In terms of Alibaba, let me walk through the transaction and how it impacts the financial statements this quarter as there are a number of adjustments to be made. First, as you know, we are pleased to close the first stage of previously announced transactions in September. And really, a special thank you goes out to Tim Morse for all the great hard work he put into getting this deal done. It was a huge effort and a great success for the company.

We received gross proceeds in cash and preferred equity of $7.6 billion. $7.1 billion of this was from the sale of shares, and $550 million was related to the TIPLA. We received approximately $6.8 billion in cash proceeds and $800 million in preferred equity.

Starting at the top of the P&L, we recognized $4.5 million of other revenue from the amortization of the TIPLA in the final few days of the quarter, as mentioned earlier. Further down, you will see $4.6 billion in other income. This is our booked gain on sale, net of transaction fees. Also included in this number is accrued interest in the preferred equity in the quarter, which was just a few million dollars. And net gain realized after taxes and fees from the sale of shares was $2.8 billion during the quarter.

On the cash flow statement, accrued expenses and liabilities related to this transaction increased by $2.5 billion. This relates to taxes owed, but not yet paid, on the sale of our Alibaba shares. Most of this cash will go out in Q4.

On the close of the transaction, we now own approximately 24% of Alibaba group's outstanding shares in addition to the $800 million in preferred equity. Once again, the pretax value of our equity stake, based on the recent transaction price per share of $15.50, is $8.1 billion, again not including $800 million of preferred. Cost basis for tax purposes of this stake is approximately $250 million.

So in terms of guidance before I close, as you might expect, we are not prepared to give guidance today given my short history with the company. Between now and the next earnings call, we will evaluate what form of guidance to provide on an ongoing basis.

Thank you for your time today. I am extremely excited to be here and look forward again to know and meet all of you. I also realize we'd much rather hear from Marissa and her plans for the future, so I'll turn it back to Marissa.

Marissa A. Mayer

Thank you, Ken, and thank you for joining the call on your very first day here at Yahoo!.

I'm very pleased with our Q3 financial results. We have a solid foundation on which now to grow. Fundamentally, Yahoo! is part of the consumer Internet, where growth is expected. We'll become a growth company by inspiring and delighting our users. The first step is to grow at the same pace as the particular market that we are in, which we already do in a number of cases but not all. Later, the goal will be to gain users and share disproportionately.

Our vision and direction for Yahoo! is to make the world's daily habits inspiring and entertaining. Let's start with the daily habits part. At Yahoo!, we see users making daily use of Search, Mail, the home page and Mobile, among other offerings. Search is a core daily habit for all of us and a fundamental user behavior, the top priority for Yahoo!. We'll focus on reshaping Search, driving smart distribution deals and making organic investments to grow our market share. There's a clear upside potential here, and it's time now to execute against it.

Communication is another of these daily habits and is prime to be reimagined. There is great opportunity to modernize Yahoo! Mail and Messenger, especially given the continual increase in the amount of communication we're all receiving. The Yahoo! home page is one of the biggest draws on the Web, including more content and being more precise in the targeting of content and advertisements to make this daily habit even more compelling for our users. Mobile represents not only a daily habit, but a fundamental and massive platform shift, a platform shift that we have to ride and participate in, in order to be relevant.

Today, there are more than 1 billion smartphone users globally. As expected, that will double in the next 3 years. And while we've made progress, Yahoo! hasn't capitalized on the mobile opportunity. We haven't effectively optimized our websites, we've underinvested in our mobile front-end development and we've splintered our brands. We have more than 76 applications across Android and iOS. All of this needs to change. Our top priority is a focused, coherent, mobile strategy. We're accelerating our efforts to build a strong technical talent base for mobile. This includes engineers, product managers and designers.

As the world becomes increasingly mobile, the way we all consume content has dramatically shifted. Interestingly, when you look at the most frequent uses of smartphones, they include checking the weather, checking sports scores, checking stock quotes and other financial information, watching videos, sharing photos, getting the latest news and playing games. Does that sound like any particular company that you know? Yahoo!, with its content and leadership in these key verticals, is already very well positioned here. We will continue to work with top partners and media companies to further build and scale these opportunities. We'll strive to make the daily habits of smartphone and tablet use more social, engaging, beautiful and compelling.

Yahoo! is about inspiring and delighting our users. Much of that inspiration and delight will stem from what we know and understand about our users and their needs. In that context, personalization of content and advertising is fundamental. Personalization has been part of our DNA for some time, and it's key to a great user experience. Our home page alone serves millions of different combinations of content every day. This deepens the engagement that inspires our users' actions, like clicking, reading and sharing. We just scratched the surface of personalization, and we're going to continue to invest in shaping the future here.

Inspiring and entertaining our users extends to our advertising partners as well. Using our solutions, advertisers can reach the audiences that want to engage with their brands. We'll continue to work with our advertising partners to create engaging, branded entertainment experiences as well as seamless, programmatic buying opportunities. And with our renewed commitment to owning and growing our Display marketplace, our advertisers will continue to see Yahoo! as a key piece of their online strategy with simple, targeted and effective advertising opportunities. Ultimately, we want to be the favored partner of advertisers.

In closing, while we have a lot to do, the future for Yahoo! is incredibly bright. Our extraordinary global reach and unique content position will allow us to build transformative products and compelling content that will be indispensable to people's daily lives. Our products will change how people learn, share and communicate. We will inspire, innovate and entertain.

I came to Yahoo! to grow and to help redefine one of the Internet's most beloved companies. But what I found is that I'm not alone in that passion. No one wants Yahoo! to grow more than the people who work here. We're committed to going back to our roots as a consumer Internet company focused on user experience.

The excitement and optimism that permeates Yahoo! right now is undeniable. And with the leadership and guidance of our new management team, it's time to execute. We believe that Yahoo!'s best days lie ahead. We intend to do great things, and we intend to win. Now let's take some of your questions.

Joon Huh

Operator, if we could take questions?

Question-and-Answer Session


[Operator Instructions] And your first question today comes from the line of Youssef Squali with Cantor Fitzgerald.

Youssef H. Squali - Cantor Fitzgerald & Co., Research Division

Marissa, maybe start with you. How does a mere vision differ from that of your predecessors? Just I'm really looking for some nuances kind of how your vision kind of differ from theirs. And then where would you see kind of the bigger growth opportunity for Yahoo! going forward if you had to choose? And I'm asking you to choose between Search and Display.

Marissa A. Mayer

I think that in terms of vision, I think that my view is that the core of Yahoo! is incredibly valuable and there's a great platform to build on. I don't think that this is a situation where there's a giant pivot and we're going to a completely different business. I think this is about improved execution and seeing the opportunities that already are apparent within our business. That means focusing on daily habits, like Search, Mail, home page, Mobile. It means investing in key verticals where we're already in a leadership position. And we need to make the bridge to Mobile, Finance, News, Sports, Games, Messenger, Flickr, Answers, Groups, the core big Properties here at Yahoo!. I also think it's really important for us to be a terrific company to partner with, not only for our advertisers but also for other technology companies. Yahoo! occupies an interesting and unique space where we don't have as much channel conflict with other players and technology as many of our other comparable companies, which means that we can partner with different companies with their browsers, with social networks, with their mobile operating systems. And I think that there's a great opportunity there. And I also think that the mobile wave is a huge wave for us to ride, and it's a great way for us to take our content and our current investments and make them more relevant moving forward. In terms of your second question, Search versus Display, these are already 2 very large, very successful businesses, so think it's difficult to say which 1 we should choose. It's somewhat of a false dichotomy. That said, I do think that there is potentially more upside in Search. We can see right now that given some of the monetization challenges we've faced, that there is an opportunity there to improve monetization. That said, the content investment that we've made yields so many impressions and page views and so much opportunity around brand advertisement that is very compelling. When I look at Yahoo!'s business, we again occupy a very interesting and unique space in the market, where what we -- what we see is that because we have people who are interested in finance or interested in entertainment news, interested in sports, we fundamentally have a great segmentation of audiences already. And many of the other people who operate in terms of display advertising are either less granular and they understand less about their users or are much more granular. What we find, and when I talked to advertisers, what I've seen and heard from them is that the way that audiences tend to aggregate on Yahoo! is unique and particularly advantageous to them in terms of what they ultimately want for audience-based buying. And for that reason, I think that I'm bullish on both Search and Display, but I really think, given the trend towards audience-based buying in the advertising space, the Display opportunity is particularly compelling.


Your next question is from the line of a Brian Pitz with Jefferies.

Brian J. Pitz - Jefferies & Company, Inc., Research Division

Great. I had 2 question's for Marissa. Would you provide any color on your longer-term plans for international? Are there any regions which you may direct more or less focus to? And should we assume growth plans will be driven more by organic or acquired? And then just one separate question. Given your expertise in local, I was surprised not to hear you mention anything about local in your plan.

Marissa A. Mayer

Sure. On the international market, there, we are really looking -- again, we are looking here to build growth. And so, as we've assessed different countries, one of the things we want to do is we want to really bring a coherence to our offerings across different markets. So while we have some markets where our product offerings are very different and we intend -- and are very successful and we intend to keep them in place that way, I do think there's an opportunity for us to take our very vast set of offerings, narrow it to a very compelling set of offerings and really make it much more compelling around the world. For example, you may -- in terms of how we may change this in the future, you may have seen, for example, on News on Friday of closing our Korean operations. The reason we chose to do that is because as much as it was a very successful market for us historically and it's something that we're very proud of the team there, we have a great team, and they've worked very hard, we had a hard time finding a growth story moving forward. Well, that isn't the case with many of the other markets. So I think we're likely to stay in markets where we see an opportunity for growth, be it on the desktop or in mobile, and we're likely to withdraw from markets where we don't see growth. Though, I will say that, to date, Korea has been an unusual exception in that space. In terms of the question around local, it is something I've spent a lot of time working on and I really do love and I'm very compelled by. With that said, I also have a deep respect for it, but it's very hard to do it well. It requires a deep investment, a lot of people, a lot of energy and time to build terrific listings. We have some offerings in the space already, including Yahoo! Small to Medium Business offerings, where we host websites and stores. We also have Yahoo! Maps, where we have licenses in place to support that. So I think that our local offerings are good at the moment. I think it's hard to take that next step to provide even deeper functionality. And so, while we don't intend to make significant changes there in the short term, I do think that it's probably not an area where we're going to invest heavily moving forward.


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

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

As we think about tracking the business, I mean, clearly, you will do things that have a positive impact on users and the site while revenues may lag. I noticed the times for that metric was excluded from this presentation. Is there another metric that you were thinking about providing to think about engagement and how we should judge your progress? And then, just a second follow-up, can you give us a bit more details on the remaining $4.5 billion roughly of cash or so? Outside of buybacks, where could you see the capital going? And if towards acquisitions, can you give us some guidelines on that?

Marissa A. Mayer

Sure. In terms of metrics, we really want to rely on our internal data. We think that it has an accuracy and insight that we sometimes don't get from external third-party data. And so that is a shift in terms of the metrics that we're providing. We're going to analyze those metrics and come back to you in terms of what metrics we are using to really guide our business and our decisions. Certainly, some of those metrics will include things like the overall number of users and the overall number of page views that occur on the site in terms of consumer-based metrics. Obviously, we'll continue to provide all the revenue-based metrics and breakouts that we have historically. In terms of the remaining cash in the business, I'll ask Ken to comment on that, and then we'll come back to some of the possible areas for investment.

Ken Goldman

Yes. I would say, to me, it starts with -- it's important to have a strong balance sheet. I think we -- in this space, it's just important to have that, so we treasure that. That's one thing. Two is there's no question that we will be spending capital expenditures. We talked about data center investments in Q3. We expect to continue to invest in our data centers and capital for a while. Three, and maybe Marissa will add to this, but we want to have the flexibility and the ability to make acquisitions if they make sense. Historically, many in this industry have been smallish. It's probably what we're looking for -- at as well. We don't have any in mind that I'm going to talk to you today, but we do want to have the flexibility to look at acquisitions that are strategic and that do further our ability to grow in addition to organic growth because we fundamentally believe that growth is really key and core to basically creating shareholder value over time here.

Marissa A. Mayer

Yes, and in terms of investment, I do think that a lot of times when you invest in user experience, it's something that just comes as part of what Yahoo!s are doing in terms of improving their products. That said, there are times, like in the case of data centers, where you need to spend in order to reduce latency and overall improve user experience. So we will be making some investments there. In terms of the possible acquisitions, I want to echo what Ken said. We don't have particular acquisitions in mind today. We do need the flexibility, where if we see something that aligns well with our business and provides terrific growth that we can make that acquisition. That said, I think one of the things that is lost on people is because so many of the high-profile tech acquisitions are above the $1 billion mark, people tend to think that tech acquisitions are all in that space, and that's just not the case. Many acquisitions and most acquisitions, a vast majority, are less than $100 million. And so we're looking for smaller-scale acquisitions that align well overall with our businesses. In my history and my career, I've done about 20 or so such acquisitions, and I think that the size and scale that's comfortable for a great integration, a great product coming out of it is something that's much more in the size and scale of double-digit millions and low hundreds of millions.

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

And just one quick follow-up just for Ken, housekeeping. So obviously, the taxes had a big impact on, or the acquisition and the tax payments whatnot have a big impact on working capital in this quarter and will reverse out in next quarter. I mean, kind of, for the full year, would you call the net impact to working capital is probably about the same as last year? Is that fair?

Ken Goldman

Well, I can't really talk to that. I would just say that from a tax point of view, clearly, we did get the benefit of the $135 million this quarter from a tax rate point of view. If you excluded that, our tax rate would have been more like it has been historically this year in the mid-35s -- or mid-30s, I should say. The tax rate on Alibaba was probably closer to 40%, so you can figure it all out. And so, yes, I think there's really nothing that atypical, if you will, in thinking about how working capital here works. And so we are going to be very focused on free cash flow, free cash flow growth. More correctly stated, we're going to be focused on EBITDA. But again, the way to really create value is growth in those metrics, not having them stay thin. And I think, frankly, I think a lot of people have sort of assumed that those numbers are flat or stable. And, yes, we are happy that we did achieve stable results this quarter. But honestly, the way to win is to grow those numbers, and that's what we're focused on here.


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

Mark S. Mahaney - Citigroup Inc, Research Division

Ken, a question for you on that $100 million figure you referred to. I assume that's both revenue and EBITDA, but could you clarify in terms of the search risk? And then, Marissa, do you think that Yahoo! has strategic options for another Search Alliance post next April if the Microsoft deal doesn't work out the way you would like it to?

Ken Goldman

Yes, are you referring to the Microsoft in terms of the guarantee?

Mark S. Mahaney - Citigroup Inc, Research Division

Yes, I was thinking of effectively revenue and income, yes.

Ken Goldman

And so, it'd be -- it would be -- think of it as cash revenue and income, yes.

Marissa A. Mayer

And from my perspective on the strategic alliance, we have been happy working with Microsoft. The teams actually work quite well together. We experienced some disappointment on the monetization side, which is why the revenue guarantee is in place and why we're benefiting from it. But our goal is to produce a terrific search experience and to work well with our partner in the form of Microsoft to do so.

Ken Goldman

Well, Mark, I -- a sense is that, sort of, on the worst case. I mean, we're obviously hoping to improve upon that both in terms of how we work with Microsoft and how our results on their own -- we achieve our own results.


The next question is from the line of Heath Terry with Goldman Sachs.

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

Marissa, I was wondering -- you mentioned the need to hire mobile engineers, specifically. You've obviously been able to make high-level hires like Ken already, but how do you perceive the hiring environment that Yahoo! faces? And what's your strategy for bringing talent into the company at that level?

Marissa A. Mayer

Sure. We do need more mobile engineers here. I think that it's clear that at some point in the near future, Yahoo! will have to be a predominantly mobile company, which means that at least 1/2 of our workforce, our technical workforce, should be working on mobile. So we do need to grow that, and we also need to help the people who are already here develop the skills around building out mobile applications. So I think that, that is something that's really key. I will say and echo what I said earlier is I'm already impressed with the change in our applicant pool. There's a lot of excitement here at Yahoo! In a recent all-hands, I asked people, how many people in the past month have had someone say, "I'd really like to come work there." And two, probably, the vast majority of the hands in this room went up. People tell me that's a marked change from the past. So I think people are excited to come work here. I think that's shown with the management team and how quickly we've built that. I've been hearing from various entrepreneurs and investors that people are excited at the prospect of potentially selling their companies to Yahoo!. They think this is a great place great place for companies to land. So I think in the case of some of these smaller-scale acquisitions, we can be a very good home for those people. So I think that there's actually terrific potential in terms of hiring here. And as I said, some of the cultural changes that we've made around just being much more open with employees, providing nice benefits like the free food. I hope this is making their productivity that much better with things like the mobile phones, and also just reducing bureaucracy in terms of what it takes to get something done here is something that is ultimately getting us on the path to really making Yahoo! the absolute best place to work. And if you're that, I think attracting talent is -- comes reasonably easily.

Ken Goldman

Yes, I'm going to echo -- in my prepared comments, I did talk about that's the focus here on making -- really making this a great place to work. There's a funny anecdote, I have 3 young adults for kids, and this is the first time I went to a company that they actually said, "Great, dad. We're really, really excited for where you went." It's the first time in any company I've gone to. So I think there is a lot of great buzz in young folks, if you will, about Yahoo! and what we can do here.

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

Ken, just one follow-up question, could you give us an idea of the split on the cash balance between U.S. and international?

Ken Goldman

Yes. Roughly, I think, as of end of Q2, I think it was like about $1.2 billion, and I think it's roughly the same. We'll put all that out more explicitly in our 10-Q, but I think it was right around $1.2 billion, $1.3 billion internationally.


Your next question is from the line of Carlos Kirjner with Sanford Bernstein.

Carlos Kirjner - Sanford C. Bernstein & Co., LLC., Research Division

I have 2 questions about competition. Can you win in mobile without an operating system? Or in the long term, wouldn't companies like Apple, Google or even Microsoft, who control the platform, end up disseminating [ph] you from any application whether it's material value or that turns out to be important for end-users? And secondly, can you talk a little bit about specifically what Yahoo! brings to the table to compete and win versus companies such as Google and Microsoft in the high-tech space, given their resources and scale?

Marissa A. Mayer

Sure. In terms of winning in mobile without a mobile OS, I actually view that one of the advantages here is that we don't have a mobile operating system because it allows us to operate and innovate and provide our products across all the different platforms. So we would like to offer our products on iOS as well as on Android. And I think that it's important to remember that, that list of items, checking stocks, checking news, checking weather, sharing photos, getting all of the -- all of those types of things are things that people do on the phone. And in that situation, Yahoo! has a unique set of content that we can provide our end-users, and that's something we've invested a lot in and I think it's something that is differentiating and a unique advantage. In terms of advertising technology, I think that, obviously, in terms of Search, we are cooperating with Microsoft on the Bing Yahoo! network in terms of selling our Search inventory. In terms of Display, I'll harken back to what I talked about earlier in terms of audience-based buying and the opportunity that our verticals provide in Display advertising. Our verticals already aggregate our users at a level of granularity that advertisers understand, and they provide a level of engagement that is something that isn't often seen on the Web. And so, I do think that the particular products we have, the way that they align with advertiser spend, be it in a sports-based context, an entertainment-based context, in autos, in travel, et cetera, these are things that align really well with advertiser spend and are a large enough block to be meaningful to be purchased, but not so small and so over-personalized that it's difficult to actually get a meaningful number of impressions and a meaningful impact from your campaign. So I do think that we occupy an interesting space inside of Display, and that's one of our advantages.


Your next question is from the line of Justin Post with Merrill Lynch.

A. Justin Post - BofA Merrill Lynch, Research Division

Marissa, you've got some unique benchmarking knowledge of Search, and so I just wanted to ask you a couple question about Yahoo!'s position there. First, how do you think the company does as far as capturing queries from PC usage of your other sites or convenient searches? Is there opportunity there? Second, how do you get mobile share? It seems like Google is pretty dominant with mobile share. Does it take toolbars or are there ways to, kind of, break in there? And then, third, maybe could help us with just monetization, how you feel Yahoo! plus Bing is right now, and how much opportunity is there to grow that if you get the -- just the basic algorithms right?

Marissa A. Mayer

Sure. I think in terms of Search, there is an opportunity to do more integration across our sites and ultimately drive more search. I think that's a clear area of opportunity. We haven't been completely consistent on that in terms of our overall site design. In terms of mobile share, I think that there is going to be a few large players in the mobile search space, and I think that Yahoo! should absolutely be one of them. And to the end that we are able to create a coherent set of very compelling mobile applications that people viewed on a daily basis, that also provide us an avenue to not only serve advertising in display or video or mobile format there but also to drive Search. And finally, in terms of monetization, I think that there are some elements that are going to continue to be challenging, and we're working with Microsoft very closely on those. And this has to do with, for example, auction dynamics, the network dynamics and some of the ways that advertisers spend on the platform. I do think that we've had a lot of success with what some might call publisher changes or user-interface changes. In fact, in the past year, a lot of the upside that we have seen in Search had come from changes we've made to our user interface to make our ads perform better on a click-through-rate basis. And ultimately, those publisher changes have also helped us increase, not only revenue per search, but also cost per click.


Your next question is from the line of Douglas Anmuth with JPMorgan.

Douglas Anmuth - JP Morgan Chase & Co, Research Division

I just wanted to ask 2 things. First, just in terms of Display and I guess the overall site, can you give us a sense of whether you view the site as being over-monetized or whether the ads on the site are quality enough in terms of the different ad units that are there? I'm just trying to get a sense of whether you think there's any kind of cleanup effort that might need to take place here in terms of Display. And then, secondly, just in terms of Search, TAC came in, I think, lower than at least we expect and I think it was about 12% of GAAP revenue is down from about 16% last quarter, can you give us some color on the decline here? Is this just simply a shift of the Search business from affiliate to Yahoo!, or is there something else going on?

Marissa A. Mayer

Sure. On the Display piece, I don't think that we are over-monetizing the site. That said, the way that I really look at this is, in the Display and advertising world on the Internet, basically, your revenue is a function of traffic times RPM, revenue per thousand pages. And so one way you can look at this is there are ways where we could perhaps back off some of the ad units, especially if they're very disruptive to the end user experience. The reason to do that would be, of course, if that causes you just to like the site more, traffic, in theory, should rise. So if we basically reduce one of the variables in that equation, RPM, the only reason to do that is if we actually think traffic will grow because the users' appreciation for the products will grow. But I think that to the extent that we make changes like that, we're hoping for those kinds of trade-offs. And on the question around Search, I will hand over to Ken.

Ken Goldman

Yes. I think we -- I don't think I have the exact answer on that one, so I'm going to probably want to get back to you. It may have to do with some lower rates relative to affiliates. But again, I think maybe, Doug, we'll just get back to you and give you a more specific answer on that one.


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

Benjamin A. Schachter - Macquarie Research

Marissa, on the content side, do you think you need to own any content in particular, or is this all about partnerships? And then also, I know it might be a bit early here, but how should we think about the profitability curve to achieve your vision in the near, mid and long term? Should we expect profitability to decline early on? And then finally, just housekeeping, can you remind us where Alipay fits in all this? Do you own any bit of Alipay?

Marissa A. Mayer

On the content side, I do think that there are some elements of content that we do need to own. So I think it's important to do partnership. I actually think it's also important to do user-generated content. For example, I think that Yahoo! Answers is an undervalued property at the moment. I think that the amount of the app participation there and the page views there are compelling. That said, when we look at things like the Olympics, like the upcoming elections or even the conventions that happened at the end of August, what we're seeing is, that by putting our reporters and our editors there, we are able to create interesting unique pieces of content that do drive meaningful page views and engagement, 3.5 billion minutes, for example, on the Olympics. And without a -- an ownership of that content, and us doing some of our own original programming, we would not be able to drive that kind of engagement. So I do think that's something that is ultimately important. In terms of the profitability and Alipay, I will hand it over to Ken.

Ken Goldman

Yes. Let me -- I don't have a distinct number as you would expect me to give today, but I just -- I think directionally as follows. One is we're very mindful of what Yahoo! has done in the past. We're mindful of looking at what we think makes most sense from a return on capital point of view. So we're going to look, and I actually said this, very carefully at expenses, not so much at headcount, which I think has been done, but other areas of expense where we think we can save or be more efficient or effective. So we're going to continue to look at that. And so our thought is that we will basically allow us to create some room by doing that to invest in areas where we are going to grow and also look at really a comparison of benchmarking relative to how to think about improving profit. So I'm not going to give a timeframe today on that. Again, it's just too early. But I will say we do believe that we are very, very committed to seeing best-in-practice numbers for that. Relative to your question on Alipay, we don't own it directly. We only own it through our share of our ownership of Alibaba.


Your next question is from the line of Martin Pyykkonen with Wedge Partners.

Martin Pyykkonen - Wedge Partners Corporation

I wanted to ask on -- from Marissa's standpoint in terms of content and original programming, there was a kind of widely held perception on your background, obviously very product-focused from Google and so forth, how important is this to you going forward, things like omg!, Yahoo! TV and so forth from an investment standpoint? And the second question, just on Display, again, I wanted to talk about automation. And having come from Google and they're buying DoubleClick and the fact that, that has ramped, I guess my question is how do you feel -- you stack up against that? And what sort of investment focus is needed to compete with that to the extent you feel it's a stiff competition?

Marissa A. Mayer

I am very product-focused. I do think that there is all kinds of hallmarks of terrific products. I think they are low latency. They understand the user need. They make it fast and simple and straightforward to ultimately get what you need. As an end-user, I think all those are very important. Another piece of a great product is an element of differentiation. And I do think that, for example, omg!, some of our original videos actually are interesting and important pieces of differentiation. So I do think that we will be doing some continued investment there. For example, as we've discussed earlier, the Olympics, the election, a lot of our live events and some of our other original programming are very important. On the question around the automation of Display advertising and, particularly, programmatic buying, I do think this is an area where Yahoo! needs to invest more. Well, ultimately, there will always be advertisers where we need to do something like creating a custom branded experience in order to create entertainment, or because it's just a very important campaign or a very large campaign that there will be elements of manual touch. It think it's also important for us to enable our advertisers if they have an idea for how to run a campaign, and they want to log onto a system in the middle of the night and file a campaign, I think we need to have a system that makes that really easy to do. And I think that, today, we have that, but it could be better. And so that's something that where we do need to ultimately change the mix of our manual versus programmatic buying, and that's something that -- one of the reasons why we're investing in the ad technology platforms that we had announced in September and we enforce today.


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

Herman Leung - Susquehanna Financial Group, LLLP, Research Division

Two quick questions. First question for Marissa. I think you talked about being able to grow at industry growth rates. I was wondering if you can share with us the timing and the -- I guess, the gap that you need to bridge to get Yahoo! there onto the industry growth rate trajectory. And then, Ken, the question for you is regarding -- you talked about the Alibaba Group and your best use of that proceeds is to repurchase Yahoo! stock. I was wondering your thought process in terms of -- is that just going to be a regular share buyback, accelerated share buyback? Or is there some sort of Dutch offering that you guys are contemplating on?

Marissa A. Mayer

Well, to be clear, my goal isn't to grow at the industry rates. My goal is to grow faster and more than the industry rate. That said, I do think growing at industry rates is the first step. I think it will take multiple years to get to where I want the company to be, which is above market growth. That said, I do think that there will be measurable progress, such that shareholders will be able to see growth at the industry level or above in the meantime. Today, we already have some areas where we are growing at an industry level. We just have a few areas where we're not that really have some potential upside even if we can just get to growing at the industry rate.

Ken Goldman

Yes. Relative to repurchasing stock, yes, we're looking right now at very simply OMR, other market repurchase -- so open market repurchase. So we're going to do that for now. At least that's the way we're thinking about it. We may change over time. We'll look at it. We'll evaluate the stock. And again, saying what I said before and I'll just repeat it because we feel strongly that we just think buying back stock at these levels is extremely attractive. Great use of cash, good for our shareholders, good for our future dilution, if you will, of our stock or less dilution, if you will. So we think it's just a great use of that $3 billion of cash that we've previously committed in terms of how to use it for now. So we'll do open market repurchase for now and -- but again, I don't want to be -- I don't want me to forever do it that way. We may change over time.

Herman Leung - Susquehanna Financial Group, LLLP, Research Division

And then you guys mentioned you guys are obviously hiring on the mobile front. Are there areas that you guys might be thinking of potentially streamlining at this point in addition to Korea?

Marissa A. Mayer

I think that one of the things to keep in mind is that we are still completing the restructuring that was announced in April, though we have revisited parts of that, there were subsequent restructurings and it changed the overall area there. By and large, I think that we aren't necessarily looking at large-scale restructurings. What we're looking at is bringing the company into alignment with the new strategy. So again, that strategy is focusing on the daily habits of Mail, Search, Homepage, Mobile; continuing to invest and really rejuvenating our investment in the key verticals where we already have a leadership position: Finance, Sports, News, Flickr, many of those; and really getting very focused on the shift to mobile. And so we will be doing some realignments to make sure that we have people in all of those key areas where we need to increase our investment. But at this point, it's really about getting aligned with our strategy and getting goals for the company aligned with that, so we can ultimately execute in a really excellent way.


Our final question comes from the line of Peter Stabler with Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Marissa, earlier in the call, you mentioned Display as being compelling. You've also talked about differentiation and personalization. To me, that all adds up to data. And really dating back to the launch of My Yahoo!, Yahoo! has been sitting on a tremendous amount of user data. What's been lacking in your view in terms of taking that data and making it actionable for advertisers in really driving some pricing power in the market? And are there steps that you can take going forward to make that data more valuable? Oh, and then, Ken, a quick follow-up, if I could. Could you give us a sense of FX impact on EMEA revenues?

Marissa A. Mayer

One of the interesting pieces here at Yahoo! is the technology platforms, and we have a lot of them. As opposed to having 1 or 2 coherent technology platforms over our various verticals and over our various offerings, we have almost 1 system per vertical, and that's improved in recent years, but it's still, by and large, the case. And what that means is that it's actually hard to have a coherent view of a user, what they like, who they are, where they are, what they've responded to in the past, what they haven't responded to and to have that as a coherent view across all of our services. So while Yahoo! has a lot of user data, pulling together that understanding in one centralized place and having all of our different offerings access that is something that we don't have in place today and we'll need to get in place in the future. With that said, there is no question that there is tremendous potential here, and we need to improve our overall technology platforms in order to really improve how we use that user data to ultimately meet our users' needs better.

Ken Goldman

Yes, the -- you asked the question relative to the impact on FX in EMEA, and it's about $8 million to $9 million for the quarter. So just think of that number. The total amount that FX affected our revenue was about double that for the total company, which includes some of the Americas regions, obviously, outside of America itself and Asia-Pac. The other thing I just want to make sure, on Alibaba and Alipay, the way it works is Alibaba gets an economic interest in Alipay through a liquidity event, and we would participate through our participation thereon as opposed to directly.

Marissa A. Mayer

And with that, I'd like to thank you all for taking the time to join our call today. I'm glad we've been able to bring our vision for Yahoo! into focus and also reaffirmed our deep commitment to shareholder value, especially with the significant return of Alibaba proceeds. I couldn't be more excited to have our new world-class management team in place serving our partners, advertisers and investors. Together with our top talent, we're going to take -- make the world's daily habits more inspiring, entertaining and personalized, especially with product excellence in mobile. With strong leadership and clear focus, it's time for Yahoo! to execute and bring our business back to growth. Thank you again.


Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation, and you may now disconnect. Have a great day.

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