Yahoo! Inc. (YHOO) Q4 2013 Results Earnings Call January 28, 2014 5:00 PM ET
Mike Santoli - Business Reporter, Yahoo! Finance
Marissa Mayer - Chief Executive Officer
Ken Goldman - Chief Financial Officer
Anthony DiClemente - Nomura
Mark Mahaney - RBC
Heath Terry - Goldman Sachs
Mark May - Citi
Youssef Squali - Cantor Fitzgerald
Carlos Kirjner - Sanford Bernstein
Robert Peck - SunTrust
Ken Sena - Evercore
Ron Josey - JMP Securities
Good afternoon. And welcome to Yahoo!’s Fourth Quarter and Full Year 2013 Earnings Video Webcast. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. The webcast today will be moderated by our business reporter from Yahoo! Finance, Mike Santoli.
Before getting started, I’d like to remind you that today’s presentation will contain forward-looking statements about our expected financial and operational performance, as well as our strategy, products, cost control and related matters. Actual results might differ materially from our projections.
Potential risks factors that could cause these differences are described in our Form 10-Q filed with the SEC on November 12 2013. All information in this video is as of today, January 28, 2014 and we undertake no duty to update this for subsequent events.
Today’s discussion will include non-GAAP financial measures. Reconciliations of our non-GAAP results to the GAAP results we consider most comparable can be founded on earnings slides, which also contains full version of the financial charts and graphs you will see in today’s video. We encourage you to review the complete earnings slides in our Investor Relations website at investor.yahoo.com under the Earnings tab.
And with that, let me turn the program over to Mike.
Welcome to Yahoo!’s fourth quarter and full year 2013 earnings live stream. I am Mike Santoli. I’ll be moderating today’s earnings event. Here with me are Marissa Mayer, Yahoo!’s Chief Executive Officer; and Ken Goldman, Yahoo!’s Chief Financial Officer.
Today, we bring you prepared remarks from both Marissa and Ken around Yahoo!’s fourth quarter and full year performance and the outlook for 2014. Later they will be answering your questions and be taking questions submitted earlier via email.
I’d like to now turn it over to Marissa to discuss Yahoo!’s fourth quarter performance and full year business update. Marissa?
Hi everyone. Thanks for joining our earnings live stream hosted on Yahoo! Finance. Today I am excited to discuss our Q4 performance as well as our latest efforts to deliver growth in our core business in 2014. In terms of revenue ex TAC, we delivered $1.2 billion in Q4. We also built and delivered imaginative new products for our users and advertiser while maintaining our expense discipline.
Our smart investments have yielded sound profitability. In 201, we built the foundation for growth. We hired incredible people, released beautiful, reimagined engaging products with increased quality, speed and intensified focus on user experience and most notably in 2013 Yahoo saw traffic increase after years of decline.
As I said on past calls, getting overall company growth to a pace we are happy will take multiple years but I am very pleased with our progress in my first full year as CEO. In 2014 we will continue our efforts around people, products and traffic while concentrating our efforts on revenue. We expect the business to exhibit stable momentum with modest acceleration in the second half of the year.
Before I talk more about our plans for 2014, I would like to talk a bit about our Q4 performance and 2013 overall. Let’s start with mobile. It’s hard to believe when you view the progress we have made in mobile. But October marks the one year anniversary of our mobile organization. In just 14 months, we have added more than 150 mobile users hitting the milestone of more than 400 million monthly mobile users in Q4. Approximately half of the users we see on Yahoo network overall.
With the average smartphone user tracking their phone more than 150 times a day and the expected 2.7 billion smartphones in existence by 2017, our strategy is to proactively benefit from the platform shift to mobile. Looking at our product execution in Q4, let’s walk through our core product areas – search, communications, digital magazines and video, all powered by Flickr and Tumblr.
First, Search, in Q4 we continue to invest in search user experience and today, I am happy to report that Q4 marks the eight consecutive quarter of revenue growth ex-TAC for our Search business. This past quarter also marks the highest quarterly Search revenue ex-TAC since 2009.
We recently made an acquisition aimed enhancing our Search offering. In Q4 we have hired Aviate, whose technology and talent will be critical in future Search, especially contextual mobile search.
Factoring contacts into our Search offering opens up tremendous opportunities to better answer our user’s curiosity and make their daily habits easier. This is a new area of experimentation with lots of room for rapid innovation and we will be investing here.
In addition to Search people come to Yahoo! everyday to communicate with their friends and family. We know how important emails for our users, so we continue to push ourselves to innovate on our approach to everyday communications.
In October, we launched a new version of Yahoo! Mail introduced threaded conversation use, the ability to quickly reply to messaging contacts and incorporated beautiful photographic themes. The result is improved ease of use and a much modern email experience. We also improved the Yahoo! Mail mobile app, which have seen 150% increased in daily active users since the launches on Android and iOs earlier this year.
We pride our sales on listening to our user and responding to their feedback, after removing the tab feature from mail, we heard from a lot of users that they missed it. So we brought it back with even greater functionality. We also added new search capabilities to make you managing your inbox even easier.
And at the beginning of January, Yahoo! Mail turned on SSL secure protocol for 100% of users and Yahoo! help protocol applies to ads as well, effectively making us the largest secured publish around the web utilizing display advertising.
Our digital magazines are aligned with verticals and our two biggest verticals are Yahoo! Sports and Yahoo! Finance. In November we launched a new Yahoo! Finance, our industry leading business and financial news product. As part of this upgrade, we introduced the new Yahoo! Finance portfolio, which allows user to sync to their brokerage account for a real-time user performance.
We also introduced the new Yahoo! Finance app for iOS, putting a stream of relevant business news, deeper date integration and access to the stocks you care about in the palm of your hand. Similar to the desktop experience, user response has been incredibly positive, with daily active user doubling since we launched the new app.
Turning to Sport, at the beginning of January, we released with a new way to easily capture, transform and share your favorite sports moments, think of them as animated GIFs with captions, effects and comments. In a three weeks since launched users are loving this feature, with more than 15 million loop used.
Since we last spoke, we also launched two new digital magazines, Yahoo! Food and Yahoo! Tech. These new digital magazines combined with things we love about magazines, they are elegant and editorial excellence with the vast resources of the internet, original in carrier content, photos and videos to create an immersive beautiful experience.
With Yahoo! Food we are bring together recipes, food trends and new techniques through bite-size content, engaging videos and sending photos carried from Flickr and across the web. Yahoo! Food is being led by also our editorial team, assemble from meeting culinary publication, including Bonaparte, Martha Stewart Living and Gourmet.
And best-selling author, Emmy-winning TV host and columnist David Pogue joined Yahoo! this past fall to lead Yahoo! Tech. David and his talented team will be producing daily and weekly features, with sage advice for everyday tech consumers to help them learn about the latest products and trends that are relevant to their daily habits.
Since launching on January 7th we have already seen more than 10 million unique users on these magazines. Although, it’s too early these engagement numbers speak to region scale of Yahoo! network. For example, if Yahoo! Food and Tech or print magazine together they will be the third largest U.S. print magazine in circulation.
Over the last year our mobile team has been hard at work imagining the future news and information consumption. At start of the integration of summary technology into our Yahoo! app last spring and continued this -- with this month launch of Yahoo! News Digest.
Yahoo News Digest brings user summaries and the most important new series twice a day. The stories are algorithmically produced from multiple sources, editorially curated and include infographics, maps, photos and other content from across the web. The response to News Digest just has been tremendous. Since launch over 50% of all app installed have become daily active users. This sort of stickiness is incredibly rare.
In concluding our news and journalism Kathie Correct [ph], the award-winning journalist joined as our global anchor. Bringing top editorial town to Yahoo will continue to be a focus in 2014 as we strive to bring our users the very best content on the web.
The fourth core area of our business is video. Video has gone from being a novelty to a daily habit for millions of users. This year, we introduced our new video experience, Yahoo Screen. As we built the product we focused on three themes – building mobile first, creating a personalized experience and offering exceptional content. In Q4, we updated screen with further customization features including ability to follow your favorite channels and save videos to view later on.
During this December’s I Heard Radio Jingle Ball Concert we saw more than half a million screens on Yahoo Screen. And with respect to mobile during our recent live stream of one direction’s [indiscernible] party half of all streams came from mobile devices. With the right content, we can achieve scale on video and in particular mobile video. That’s why we’ll focus on bringing the best partner content from across the web to our users.
In fact tonight, we’ll be broadcasting President Obama’s State of the Union address live on Yahoo Screen with our partner ABC News. These four areas of our business are powered by two incredible engines, Flickr and Tumblr. With more than 10 billion photos, Flickr is one of the world’s most comprehensive photo platforms. It is also the platform powering the beautiful images and products like Yahoo Weather app and the Yahoo Mail Themes. In Q4, we introduced Flickr Photobooks with the series of creation tools that analyse our photos and intelligently crop, position and place them seamlessly. Now your photos can go from Flickr to a printed book in one easy click.
And Tumblr is a go-to platform for curators and creators to express themselves. The acquisition has already begun to deliver strategic advantages. For example, Yahoo Food and Tech are built on Tumblr. Our editors are using Tumblr to publish the content and overall we have seen some really encouraging growth metrics on Tumblr. Time spent on Tumbler has grown almost 50% year over year and the number of mobile post on Tumbler has grown more than 200% over the same period outpacing the growth in total post which is up more than 40% year over year.
Earlier this year, I announced some really exciting news on traffic. After years of global traffic decline in Yahoo, we managed to reverse the negative trend. In June of 2013, we achieved year over year growth. Effectively, our raise in the declines in the prior year. And then in September 2013, we achieved cost over with our 2011 global traffic levels raising in two full years of decline. These were incredible milestones for Yahoo and I regard this progress as a testament to the impact of building great products that engage, inspire, and entertain our users. In January, we started 2014 with traffic solidly higher than last year which poises us well for growth.
All the great progress you see is a result of incredible talent we have at Yahoo. We really made hiring our priority in early part of 2013 and these efforts paid off. Over the year, we received more than 340,000 applications, more than double the number we received in 2012. That transition takes more than 140 applications for every position we filled in 2013. And in Q4 alone, we received more than 85,000 applications or more than 50% increase from Q4 2012.
Our biggest talent investment in 2012 was in our technical capability. I’m proud to say that more than 40% of our hire is our engineers bringing technical experience to our core products and re-establishing Yahoo as a home for technical talent. Our strategy around hiring continues to be focused on addressing almost critical product means.
In the past, we have talked about the multiyear road to growth of being comprised of a chain reaction, people, then products then traffic then revenue. In 2013, we made tremendous progress bringing great talent to Yahoo, launching inspiring products and increasing traffic across our network. In 2014, the chain reaction leads us to revenue growth monetizing our now growing traffic. We will be amplifying our efforts on delivering value to both users and advertisers. I’m confident that our efforts around people, products and traffic are the right prerequisites to position us for revenue growth.
And with that I turn over to Ken to discuss the financial highlights for Q4 in 2013 as a whole and then I’ll discuss our plans for 2014.
Thank you, Marissa, and welcome and good afternoon, everyone. Thank you for joining us for our quarterly and full-year 2013 earnings presentation. As I look back over the last year, it is clear we have made meaningful improvements to the business with new operating metrics, updated improving processes and regular business reviews. We have developed a good operating rhythm for the company.
As a result of the hard work, we’ve laid the central foundation for long-term growth. All of us have built enormous energy and effort to reposition Yahoo and instill financial discipline accountability throughout the organization. Momentum has begun to show in our growth initiatives and make no mistake, this is a new company with a clear focus and discipline.
We are excited with the opportunities to drive business growth in the future and look forward to sharing this with you as the year progresses. Now before I walk through the details of Q4 for the year, let me once again touch the progress we’ve made against our three financial priorities.
First, on revenue growth, not only we laid the necessary groundwork, global revenue growth was our number one goal. Looking at results from this past year, our revenue stabilizing and we continue to make meaningful progress in our user engagement and ad volume trends.
We've also developed new ad technologies and formats with the launch of native stream-ads for display, high-end converting ad performance for search. Advertising have also improved products and growing audience. Revenue ex-TAC fell approximately 2% in Q4. It was roughly flat for the full year versus 2012.
Growth in search revenue ex-TAC was once again the highlight with Q4 showing the strongest year-over-year growth for that business in 2013. Ex-TAC revenue from display was lower in Q4 than prior year, but we are seeing improving trends from that business and notable returns are positive in number of ads sold. These encouraging signs lead us to believe the business is heading in the right direction.
Second, on costs, we continue to be mindful of our cost structure and focus on our spending to fund our business needs, investment plans. Excluding benefit from patent sale of $70 billion, non-GAAP operating expenses were up just 4% for full-year. For the prior year, despite having aggressively ramped spending in key areas like mobile and product development, capital spending once again came in significantly lower than year-over-year at $109 million in the fourth quarter and $338 million for the year.
The capital spending in 2013 was down 33% from 2012 and down 43% from 2011. This type of increased discipline will allow us to push further investment initiatives and continue to redeploy resources in 2014. Third, let me talk about capital efficiencies and commitment to shareholders. We made significant progress in this area in 2013 and are pleased with our efforts. We managed our balance sheet well and continue to hold this as our priority. We create a more efficient capital structure by raising convertible debt at very attractive rates into fourth quarter.
We further increased our cash position by realizing a $304 million net gain from our Japanese yen hedge and generating strong free cash flow from operations. And we continued our ongoing commitment to shareholders as we repurchased 129 million shares at an average cost of $25.95 per share, for a total of $3.3 billion during the year. We ended the year with 1,037 billion fully diluted shares outstanding.
Now, let’s move to our quarterly and annual results. First, I'll walk through the Q4 and full-year 2014 financial results then I will close with our views on forward-looking guidance. As a reminder, I will focus most of discussion on non-GAAP results. These numbers exclude stock-based compensation expense of $85 million and $278 million, and restructuring charges of $8 million and $4 million for Q4 and full-year 2013 respectively.
Non-GAAP results also exclude a goodwill impairment charge of $64 million for both the fourth quarter and full year and the related tax impacts from all of these items. Please see our earnings slides on our Investor Relations website for complete reconciliation between GAAP and non-GAAP results.
So, I would now start with the financial results for Q4 seen in slide five and then I will go from there and talk about annually -- some highlights for the year, and I will also talk about the income statement details and balance sheet and then follow-up the guidance. So for Q4, revenue ex-TAC was $1.2 billion, right at midpoint of our guidance range.
Search revenue ex-TAC continues to show growth with a gain of 8% in Q4 as reported or 11%, excluding the impact of Korea. This was offset by display and other TAC and other revenue ex-TAC, which were down in the period. Adjusted EBITDA was $478 million in Q4. While we are making meaningful investments to drive future revenue growth, we continue to take a disciplined approach across, minimizing margin impact.
The number is also impacted by patent sales to operate company in the fourth quarter which benefitted EBITDA by $70 million. Non-GAAP operating income was $330 million resulting in non-GAAP operating margin ex-TAX of 28%.
Non-GAAP net income was $484 million, up 17% from Q4 2012. Strong performance from equity investments built a 49% growth in earnings and equity line, providing a boost net income. Non-GAAP EPS was $0.46, up over 30% for the period and our fully diluted share count for the fourth quarter was 1.039 billion shares, a 11% drop from the prior year.
When excluding the patent sale benefit, non-GAAP EPS was $0.41. Finally we continue to generate significant free cash flow of $256 million for the quarter, up 16% from Q4 2012 as adjusted.
Now moving to the full year review, as seen in Slide 6. 2013 reported revenue ex-TAC was $4.426 billion, roughly flat with 2012. We faced three significant headwinds this past year, including the close of Career [ph] a low payment from Microsoft and foreign exchange primarily related to yen, was totaled approximately 150 million. Adjusting for these items, revenue ex-TAC would have grown approximately 2.5%.
Adjusted EBITDA was 1.564 billion, a decline of 8% versus 2012 due primarily to the significant investments in technology. Non-GAAP operating income was 935 million, a decline of 11% from 2012. Non-GAAP net income was 1.646 billion, up 4% from 2012. Non-GAAP diluted EPS was a $1.52, a 16% improvement over 2012.
Finally, free cash flow was 786 million for the year, a decline of 11% from prior year as adjusted. It excludes the one-time payment of 550 million that we received in cash in 2012.
Now let me walk through the financial results for Q4 in more detail. Starting with search, search revenue ex-TAC grew 11% in Q4. Excluding career, billing was in Q4 the strong quarter for this business in 2013, we also faced the toughest year over year comparison in the period. Business really ended the year on a strong note.
We continue to see improvements in click yield which has been the primary driver of performance all year. Looking closer to search metrics, paid clicks grew 17% on a year over year basis while price per click fell 3%. These metrics resulted in year over year growth of 13% in search click revenue in Q4. We believe this figure best represents the overall health of our search business which has clearly been an area of stress.
Pay click growth was driven by a number of factors where we have seen ongoing benefits from improved date formats given we passed the anniversary of the implementation. This is a credit to our sales efforts as we have really been pushing to sign up new customers as well as the adoption of new ad formats.
Additionally, we design the search user experience, in mid 2013 in addition to the new ad unit launches have helped drive clicks further. Price per click was down due to the continuous shift in redo [ph] mix as international clicks with lower price per click particularly from mobile devices continue to grow faster than domestic.
Looking geographically, the Americas region continued to perform well with search revenue ex-TAC up 13%. In Asia Pacific we successfully completed the search migration in the Taiwan, Hong Kong markets late in the quarter. So we now have safely completed with the transition.
Turning now to display, revenue ex-TAC was 491 million in the fourth quarter while this is a decline of approximately 6% versus the prior year, the underlying fundamentals tell a recovery story.
First, the rate decline in this business continues to slow as the efforts have stabilized and transformed our display business again to the result. And more importantly, volume is clearly turning to growth. Looking closer to components, the number of ads sold grew 3% in the quarter. So a meaningful sequential improvement in this metric. Our metrics show that display ad volume reached an inflection point in mid-2013 and continues to improve as we drive and engage with product improvements and launched innovative ad formats.
Price per ad fell 7% as we sold the low percentage of ads on a premium basis. However the primary driver of this in Q4 was stream match [ph] product, which we introduced recently and currently yield lower than premium ads, as the marketplace is still growing again. We are very encouraged by the acceptance of products and as we stated in our Q3 call, the service potential is significant especially -- more especially at the mobile platform.
The price per ad excluding our stream product was up marginally in the quarter. Other revenue ex-TAC fell 9% year-over-year to $248 million, driven by decline to some of our leads, listing and fees businesses.
For revenue detailed by region, please refer now to Slide 12. In the Americas region, total revenue ex-TAC was flat on a year-over-year basis. In EMEA, revenue ex-TAC fell 3% versus the prior year. And turning to Asia-Pacific, excluding the impact of Korea, revenue ex-TAC was down 4% year-over-year, driven primarily by unfavorable foreign exchange. In constant currency, this would have been up 3% year-over-year.
Now let me turn to expenses. Beginning with traffic acquisition cost, TAC was down $59 million to $66 million for the quarter. The closure of Korea cost is above the client. We also substantially completed migration of our Asia Pac region in Q4 which also had impact.
With the migration now substantially done in all markets, TAC from our Search business is now negligible. As a result, please note that going forward we will turn our focus back to GAAP revenue and margin reporting as results have no longer impacted by the different presentation for non-migrating markets.
Non-GAAP total operating expenses were $870 million a quarter, a decline of $11 million, roughly flat versus Q4 2012. Excluding $70 million benefit from patent sale which shows up as a cost and expense, adjusted expenses were $940 million of roughly $60 million. From time to time, we have and we’ll make conscious decisions to monetize certain of our technology patents by selling to operating companies.
Sales and marketing product development expenses were both higher versus last year, which reflects the investments and acquisitions, we made in our businesses -- in our business in 2013 to reposition the company for growth. G&A was roughly flat and we ended the quarter with approximately 12,200 employees up 4% from a year ago period but was significantly reduced contract to headcount.
Offsetting these increase in spending Q4 is a gain of sales of the patent for $70 million as I noted. In terms of profitability, adjusted EBITDA was $478 million and equaled with our margin revenue ex-TAC, up 40%. Non-GAAP income was $330 million from margin on revenue ex-TAC of 28%.
Finishing of the income statement, other income was a loss of $3 million in the quarter versus a benefit of $18 million in Q4 2012. 2012 does include interest on the Alibaba preferred shares, which was subsequently due in 2013.
In addition, we realized approximately $5 million of interest expense as a period, related to the amortization of the convertible note offering for one month. Other notes has zero coupon, we recognized accrued interest for accounting purposes.
Looking forward 2014, this appears interest expense of approximately $50 million each quarter. Our non-GAAP tax rate was 19% in the quarter. This is a bit lower than normal due to the favorable resolution of certain tax audits, which benefited our effective tax rate for the period.
Earnings in equity interests grew 49% year-over-year to $222 million. Alibaba once again showed impressive growth in his calendar Q3 results, now contributes approximately the same amount as Yahoo! Japan. Finally non-GAAP EPS was $0.46 in Q4, a gain of 31% as non-GAAP net income grew 17% in a fully diluted share count, the period is down 11%.
Let me now quickly turn to a few balance sheet and cash flow items to call out. As mentioned earlier, cash and marketable securities were just under $5 billion at the end of 2013. So walking through the change in cash over the quarter, we ended Q3 with $3.2 billion. We raised $1.3 billion in convertible note offering, debt of the cost spread. This was incredibly successful offering for us as we capitalized on favorable market conditions.
We also realized $304 million from settling our portion of yen hedge contracts. We had positive free cash flow of $256 million while made the uses of cash for acquisition of $60 billion net and share repurchases totaling 6 billion shares of stock in the quarter and average price of $36.42 billion for nearly two-third -- or nearly $231 million or $81 million net of the proceeds for equity issuances.
Before I walk through the outlook, please note that as I mentioned earlier, we’ll be shifting our reporting focus to GAAP revenue. As the Search transition is substantially done and this metric now best reflects how we run the business.
We will continue to also provide revenue ex-TAC guidance this quarter but our discussion will focus more on GAAP revenue going forward. With all the progress we have made in 2013 it gives me increased confidence with the health of our business and long term outlook.
We expect the following for Q1. GAAP revenue could be in the range of 1.12 billion and 1.16 billion; revenue ex-TAC to be in the range of 1.06 billion and 1.1 billion. Adjusted EBITDA to be between 290 million and 230 million and non-GAAP operating income to be between 130 million and 170 million.
For the full year, we are refraining from giving detailed guidance at this time as it is difficult to predict the inflection point for sustainable growth. Looking back in 2013, it was an investment year to executing a number of major initiatives to build a solid foundation for our future success. Revenue was stable, we brought on a lot of talent. In 2014, we expect to continue investing and we expect to see continued momentum especially in the latter part of the year.
With the continued investments in the business we expect EBITDA to decline modestly on a year over year basis. Also going forward, we estimate the tax rate to be closer to a normal rate of approximately 37%.
Thank you again for your time today and now let me turn it back to Marissa.
Thanks, Ken. 2013 was a year of investment and one to build a strong foundation for Yahoo. It was a year of literally thousands of small but important movies to get the Yahoo! engine fit bringing on tremendous talent, focusing on making Yahoo the absolute best place to work, creating a culture that deeply values performance, clarifying our focus, particularly on mobile and technical excellence and delivering new more beautiful inspiring products, thus actively grew Yahoo network users more than 20% to 800 million monthly users is proof that this approach is working.
As we look at 2014 and beyond, there are few areas in our industry that are emerging as fundamental to the future and core to any growth engine – mobile, social, video and native. Looking at Yahoo’s offers in mobile, social, video and native advertising, we see businesses are so small but are growing incredibly fast. In fact, collectively these four areas at Yahoo grew nearly 60% year over year in 2013 which we believe outpaced the industry growth in these collective areas.
Looking to 2014, we believe that our growth in these new businesses will accelerate even beyond 60%. We have clear strategies in these areas to achieve profound growth. Turning first to mobile, mobile is a huge driver of growth. As I mentioned earlier today, we surpassed 400 million monthly mobile users in Q4. As we continue to expand and strengthen our mobile products, we are also strengthening our mobile advertising offerings. Those offerings saw revenue nearly double year over year in 2013.
In the context of a larger business, our mobile revenue is still not material but the growth trend is very promising. As I said on earlier calls, we believe there are ad products that have the potential to monetize better on mobile than on desktop. Basically when you look at ads that are specifically designed for the mobile experience we believe we can outperform we have seen in traditional display.
We remain confident that there is a big opportunity for Yahoo and we will continue to focus and invest in mobile monetization in 2014. In terms of social, I spoke earlier about the tremendous growth we are seeing on Tumblr. Last week comScore announced that Tumblr desktop traffic grew faster than any other social network in 2013. And as I mentioned earlier, we are seeing exciting things on mobile too. Since March, monthly mobile users on Tumblr have grown more than 50% and this is not just about user growth. This is about revenue growth too.
Recently we announced that native ads on Tumblr would be supported by Yahoo advertising. This means our personalization and targeting capabilities will be wrapped into Tumblr ads benefitting both our users and our advertisers. We think the opportunity here is pretty incredible. The average Tumblr post is reblogged 14 times which is a huge part of the distribution power of the Tumblr network. But the average sponsored posts Tumblr number for a native ad is reblogged more than 10,000 times.
In video, we are focused on building our audience and our library. Changes in user behavior have guided our approach to video content, focusing on introducing a personalized well organized video experience that engages our users. While our video offering is still nascent, we have made some good progress in 2013.
In September we launched our new screen app across tablets and phones and beginning of Q4 we introduced new channel customization features and additional content partners like [Pulse Feed], the New York Times and College Humor. With our continued commitment to expanding our video offering, we believe we are well positioned to grow video revenue in 2014.
Turning to Native, our growth here is really about two things, stream ads and digital magazines. Our Yahoo! Stream ads continue to see positive traction with both users and advertisers.
We demonstrated the effectiveness of these ads and were confident they will continue to scale. With digital magazines, we are introducing a seamless native advertising experience. While the advertisings are clearly marked, they are inspired by the elegance and richness of the digital magazine content with articles, recipes, videos and other tips that are fun to read, easy to share and can be promoted.
Moving on from mobile, social video native, I would like to take a moment to discuss our ad technology. Over the course of 2013, one of our largest investments was around improving and simplifying our advertising technology staff. We wanted these improvements to really unlock the power of Yahoo!’s data, reach and analytics while bringing the beauty and ease of use that we provide -- that we pride ourselves on to our advertisers.
In January, we announced a new unified advertising solution, simplifying and reducing the number of ad products we offer. Similar to how we streamline our consumer facing products, we’re bring a unique value proposition to market as a simplified one stop shop for our partners. Part of this announcement was Yahoo! Ad manager, a brand new buying platform for a small to large advertisers who want to take advantage of our self-service advertising opportunities including image ads, stream ads and Tumblr sponsored post.
Yahoo! Ad manager also provides better access to data and targeting segments, inventory both on and off network as well as analytics. The early reaction in the advertising community has been extremely positive.
In closing, in 2013 as we are doing many smaller but important things, refreshing dozens of products across the PC, Android and iOS, building our technical workforce and setting more than 30 products.
And 2014 is about doing bigger things in key areas of growth, fewer changes but each larger and more strategic. Getting the company growing at the rate we would like will take several years but we are committed to grow in 2014.
With that Ken and I would like to take your questions.
Thank you, Marissa. That brings us to the Q&A portion of our live earnings event. (Operator Instructions) The first question will come from Anthony DiClemente of Nomura.
Anthony DiClemente - Nomura
Thank you very much. Actually I have two, one for Ken and one for Marissa. Ken, just on your forward guidance, I think your guidance implies a significant margin compression EBITDA in the first quarter. Just wondering if you could talk about the nature of the investment that are kind of driving that in the first quarter and then how should we expect those investments, the sort of cadence throughout the year?
And then Marissa, this is just a bigger picture question on your acquisition strategy. I think that Yahoo! has acquired 30 different companies since the beginning of last year. And I wonder if you could just remind us, is there a common theme across the acquisitions that investors should be mindful of and even going forward in 2014 and ‘15, is your acquisition strategy. Should we expect the same velocity of acquisitions going forward? Thanks very much.
I thought you might ask -- somebody might ask some questions about guidance. Let me suggest this, first of all many investors would be comparable. If you really think about it, we are pretty much of the run rate of expenses that we expected to continue for some time at the current run rate. So when you think about Q1, we really have to think about the expenses, really sequentially from Q4 to Q1 and that sort of drives when you coupled that with the revenue we suggested, that sort of drives the operating profit and EBITDA.
I think as year goes on, our expenses will be, that’s pretty much around the level we are expecting and so as the years goes on, the increased revenue should hopefully propel to higher profitability, I mean that’s the way we are trying to work it. So from the expense point of view, we sort of go into year with a state where we believe is pretty much steady state run rate. There are some investments beyond that but that’s really what drives Q1, if you think about the EBITDA, vis-à-vis Q4, comparable kinds of expenses but obviously with the lower revenue.
Thanks Anthony and in terms of acquisitions, there are basically three different types of acquisitions that we do. We do smaller talent acquisitions where we tend to tuck those teams in which have largely been in the mobile area. We also make small strategic acquisitions. I would put 88 [ph] for example, in that bucket. I would also put some only powered both Yahoo app as well as the new Yahoo News Digest app. And then finally we have some acquisitions that are really fundamental of building blocks into the Tumblr, allows us to tap into a new demographic, allows us to really participate in new growth engines like social and it’s really fundamentally be counting a key part of our overall technological offering as well as our strategy in that it helps bring new content on to the Yahoo platform through all the creators and curators who are active on Tumblr but also we are now beginning to use it as our internal content management system on things like our new digital magazines food and tech.
And in terms of what we intend – this year, we will continue to opportunistically look for talent acquisitions as we continue to grow particularly our technical workforce and our mobile workforce and we will also look for good strategic alignment, it will largely align with our four main areas – search, communications, digital magazine and video as well as Flickr and Tumblr.
Our next question come from Mark Mahaney of RBC.
Mark Mahaney - RBC
Marissa, could you just comment a little bit on the big cash growth departure, and what that means in terms of the strategy, do you need to do a major reshuffling or if that change is pretty incremental in order to get to the revenue goals that you talked about and Ken, really quickly the sale of patents, I assume that wasn’t in your guidance for the quarter, could you just talk broadly about what your patent portfolio looks like, should we expect more of these kinds of gains forward going?
Ultimately re-K [ph] was not a fit and that’s very regrettable conclusion. That’s a conclusion that we try very hard to avoid but it was the right decision in the end for the company. In terms of moving forward, we are not planning to replace our position. We have a very strong sales team and a very strong sales leadership team. And ultimately this also gets media opportunity to be much more involved with revenue as we drive towards revenue growth.
In terms of – yes, clearly the patents were not in our guidance, that’s why I provide the number – we achieved without the patent sales $0.41 in the quarter which still is comfortable with our guidance. If you look at it – from time to time in the past and I suspect, from time to time in the future we will look to monetize some of our patents, where particularly ones that we don’t find core to our internal needs and so we will look to that.
I would also make the comment which I said before is our intention always is to sell those to operating companies or entities.
Next question comes from Keith Heath Terry with Goldman Sachs.
Heath Terry - Goldman Sachs
I was wondering if you could give us a little bit more detail in terms of where you are actually seeing the traffic growth, it’s certainly notable that you are seeing the kind of user growth that you are but in terms of the engagement, whether it’s specific properties or time spent either on mobile apps or within verticals on the site, where is that user growth translating into the higher levels of usage for Yahoo as a property? And then Ken, just quickly in terms of the buyback when we are thinking about sort of the pace, of execution here, how similar should we expect it to be till the last round of buyback that you have done?
In terms of traffic growth, one of the big drivers of traffic growth for us is clearly mobile. As users are discovering our offerings both on mobile web and the mobile app, we are seeing a very nice uptick in traffic and corresponds to 400 million monthly users that we ultimately reported on. In both desktop and on mobile, we are seeing tremendous engagement on finance, on sports and on weather and we also continue to have a very steady base of traffic that comes from Yahoo mail, basically people continue to use that as a key communication platform in their daily life and that ultimately is something that’s actually grown over time.
Yes, relative to the buyback, I think we see it a few different ways. One is we are thoughtful on the price, we have also looked at what I said before is we like the idea of using much of our free cash flow to buyback stock. And so, I think, we feel good about, frankly, having $5 billion in cash today roughly. We could obviously go down, we’ve also said that we like to keep that number again it’s not in line the sand but approximately $3 billion plus that gives us the way with resulted to buyback extra amounts of stock, acquisitions and invested businesses and so forth. So in my sense from what I’m going to see right now is we’ll continue to be active purchaser of our stock this year but again watching being sensitive to the price.
Next we’ll take a question, I mean, by way of email. As a user of both Tumblr and Yahoo! services, I have noticed that these platforms have yet to become significantly integrated. Any comment on when and how Yahoo! plans to bring these two services more closely together? Marissa?
Sure. Thanks. I think that when you take a look at what’s happening with Tumblr, you can see some our integration strategies clearly when you think about Yahoo! Food and Yahoo! Tech. What we see there is there is a tremendous amount of activity on Tumblr in the area of food. People posting recipes, dishes that they've made, observations about restaurants and food trends, and our editors are taking that content to manage our own editorial reporting and combining it to ultimately present Yahoo! Food.
So, we’re taking post from Tumblr and reblogging them under the Yahoo! Food platform. We’ll also blogging our own original content. So we’re overall really excited about what the opportunity will be overall to integrate these two and this is in early precursor to what we like to achieve.
Great. Well, next we had a question from Mark May of Citi.
Mark May - Citi
Thank. I appreciate you taking my question. First and probably for Ken, well, you’re not guidance, I wonder if there's anything that you would think is kind of missing with the simplistic starting point for how to think about it. I believe your net revenue ex-TAC on a performing basis last year was up 2.5%. You clearly have something this year that are additive to that picture. You have building, improving user engagement trends and you have things like Tumblr monetization, stream ads, video, et cetera, which seem to be additive this year versus last year. So is it fair to say given that simplistic framework that the 2 -- plus 2.5% is kind of the starting point to grow on when we are thinking about revenue growth for this year?
And then, second question, I believe you said if you excluded stream ads, which I think are still relatively new that your display ad pricing would have been modestly up. I believe the reported number was down in the like 7% range. That would suggest a pretty significant amount of volume of stream ads early on, is that fair to say?
Yeah. I don’t have exact number there, but I think that is fair to say, the -- on guidance let me, you’re working very hard to get me to raise the number. In all respect, I sort of look back at our success so to speak in ’13 and we took a little bit different approach going into ’14.
We also, frankly, look to the estimates out there and so forth. So there’s a lot of things and so we felt for this year, we felt it would be makes more sense for us to give distinct guidance if you will for the first quarter.
Look at some of the trends, we do feel good about some of the trends we see for this year. We do think some of those will kick in little bit more so in the back half of the year. So that's positive. We do like the engagement going up as Marissa talked about. So those things we look is all favorable.
But, again, I think we felt that let’s take a quarter a time here for guidance. I think the key, I’ve seen this before is, the most important part is to see the inflection. We really do see a sustainable growth and we can trend off of that and I think when we see that we’ll feel better about giving much, maybe perhaps, longer forward guidance that we did this time.
So that’s how we thinking about, we are looking at, what we did in Q4, how that compared the prior year, Q1 which we think is appropriate for what we see today and then we will go forward from there on.
And I would just chime in on the stream ads. Overall, we are really excited about them. As you noted that we are doing a large volume. It tends to be lower priced advertising, but we’re incredibly bullish and we’re integrating them in more and more prices.
So for example our stream ads are now one of the primary raise that we monetize on mobile. We can integrated them also into Yahoo! Mail on both desktop and mobile and when you look at our Homepage, Sports, News, Finance, our celebrities site, Yahoo sign, all are now incorporated stream format that makes it possible for us to put stream apps on them. So we expect to see this business grow as the auction space becomes a marketplace base becomes mature on, stream apps and overall we’re very, very excited and encouraged by the trend and adoption response in the advertiser community on this.
Next question is from Youssef Squali of Cantor Fitzgerald.
Youssef Squali - Cantor Fitzgerald
Starting the almost 25 or 30 acquisitions you made, can you maybe just speak to the organic growth in both revenues and in traffic, so could you just strip out those acquisitions, what would be organic numbers looked like and then on the mobile, can you just help us the size of that business, right now you talked about how great growth is and we have every reason to believe it. Maybe just help us kind of gauge a basis of where it is right now where is the monetization on mobile versus desktop and how quickly do you think you can get mobile revenues to equal or approach mobile usage?
Relative to the acquisitions I think we have been very clear, the bulk of the acquisitions really in ’13 – all about acquiring talent, so we really were buying so to speak revenues of products per se, it was really about acquiring talent and people. So we really had I would say virtually no revenue associated with them. Tumblr has some revenue back half, second half of the year, again not very material to our numbers, we are obviously extremely hopeful there, if you will relative to ’14, where we think it will be an important element to our revenue in ’14. So really from the acquisitions didn’t affect our revenue in any material way for ’13.
Next question is from Carlos Kirjner from Sanford Bernstein.
Carlos Kirjner - Sanford Bernstein
Hi. Thanks for taking my question. I have two. Could Yahoo revive Panama or any other homegrown search platform, or are you now dependent on Microsoft or someone else for processing your queries? And secondly, you said EBITDA will decline year-on-year in an industry growing at least in the mid-to-high teens. Your total number of employees is roughly constant for the last six quarters or so. While you can’t grow by cutting cost, is it the time to cut some cost and resize the business to focus on the areas where you can win, do you really need more than 12,000 people, which is above a third of what Google has? Thank you.
Sure. Overall in terms of search, we completed the transition this past quarter of our Panama platform so and by in large part it is now been shut down. As we mentioned in the previous question, search is very strategic for us. We’re long in search and we do intend to continue to invest in the search user experience and in really making sure that Yahoo users on the network ultimately, really gather tremendous experience.
In terms of the overall employee headcount, we do need to make investments. We’ve tried to be very smart about this in terms of managing the overall headcount, not only in terms of hiring new people but also managing this through attrition, through performance and through reallocation.
And so, for example, there’s a lot of areas where people have ultimately left the business and we’ve chosen to take that headcount and reinvested much more core areas. One such example would be mobile where we grew the number of people working on it from well under a 100 people to now over -- approximately about 500 people inside the company over the last year without remarkably changing the overall number of employees.
Carlos, that’s a good question. We continue to wrestle with that and I’m sure overtime, we do need and we will become more efficient. So we will work that. On the other hand I would say, right now at least in ‘13 and ’14, the focus is getting to ship back to where we can grow again. So we are focused on adding people in the areas we need.
We did as you saw the headcount were down little bit in Q4, so there were some actions we did take on that score so to speak relative to headcount. So, yeah, I think you will see us get smarter on expenses and efficiencies overtime as we get smarter about the business where we can do that. So we’re not forgetting about that if you will. But we also think that we are behind in some areas. And we do need to catch up and the only way we can do that is by investing.
I would point out on the other hand, that we have really worked hard on capital expenditures. We had the lowest numbers in many, many years, this past year relative to capital expenditures in ‘13. Even number that we suggested in terms of ’14, we still think will be relatively low because it’s around $500 million, which is relatively low compared to historically what we’ve been spending here. So we are watching capital expenditures very carefully. We’re watching expenses very carefully. On the other hand, we have a little bit of a catch up to do, because frankly some lack of investment that we feel was made or wasn’t made if you will back years past.
We have another email question. Does Yahoo plan to bring back the high impact premium display advertising that was central to its strategy in the past as a compliment to its newer contextual in line advertising, or will in line advertising fully replace the more visual ad campaigns for the foreseeable future? Marissa?
We’ve hired the managers right now ultimately as a mix. So there will certainly be like need of advertising, we think it’s an area of investment and a profound growth moving forward. The same time, we know that some -- this last year ad can really add not only a lot to the advertisers value but also to the user experience, which is why for example we will still have our billboard unit. It’s available on our home page as well as many different custom installations both on our homepage and across the network. And so we will continue to manage this ultimately as a mix, trying to find the right balance of both user experience enhancement as well as advertiser value.
Next question is from Robert Peck of SunTrust.
Robert Peck - SunTrust
It’s strictly a follow-up on Mark’s question about Henrique. Personality aside, could you just talk a little bit, give us a little bit clarity on what did you see that wasn’t being achieved and how do you think Kathie and Ed in a team can focus on that you address what you were seeing over the last couple of quarters from Henrique? Thanks.
Sure. Out of respect for Henrique, I’d rather not comment on the past and on his performance, but rather on what we’re going to do going forward. The opportunities here are around much – we have a much more direct involvement with our sales team, sales leadership, Don and Rose. And on the media side, working with Kathie and some of the key immediate talent we brought in – to really shape a tremendous overall content strategy and I think that given the fact that we really lack this year, what we are seeing is overall a streamlining and something that allows for more flat organization and about our focus on execution.
Next question is from Ken Sena of Evercore.
Ken Sena – Evercore
Yahoo finished 2013 at about 20% EBIT, but if you go back as far as when the search alliance was announced, margins were essentially the same. As we think about the search expenses and should we be looking at an opportunity as being realized and fully re-invested or is it something that you are still working towards perhaps with Microsoft but potentially down the road with other partners?
We still do a lot of investments in on search and maybe I guess Marissa will talk about that. We are still investing very heavily in search.
I can’t comment on what was on before, but search is certainly a very capital intensive business and I think the comments that Ken made in the previous question around our rigor on capital expenditures and the fact that they were less than many of the preceding years is really where you are seeing, ultimately that benefits. So there has been some amount of reinvestments but ultimately it’s really about much better capital control around those expenditures and investments,
We will now take a final question from Ron Josey of JMP Securities.
Ron Josey - JMP Securities
I wanted to ask about display pricing and specifically I think in December Yahoo announced open dope [ph] user data of the third parties and announced partnerships with the few leaders in the problematic space. And in January you unveiled new ad exchange in your new ad product. So I am wondering if you can talk about the benefits that Yahoo should receive in opening up the user data that others and particularly if that’s helpful or should work in leading the pricing growth for display overall?
Sure, I think there is a lot of really incredibly exciting pieces happening inside of the display business with those partnerships as well as these new products. [indiscernible] many times both from internal Yahoo to external is that Yahoo has creams of the cream of the inventory of the web as well as the data of the web. It is a easy segment users, see people who have been on the Yahoo homes or Yahoo sports, ultimately getting very good handle on demographics and really making that data and targeting available with our analytics as well as our inventory, on our network as well as off network.
But having in the past is advertisers have had a pick and choose. One of our many ad products support one of their favorite things, the data or the inventory or the analytics and now Yahoo ad manager we are bringing all of that together. So you can really get the best of the data and targeting, the inventory as well as the analytics.
Thank you for all your questions. That concludes the Q&A portion of our call. Before we go, I will hand it over to Marissa for her final remarks.
You may have noticed today’s earning presentation that was in the format of Yahoo News Digest. Similar to our [indiscernible] we have done in the past, here is the Yahoo News Digest summary of our Q4 2013 earnings. Mobile users exceeded 400 million in Q4 with mobile revenue up nearly 2x in 2013. Two, mobile social, video and native grew nearly 60% year over year. Three Yahoo successfully grows 2013 traffic year over year after years of decline. Four, Yahoo ad manager simplifies and strengthens opportunities for advertisers. Five, Yahoo generated 786 million in free cash flow in 2014. Six, new 140 applications for every hire and 40% of hires are engineers. Seven, 3.3 billion returned to shareholder through buybacks in 2013.
And with that, I want to thank the teams at Yahoo! Finance and Yahoo! studios for once again helping us leverage our own products to deliver today’s live stream. Thank you and see you next quarter.
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