Yahoo! (YHOO) Marissa A. Mayer on Q1 2016 Results - Earnings Call Transcript

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Yahoo!, Inc. (YHOO) Q1 2016 Earnings Call April 19, 2016 5:00 PM ET

Executives

Shibani Joshi - News Reporter, FOX Business Network

Marissa A. Mayer - President, Chief Executive Officer & Director

Kenneth A. Goldman - Chief Financial Officer

Analysts

Eric J. Sheridan - UBS Securities LLC

Heath Terry - Goldman Sachs & Co.

Justin Post - Bank of America Merrill Lynch

Brian Nowak - Morgan Stanley & Co. LLC

Steve D. Ju - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Anthony DiClemente - Nomura Securities International, Inc.

Peter C. Stabler - Wells Fargo Securities LLC

Brian J. Pitz - Jefferies LLC

Ron Victor Josey - JMP Securities LLC

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Youssef Squali - Cantor Fitzgerald Securities

Ken Sena - Evercore Group LLC

Douglas T. Anmuth - JPMorgan Securities LLC

Operator

Good afternoon, and welcome to Yahoo!'s First Quarter 2016 Earnings Video Webcast. At this time, all participants are in a listen-only mode. Later, we will 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 Shibani Joshi.

Before getting started, I want to remind you that today's presentation will contain forward-looking statements about Yahoo!'s projected financial performance and our strategic plan, as well as statements about the board's strategic review process. Actual results might differ materially from our projections. The potential risks that could cause these differences are described in our press release issued this afternoon, the related slide presentation on our Investor Relations website, and our Form 10-K filed with the SEC on February 29, 2016.

All information in this video is as of today, April 19, 2016, and we undertake no duty to update it for subsequent events. In today's discussion we'll discuss non-GAAP financial measures. Reconciliations of our non-GAAP results to the GAAP results we consider most comparable can be found on our earning slides, which also contain full versions of the financial charts and graphs you'll see in today's video. We encourage you to review the complete slide presentations on our Investor Relations website at investor.yahoo.com under earnings.

And with that, let me turn the program over to Shibani.

Shibani Joshi - News Reporter, FOX Business Network

Welcome to Yahoo!'s first quarter 2016 earnings video webcast. I'm Shibani Joshi, and I will 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'll bring you prepared remarks from both Marissa and Ken around Yahoo!'s first quarter performance, and later they'll be answering your questions as well.

And now, I'd like to turn it over to Marissa.

Marissa A. Mayer - President, Chief Executive Officer & Director

Good afternoon and thank you for joining today. Our first quarter of 2016 was very active for us and we're off to a good start to the year, achieving the top of our revenue guidance range. Despite internal restructuring, significant business changes, and substantial external noise about our company, Yahoo! employees made great progress against our previously announced 2016 plan. I'm proud of their work, and today we'll highlight much of that progress. But before we dive into the quarter, I want to address the strategic alternatives process we announced on our last earnings call. Given the obvious interest of our base of shareholders, I want to be very clear about the actions we're taking and address the misconceptions.

To begin, let me be unequivocal: Our board, our management team and I have made the strategic alternative process a top priority. Our strategic review committee is comprised of independent directors, well experienced in strategic transactions. They are leading a well-run process to achieve the best possible outcome for our shareholders. The management team and I have supported the board's process from the start and we are moving expeditiously. To give you a sense of the time, energy and leadership being devoted, management participates in daily calls and meetings often several per day with the strategic review committee and its advisers. I personally believe that the right transaction could unlock tremendous value in two ways.

One, by realizing strategic synergies and accelerating growth in our business. And, two, by separating our equity stakes from our operating business, enabling various value accretive subsequent transactions. We've been very thoughtful about running a high quality process, designed to keep interested parties engaged and highlight the tremendous value in Yahoo!.

These efforts have included delivering a comprehensive management presentation and assembling a robust data room. Our efforts to-date reflect clear, decisive action to move forward quickly and in a way that we believe will yield enhanced value.

Over the past two months, Ken and I and the rest of the management team have spent time in person and on the phone with interested participants, including some of the most well-known respected names in the industry. We've been responsive and engaging, having personally answered hundreds of questions and requests for information. We have a well-defined, aggressive calendar to move forward at the fastest possible pace. In order to preserve the value and integrity of the process, we do not intend to provide future updates or comments on specific details.

I want to state it again, our board and management team are fully committed to maximizing value for shareholders, and are completely aligned in pursuit of strategic alternatives. We're working expeditiously and diligently. We're here to serve shareholders and create value, and we are doing all that that entails.

In terms of our board composition, I'm pleased to report that we appointed two new board members this past quarter, Cathy Friedman and Eric Brandt. Cathy spent 23 years at Morgan Stanley as a strategic and transaction adviser to many of the most important companies in healthcare and biotech. Eric brings significant financial experience in the technology sector, and most recently helped lead the acquisition of Broadcom. We're delighted to have them join us.

With that, I now want to turn to Yahoo!'s operating business. On our last call we announced Yahoo!'s 2016 strategic plan to drive product engagement, grow Mavens revenue, simplify the business, and operate efficiently.

Our actions in Q1 show that we've successfully balanced our focus on moving forward with strategic alternatives, well executing on our plans to lower costs and improve long-term growth. I'm pleased to report that our Q1 performance across GAAP revenue, revenue ex-TAC, adjusted EBITDA, and non-GAAP operating income met our expectations.

In Q1 we delivered $1.087 billion of GAAP revenue and $859 million of revenue ex-TAC. We delivered a healthy adjusted EBITDA of $147 million, well above the high end of our guidance range. Now let's take a closer look at our Q1 progress towards our 2016 plan.

As discussed on the last call, the first point of our plan is playing to our strengths to grow user engagement and advance our mission as a guide to digital information. We've focused on three global platforms: Search, Mail and Tumblr, and four core verticals, news, sports, finance and lifestyles, in our priority markets, the U.S., Canada, the U.K., Germany, Hong Kong and Taiwan.

And for our advertisers, we're committed to our two key offerings, Gemini and BrightRoll. Let's start with Search. Over the past three years, we've increased our revenue per Search by nearly 3X and have achieved highly optimal Search RPMs. This achievement in RPM has shifted our focus to improving query and click volume. So we've pursued syndication and distribution opportunities, including those with Mozilla and Oracle. Additionally, improving the quality of our Search experience is key to driving volume. And our partnerships with Microsoft and Google help us optimize the Search experience for our users as well as optimize our Search revenue.

In Q1 we saw higher PPCs, but a lower number of queries and clicks. As a result, click driven revenue fell 15% year-over-year. As a reminder Mobile Search generally sees lower revenue per Search than desktop. While headwinds exist here, both in terms of volume and the mix shift to Mobile, we're working hard to drive query and click volume to achieve growth.

Turning to Communications, Yahoo! Mail is the most substantial driver of engagement across Yahoo!'s network and we continue to invest in speed, stability, and differentiation to drive growth across Mail's significant user base of hundreds of millions of users. We see encouraging trends in our Mail business, as new features are growing user engagement. We recently launched the ability to integrate Gmail, Outlook and AOL accounts with Yahoo! Mail and users love it. Over the past few months we've added more than 5 million mailboxes to Yahoo! Mail through IMAP in.

Let's move to our core verticals: News, sports, finance and lifestyles, which marry Yahoo!'s authoritative editorial voice with useful tools. In Q1 we launched a new Yahoo! app, and Yahoo.com to help users discover, consume and engage with news, and users are responding enthusiastically. In the U.S. we're seeing 14% more total page use on Yahoo.com from last quarter and 10% more page use per user in our app.

In sports, we've signed partnerships with Major League Baseball, the NHL and the PGA to stream live games and premium video content to sports fans. We also launched Yahoo! Esports for gamers to tune in to live games, read exclusive editorial coverage and stats and engage with fellow fans.

As we make Yahoo! finance a more dynamic and useful experience, we've added smart price notifications to alert users when stocks in their watch list change significantly. This encourages users to engage with the app for an even deeper analysis of their portfolios. We also announced a partnership with Berkshire Hathaway to host the first ever annual live stream of its annual shareholder meeting on April 30th.

In the lifestyles vertical, we launched menswear on Polyvore to reach an even broader base of fashion lovers. With this launch users on Polyvore can now discover the latest trends in mens fashion, create personalized looks from their favorite brands and retailers, and shop for mens products.

Yahoo! has long held a commanding position in news, sports, finance and lifestyles. We continue to see promise in these four core verticals as we strive to maximize their potential and drive deeper engagement.

On Tumblr, we're continuing to see strong trends in user engagement, with monthly Mobile active users up 12% quarter-over-quarter, and up 35% year-over-year. One unique element of Tumblr's community is to connect users through shared interests and passions, and the redesign of the replies and notes functionality brings conversations to the forefront of the Tumblr dashboard. After launching this feature, Mobile users have been engaging with notes over 20% more. So we're pleased to see early promise of these launches.

In addition to our sharpened focus on consumer products, we've also strengthened the value of our offering to advertisers through Gemini and BrightRoll. On Gemini, Native install ads gained traction with advertisers spend up 50% quarter-over-quarter. We also integrated Gemini into the BrightRoll DSP to let advertisers buy premium Native Video placements on Yahoo! Properties and Native Display advertisements on third-party exchanges. Through the quarter, we grew our DSP platform business and saw increased spend from key brand advertisers. Also in Q1, we launched programmatic Native advertising on the BrightRoll Exchange giving advertisers, DSPs and agency trading desks access to Native Mobile inventory. We realized strong growth on our Exchange on both the supply and the demand side. As the advertising industry shifts towards programmatic, our hard work on Gemini and BrightRoll solidifies Yahoo!'s position as a leader in digital advertising.

The second aspect of our 2016 plan is to drive Mavens' revenue growth. We set a target to deliver $1.8 billion of Mavens revenue in 2016, and we anticipate we will meet or exceed this goal. We delivered $390 million in Mavens GAAP revenue in Q1, up 7% year-over-year. On Mobile, we delivered $250 million in GAAP revenue, up 11% year over year. On video we're increasing supply and focusing on user engagement across our network. The significant increase in supply creates downward pressure on price-per-ad, so we're turning our efforts towards video ads, which generally yield higher prices. While some of our video revenue faced headwinds, we did see growth in video revenue across O&O, Native and Tumblr compared to last year. Since engagement drives revenue, we are proud to see improved engagement with our editorial and licensed content. In the U.S. we saw time spend watching videos up 94% year-over-year.

Our Native Display ad business continues to grow increasing 28% year-over-year. Our Syndication business contributed significantly to this growth as our strong relationships with the developer community continue to bear fruit. In Q1, we hosted our third domestic Yahoo! Mobile developer conference in San Francisco. We also expanded the reach of Yahoo!'s Mobile developer conference internationally by hosting conferences in Taiwan and Hong Kong. The Yahoo! developer network has now grown to 250,000 developers that all have the ability to monetize their apps with Yahoo! App Publishing. In all, Syndication accounted for a third of Native GAAP revenue in Q1.

On Social, monetizing Tumblr remains a focus as we optimize new ad formats. This quarter we rolled out blogless ads, reducing the time needed to onboard an advertising client and get their sponsored posts live. This makes it easier for advertisers to spend on Tumblr. We also rolled out community targeting, which allows advertisers the ability to target against specific fandoms and communities on Tumblr. With new formats targeting, and a dedicated direct sales team, we are making progress building Tumblr sales pipeline.

Overall, our investments in Mobile Video, Native, and Social are critical to counterbalancing our legacy business declines, and we're progressing towards our $1.8 billion revenue goal for 2016. Also in Q1 we streamlined sales support and operations and continued to fine tune our international sales model. We remapped orders, accounts, opportunities, and advertisers across all sales personnel and internal tools. While this was a huge undertaking, the sales team did a fantastic job of seamlessly aligning to the new structure. The resulting approach improves customer satisfaction by reducing friction in client touch points and dramatically shortening the sales cycle. As we continue to train and scale our global sales team to execute with sharper focus, we're improving our delivery on performance and pricing.

Let's turn to the third component of our 2016 plan, simplifying the business to improve execution. We shared bold plans last quarter to simplify Yahoo! and to strengthen our value to users and advertisers. In Q1 we acted decisively to clarify our product portfolio. We exited the food, health, parenting, makers and travel digital magazines to focus on our core verticals of news, sports, finance and lifestyles. We shut down Livetext as a standalone product, but will explore ways to utilize the valuable learnings and technologies into future messaging launches. We're also in the process of sunsetting autos, games, real estate and Smart TV. By sunsetting products that don't meet our aggressive growth goals and reducing investment in high margin legacy products, we're already yielding better focus and execution. Additionally, we continue to explore ways to generate value through the divestiture of non-core assets including real estate and non-strategic patents. Ken will be sharing more about the progress we've made on this front.

The fourth point of our 2016 plan is to efficiently align resources to operate more effectively. On our last earnings call, we announced that we would reduce our workforce and refocus employee efforts to ensure that everyone is directly impacting critical initiatives. Today, we have 1,200 fewer employees working at Yahoo! than we did at the end of Q4. These difficult workforce reductions and related actions were necessary, and we took great care to treat affected employees respectfully. Today, we have less than 9,200 active employees, and 700 contractors, with some employees on transition. And we're down roughly 22% since last year, and 42% since 2012.

Our efforts to tighten our global footprint continue as we plan to close our offices in Burbank, Buenos Aires, Dubai, Madrid, Mexico City and Milan. Pending consultation processes consistent with local laws for these international offices, we anticipate completing these office closures by the end of Q3.

Throughout Q1, we meaningfully reduced our expenses, compared to last year. In a moment Ken will cover this in more detail. Overall we intend to achieve quality and stability in our day-to-day operations despite a reduced cost basis for workforce expenditures. Before I turn it over to Ken, I want to acknowledge the incredible people here at Yahoo! and their resilience. The changes we instituted this quarter were necessary, but they were not easy. In particular the workforce reductions and office closures were hard on our close knit teams. Despite these changes, along with the external noise, the company rallied to deliver a productive quarter against ambitious goals. From the global sales team who tirelessly delivered great return on client investments, to the product teams that shipped impressive new products and features, our Q1 performance reflects the strength and resilience of Yahoo!. The people I work with here inspire me every day. I'm so proud of what we've achieved.

The board and I understand the paramount importance of maximizing value for shareholders. As we strive to clarify Yahoo!'s next chapter, it's more important than ever to make Yahoo!'s operating business as strong as possible. For this reason, we will continue to execute on our plan, in parallel to the board's efforts to pursue strategic alternatives. We are pleased that the company's solid performance this quarter achieves the milestones laid out in the 2016 strategic plan. I remain confident that our focus on execution will create a better Yahoo! for our users, advertisers, employees and shareholders.

I have long respected Yahoo! as a pioneer in our industry. Over the past 3.5 years, we took a company that, despite its rich history, faced legacy revenue declines and we forged a Yahoo! that is stronger and more modern. We built a strong base of technical talent to deliver a product portfolio for a Mobile first world, grew our Mobile audience to over 600 million monthly users, one of the largest Mobile audiences in the world, and created a $1.6 billion Mavens business from scratch. That business by itself would rival some of today's fastest growing start-ups. We saw the potential of Yahoo! and we continue to believe in it. The high level of interest throughout the strategic alternatives process validates those efforts, and has been both humbling and inspiring to see.

Now here's Ken to talk more about our Q1 financials.

Kenneth A. Goldman - Chief Financial Officer

Thanks, Marissa. Good afternoon, everyone, and thank you for joining us today. I plan to review our first quarter operating results in the context of our strategic alternatives review, and later close with the outlook for the upcoming quarter. As Marissa mentioned earlier, strategic review process is a top priority for us. We're working responsibly and with a real sense of urgency, and are fully committed to supporting the board's process.

In Q1, we delivered solid results that were better than our financial guidance, with GAAP revenue of $1.087 billion and adjusted EBITDA of $147 million. We delivered strong free cash flow of $297 million in the quarter, translating to $0.30 per share of demonstrable value. This was achieved through our efforts on cost controls and working capital efficiencies, including strong collections and an early receipt of relatively large tax refund. Additionally, we reduced capital spending by 32% year-over-year to $76 million. Despite the restructuring charges and ongoing strategic review, we executed on our 2016 plan which is a real testament to the professionalism of our employees and the leadership of our sales and product teams.

We got off to a good start for the year in our plans to drive operational efficiencies and improve execution. We have aggressively cut costs and continue to drive those efficiencies. We made meaningful progress toward our $400 million savings target for 2016 to improve profitability. We reduced our active head count, which is now 9,200. This represents a 42% reduction in total workforce, including contractors since the beginning of 2012. We have created a more focused company, resources properly aligned to our strategy. We exited non-strategic businesses, closed six offices, and implemented efficiency programs.

Looking ahead, we'll continue to work on longer-term projects to reduce our fixed cost base to continually achieve a more efficient and effective cost structure. We are making real progress monetizing our non-core assets and generating cash value. We are in active dialogue for the sale of our Santa Clara real estate, and we are confident the sale will be completed. We plan to maximize the value of our significant non-core IPSs. This evaluation is being coordinated with the strategic review process. As a reminder, this management team has already delivered nearly $600 million of total cash value from IP monetization. We realize another $31 million in cash value from our Japanese yen hedges in Q1, resulting in a total value of nearly $700 million from hedging our balance sheet investment.

Our commitment to shareholders has been consistent and long-standing. Since early 2012, we have reduced our fully diluted share count by approximately 270 million as we return nearly $10 billion capital proceeds. Compared to acquisitions, we have returned over four times the capital to shareholders over the same period. We are relentlessly focused on ways to drive revenue, reduce costs, improve cash flows, and prudently allocate capital to deliver real value to our shareholders.

Now let's run through our first quarter financial results in more detail. Once again, I will focus most of the discussion around non-GAAP results, which exclude stock based compensation expense of $108 million, restructuring charges of $57 million, advisory fees of $9 million, and a $39 million non-cash loss on our Hortonworks warrants.

Our financial highlights for Q1 can be seen on slide five. GAAP revenue is $1.087 billion, down 11% year-over-year. Traffic (22:39) acquisition costs were $228 million which were up 24% compared to prior year, primarily due to Gemini Search. We also saw growth in Native Syndication. Revenue ex-TAC was $859 million.

Now taking a closer look at Search, GAAP Search revenue was $492 million, which was down 9% year-over-year. As Marissa noted, Search click driven revenue declined 15% year-over-year. This was a result from paid clicks decline of 21%, driven primarily by overall traffic trends across Yahoo! Properties and the desktop. Our Gemini Search marketplace has achieved increased monetization, but we did migrate less supply than anticipated. Search price-per-click grew 7% year-over-year, mostly as a result of mix shift towards higher monetizing segments and regions. Search revenue ex-TAC declined 21% year-over-year, driven primarily by declines in paid clicks and increasing partner payments as a percentage of revenue.

Now moving to Display. GAAP Display revenue was $463 million, roughly flat year-over-year, as our growing Mavens revenue continues to offset by legacy drag. America Display revenue grew modestly year-over-year. And in addition, we saw an impact of $11 million from exits, and have now fully annualized the BrightRoll acquisition. Display ads sold increased 8% year-over-year, driven by continued growth in our Native business across Yahoo! Properties and partners and growth in our programmatic channels. PPA declined 6% year-over-year, caused by overall pricing pressure and a continued mixture from premium to Native formats. Display revenue ex-TAC was also roughly flat year-over-year.

In our Mavens businesses, we saw 7% GAAP revenue growth year-over-year for those areas in aggregate. While largely in line with our expectations, more work is required on video and Mobile Search. Mavens contributed 38% to our traffic driven revenue, up from 33% in the prior year. Mobile GAAP revenue grew 11% year-over-year. And our Native Display revenue across all devices grew 28% year-over-year, driven by Mobile across partner properties.

We grew video supply in the quarter and saw high sell-through rates in our most premium inventory. We also saw more leading brands adopt our BrightRoll DSP. In the short term, we have seen some headwinds on the managed network business. However, we do see large opportunities ahead in Native Video and through the BrightRoll platform. In terms of other revenue, ex-TAC declined 39% year-over-year due primarily to the ending of the Alibaba related fees last September, resulting in a headwind of approximately $70 million and reductions in our listings and fees businesses.

For revenue detail by region, please refer to slide 10. America's GAAP revenue declined 13% year-over-year. As a reminder, the prior year included TIPLA amortization and excluding FX headwinds international GAAP revenue was approximately flat year-over-year. Now let's take a couple of minutes to go through our expenses and income in a bit more detail.

Non-GAAP operating expenses were down 12% year-over-year, or $111 million. Depreciation and amortization was down $12 million at $140 million. Our non-GAAP cash expenses for the full quarter came in better than expectations at $712 million, declining nearly $100 million year-over-year.

This was primarily workforce driven, a result of our ongoing focus on costs over the last year, culminating initiatives announced last quarter. We are driving a business transformation, enabling us to invest in key initiatives for Search and Communications by changing our approach to doing things in a few select areas. For example, we are scaling our sales and regional teams by getting the right balance between direct selling and support costs to achieve improved productivity.

We rationalized our regional footprint exiting multiple magazines and properties. We are targeting opportunities to efficiently support a revenue plan in G&A. In technology we are reducing with density across corporate IT, advertising and Search platforms. We reorganized our lab teams to better align with our core consumer and advertiser products. We have closed or consolidated our real estate footprint to reduce facilities related costs and improve cash flow. We delivered adjusted EBITDA of $147 million in Q1, above our guidance range.

Rounding out the income statement, earnings and equity interests were $82 million, our non-GAAP tax rate is 35% and it's the estimate we expect to use for all of 2016 non-GAAP presentations. Non-GAAP EPS was $0.08.

Turning to the balance sheet. At the end of Q1, we had $7.1 billion in cash and marketable securities, up $5.8 billion net of our convertible and other debt. The change in cash balance from Q4 to Q1 was primarily driven by free cash flow of $297 million. Of note, capital spending was $76 million, lower than many recent quarters.

We had a better than cash taxes in the quarter due to the receipt of $190 million tax refund as a result of carrying back net losses to prior years.

We realized excellent working capital management in the quarter, primarily from improved collections, assuming we receive a similar dividend amount from Yahoo! Japan this quarter as we had last year. This translates to nearly $4.50 per share of demonstrable value the first half of this year.

Now, let me cover guidance. Before I walk through the outlook, we will continue to execute against our 2016 plan for the year as we described last quarter. We expect our revenues in Q2 to be generally consistent with our seasonal trends, which would deliver a slightly lower sequential revenue. As we continue to work through our platform shifts and exits.

On costs, we will remain disciplined to meet our cash flow and expense targets. For Q2, guidance we expect the following – GAAP revenue in the range of $1.05 to $1.09 billion. TAC of approximately $240 million, revenue ex-TAC in the range of $810 million to $850 million, and adjusted EBITDA in the range of $135 million to $155 million, and non-GAAP operating income in the range of negative 5 million to 15 million.

In closing, despite the potential for employee distraction despite increasing demands for our time, we have had a solid start to the year. We are achieving our financial goals, shipping products, driving engagement and meeting our advertisers' needs. As Marissa discussed, we maintain our utmost focus on the strategic alternatives process.

With that, Marissa and I would like to take your questions. Shibani.

Question-and-Answer Session

Shibani Joshi - News Reporter, FOX Business Network

Thanks very much, Ken. And that brings us to the Q&A portion of the live earnings event. If you have a question at this time, please press the star key and then the 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Please limit yourself to one question.

And now the first question will come from Eric Sheridan at UBS. Please proceed, Eric.

Eric J. Sheridan - UBS Securities LLC

Thanks for taking the question. Marissa, maybe one for you really on the Mavens business. When we look at the growth in the Mavens business and we continue to see some of the mixed shift to Mobile and to Mavens, how should we be thinking about that projecting as we move through the year? What are the key initiatives, what are the key tipping points we should be watching for as we move quarter-to-quarter and you sort of exit at a run rate you'd like to see by the end of the year? Thanks.

Marissa A. Mayer - President, Chief Executive Officer & Director

Overall as you saw, we saw Mavens grew at around 7% year-over-year. We have a goal of $1.8 billion over the course of the year, and we do expect to meet or exceed that goal. Overall we saw a lot of strength in Mavens in our Native Display products and especially on Mobile as well as in Syndication. We continue to work very hard to make sure we keep good growth in video, as well as in Social, particularly on Tumblr. And we are seeing some headwinds overall in Mobile Search. Both because Mobile Search monetizes at a slightly lower rate than desktop Search, as well as the fact that it's a very competitive space in terms of overall retaining users, having their default Mobile Search set to Yahoo!. So we're working very hard on all of those. We have initiatives in place to make sure we keep our growth vibrant there, and I think that you'll see a very consistent trend over the course of the year in terms of year-over-year growth for the Mavens businesses collectively.

Shibani Joshi - News Reporter, FOX Business Network

Okay, moving along. We're going to hear next from Heath Terry at Goldman Sachs. Go ahead.

Heath Terry - Goldman Sachs & Co.

Great, thanks. I was wondering, with reference to the decline that you saw in ad pricing on the Display side, if you could just break that down for us a little bit in terms of what you're seeing within, how much of that is mix related, and then what you're seeing within the segments, whether you want to think of it as Mobile and desktop or Native and network, sort of what's going on in the – to the extent we can sort of think about this in a same store sales basis? What are you seeing in terms of the monetization and pricing that you're able to generate within the advertising business?

Marissa A. Mayer - President, Chief Executive Officer & Director

Sure, in our view almost all of the decline was in some way or another mix shift related because there's actually three different mix shifts happening. One we're seeing more of our Display Ads Sold programmatically versus premium and obviously programmatic ads do come at a lower price than premium ads. Our Mobile, the shift from desktop to Mobile, we are happy overall with our Mobile monetization. That said, it's still is not in the state where it's higher than our desktop monetization. We've been doing a lot of good work there on things like cost per install ads that have recently seen a lot of strength this past quarter. We saw advertisers spend up 50% over just Q4, so we're starting to see better trends in terms of Mobile monetization. We really want to get it to the point where it surpasses our desktop monetization.

And also in terms of video, we know that video is a really lucrative format where premium ads may sell for anywhere on the order of $5 to $10. You might see a video ad, especially a premium video ad anywhere from $15 to $60 for 1,000 impressions. So we have been moving heavily towards video ads across the network in order to drive PPA up. That said, we right now do see that overall what happens is when we put extra supply into that marketplace it does cause short-term price pressures, and so we have added a lot of video supply to the BrightRoll marketplace, particularly in the video segment of it, both the marketplace in form of the DSP as well as the Exchange, and that has caused somewhat we view to be short-term price pressures overall in our display formats that we think that that will improve. So those are the three mix shifts, premium to programmatic, desktop to Mobile, and static display or classic Banner ads being shifted to videos. In each of those cases for different reasons we're seeing some price pressure, though we do feel we have a handle on it and have initiatives in place to create some correction over the course of the year.

Kenneth A. Goldman - Chief Financial Officer

Yeah. I would just add, even though Ads Sold were up about 8% but the reality is Mobile was up many, many times over that, so it's exactly, as Marissa said, relative to mix shift certainly to Mobile from desktop.

Heath Terry - Goldman Sachs & Co.

Great. Thanks, Marissa. Thanks, Ken.

Shibani Joshi - News Reporter, FOX Business Network

Next we go to Justin Post of Bank of America Merrill Lynch. What is your question?

Justin Post - Bank of America Merrill Lynch

Thank you. When you – I don't know if you can comment, but when you think about the sales process that you're in, can you provide any more details on timing or kind of offers that you're seeing? I know it's a big issue. I don't know, you have some issues on what you can disclose but any more details you can provide. Thank you.

Marissa A. Mayer - President, Chief Executive Officer & Director

Obviously we offered remarks earlier in our comments, and in order to protect the integrity of the process, we are not going to comment further on things like timing and/or particular offers, and so I hope you can understand that.

Justin Post - Bank of America Merrill Lynch

All right, thank you.

Shibani Joshi - News Reporter, FOX Business Network

Next, we'll be moving along to take a question from Brian Nowak at Morgan Stanley.

Brian Nowak - Morgan Stanley & Co. LLC

Thanks for taking my questions. I have two. The first one is, on the sale process, or on the core, can you help us out on a rough way to think about your tax basis on that core business? And then secondly, on the fourth quarter call I think you talked about how you expected your adjusted EBITDA run rate to be around a billion dollars in the second half of 2016. Given how you're kind of running ahead of schedule in the first quarter, give us some reasons why I guess it couldn't be even better than the billion dollar run rate in the back half. Thanks.

Kenneth A. Goldman - Chief Financial Officer

Nice try on that second question. That was good. On the tax basis, we do have some numbers there. We're not yet prepared to provide those. I fully expect that at least by the time we do our 10-Q we will provide that, but we do have some numbers there. And, again, I think I've said before, it is quite material, so that's why I'll leave there.

We're not going to update any of our guidance for the year or for the second half, and so there's really no change there. But, yeah, I think a better way of saying it is: Yes, we are very focused on costs, EBITDA, cash flow, and I have to say, in general, I'm quite pleased with – we're quite pleased with the overall performance this quarter working both the capital and I'm going to keep very, very focused on that capital expenditures, very focused on working capital, particularly how we think about accounts receivable and collections, and a number of other areas to really maximize cash, which ultimately creates additional value for our shareholders, so that's how I think about it, and so clearly, yes, we had a good start on EBITDA, and we are very focused on it, I shouldn't just say me, but we are all very focused on EBITDA and growing cash, and we'll leave it there.

Brian Nowak - Morgan Stanley & Co. LLC

Thanks.

Shibani Joshi - News Reporter, FOX Business Network

Next we hear from Steven Ju at Credit Suisse. Your turn, please.

Steve D. Ju - Credit Suisse Securities (USA) LLC (Broker)

Okay, thanks. Marissa or Ken, I'm looking at the contribution margin disclosure on the deck and I was wondering if you could help clarify the puts and takes there. The contribution margin seems to be coming down as your Mobile and Mavens revenue are increasing as a percentage of the total. So, is there anything you can say from the structural perspective on the relative differences between Mobile and desktop, Mavens versus non-Mavens? Thanks.

Kenneth A. Goldman - Chief Financial Officer

Yeah, no, I'm not going to go really much beyond what we show in our numbers. A good question relative to how we do look at it, but let me go back in terms of – we're fundamentally – most of our costs in this company are what I call shared services. We are functionally organized, and so in the regions we have some direct costs related to the selling costs, and then we do have costs that are specific to certain businesses, particularly in Communications or Mail and particularly in Search. But for the most part, the vast majority of our costs, I'm thinking much of our engineering costs, I'm thinking much of our marketing, in sales and G&A are very functionally organized and so therefore we tend not to go too far relative to thinking about product line P&Ls at this point.

Steve D. Ju - Credit Suisse Securities (USA) LLC (Broker)

Okay, thanks.

Shibani Joshi - News Reporter, FOX Business Network

Anthony DiClemente of Nomura Securities is next.

Anthony DiClemente - Nomura Securities International, Inc.

Thank you for taking my questions. I have two. First question on the strategic process: Is the board continuing to pursue the reverse spin of the core business option? Or – I noticed you didn't really talk about that in the prepared remarks, or is it just because given the sale process that's under way, that that reverse spin option has been foregone or deemphasized?

And then second question, probably for Ken, just can you please help us understand, in terms of your key business partnerships and relationships, upon a change of control, which of those would need to be renegotiated in the event of a sale or change of control and I'll just leave it at that. Thank you.

Marissa A. Mayer - President, Chief Executive Officer & Director

I would just say on the first question regarding the reverse spin, yes, the reverse spin remains an alternative. It is something that our strategic review committee and our board continues to contemplate as one of the strategic alternatives for how we may separate our Alibaba stake and how we might move forward, so we're doing some work there, but obviously the larger volume of work is being done on the process around the possible sale.

Kenneth A. Goldman - Chief Financial Officer

Yeah, I've always felt that it's really much of that's in parallel, just to add to that. Clearly we are looking at how we separate Alibaba, because that is key to value-add. So as Marissa said, that is clearly in parallel to the sale process, alternative process, so it very clearly is there, so we are doing that. On the key partnerships, I really can't really – it's fair to ask. I really can't go too far. We are looking at various structures that would have an impact as to how we think about what partnerships we would have to change, or amend, whatever. So that is something that we are continuing to look at. We are working with the SRC, we are working with our advisers. And so depending upon various legal structures, we'll have more impact on how we think about that. So I'm not going to comment. I think it would be inappropriate so to speak for me right now to comment on those, because that really is up to how the structure we do, and then the decision we take thereon, and a lot of it with the SRC.

Anthony DiClemente - Nomura Securities International, Inc.

Okay. Thanks, Ken.

Shibani Joshi - News Reporter, FOX Business Network

Moving on to Peter Stabler at Wells Fargo. What is your question?

Peter C. Stabler - Wells Fargo Securities LLC

Thanks. Two for Marissa if I could. First of all, Marissa, wondering if you could update us on your data strategy. And how would you step back and compare and the contrast your data capabilities with your two large platform competitors? And then, secondly wondering if you could update us on your self-serve platform. We don't hear too much about the small business opportunity for Yahoo!. Wondering where that falls in terms of your priorities, if at all. Thanks very much.

Marissa A. Mayer - President, Chief Executive Officer & Director

For the self-service platform, I just wanted to ask one question. Do you mean in terms of advertisers or in terms of (42:08) small business our hosting platform.

Peter C. Stabler - Wells Fargo Securities LLC

In terms of advertising.

Marissa A. Mayer - President, Chief Executive Officer & Director

Okay, in terms of our overall data strategy, we really continue to hear from our advertisers that one of the things that they turn to for Yahoo! is our exclusive data. We have great insights into what users care about, what they read about, what they comment on. We also, with their permission, you do build on their email and data and some interest expressed therein. And so overall, our data remains something that's incredibly valuable, and we've worked really hard over the past 18 months or so to make that data more available for targeting to help our advertisers better identify their audiences. And it's something that we've gotten very good feedback on. The simplification of our advertising platforms to Gemini and BrightRoll and having all of our different offerings, Native, Banners and Video available on our BrightRoll DSP as well as the BrightRoll Exchange with that data is something that's gone particularly well. So we've got a really comprehensive dataset. We've simplified how users, how our advertisers can use it. And overall that's worked well for us, and we've gotten very, very favorable reviews there.

In terms of our self-service platform we do have self-service offerings, for example on our Gemini platform, our self-service on Search is available through Bing as well as through Google self-service offerings. On Display, we continue to cater our overall tools to both agencies, as well as advertisers. The tools admittedly are more to cater towards larger advertisers. That said, we continue to add new functionality to make it both more useful and more accessible to medium to small businesses.

Peter C. Stabler - Wells Fargo Securities LLC

Thanks, Marissa.

Shibani Joshi - News Reporter, FOX Business Network

Brian Pitz at Jefferies. Go ahead, please.

Brian J. Pitz - Jefferies LLC

Thank you. Any takeaways or color from operating over the past several months with Google monetizing Search queries? Bottom line are you seeing any changes to RPS that are driven by shifts in Google's direction? Thanks.

Marissa A. Mayer - President, Chief Executive Officer & Director

Sure, as I pointed out on the call, we've actually done a good job continuously over the past 3.5 years to drive our Search RPM revenue per thousand searches up. And we've actually over the course of the past 3.5 years, we've more than tripled that number. We've continued to see nice strength from the Google partnership. We value both our partnership with Bing and with Google, and by having both we really are able to both optimize revenue, optimize return for our advertisers as well as optimize the overall Search experience for our end users in terms of the quality of both the results and the features. And so it's something that's working very well for us. And on the whole, we're excited about it. That said I should point out that it still does monetize a less than half of our desktop traffic overall.

Brian J. Pitz - Jefferies LLC

Great. Thanks.

Shibani Joshi - News Reporter, FOX Business Network

Ron Josey with JMP Securities. Please proceed.

Ron Victor Josey - JMP Securities LLC

Great, thanks for taking my questions. I wanted just to follow up Marissa maybe on Gemini and Search and specifically talk about the progress Yahoo! Search has had with the transition to Gemini. I think you said supply, or maybe Ken, you said supply was less than anticipated this past quarter. So wondering when you expect to have all verticals transitioned onto Gemini, and then once transitioned, or at least those that have transitioned, have they reached the RPS targets in 1Q and are they still on track for break even in the back half of the year for those verticals. Thanks.

Marissa A. Mayer - President, Chief Executive Officer & Director

Obviously there's a number of different ways that we can deploy Gemini. As we've talked about on past calls, there are times when the system is learning, when we may accept lower revenue in order to have that system learn. In order to drive growth in Search, we have been applying Gemini more judiciously. And so we have taken less revenue suppression, basically higher revenue, by deploying it less in learning situations, which means we generally tend to deploy it in verticals that were transitioned early on and have already achieved parity with some of the other offerings we see in the market. We also tended to deploy Gemini more on our Mobile Search than on our desktop search, just because of different TAC rates that we pay overall on Mobile. And so it overall makes Gemini more a healthier option on Mobile.

So we've overall been judicious and we haven't necessarily made the entirety of the investment that we've hoped to, or in some cases planned to, in Gemini. That said, the verticals we have transitioned have performed very well, and are now very competitive with great results for advertisers and good options for us in terms of how to monetize the searches.

Ron Victor Josey - JMP Securities LLC

Thank you.

Shibani Joshi - News Reporter, FOX Business Network

Mark May at Citigroup, it's your turn next, please.

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Thanks, just a housekeeping one left for me. Can you just remind us, in terms of the relationship with Yahoo! Japan, how much revenue this year you'll generate from various licensing and/or Search relationships, and kind of when those expire? Thanks.

Kenneth A. Goldman - Chief Financial Officer

Yeah, it's roughly about a little over $200 million in total that we get from Yahoo! Japan. And it's roughly half and half between Search and Royalty. I'm giving rough numbers, but that's roughly where it is. About total of about $200 million.

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Thanks, Ken.

Shibani Joshi - News Reporter, FOX Business Network

Okay, next --

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Any expiration date?

Kenneth A. Goldman - Chief Financial Officer

Well, there's two. The Yahoo! Search has expiration date of August of 2017. And there's no expiration date for the Royalty, so that's an ongoing relationship.

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Right.

Kenneth A. Goldman - Chief Financial Officer

But the Search relationship does end in August of 2017.

Mark A. May - Citigroup Global Markets, Inc. (Broker)

And does the Search revenue, sort of from a quarterly standpoint, mirror the seasonality of your overall Search business? Or is it more rateable over the quarter?

Kenneth A. Goldman - Chief Financial Officer

As I think about it, it's pretty rateable over the quarter actually, it's pretty rateable. If you're talking about the – I assume you're talking about the Search from Yahoo! Japan, or are you talking about Search in general? Yeah, make sure I answer the right question.

Mark A. May - Citigroup Global Markets, Inc. (Broker)

No, the search revenue from the YJ relationship.

Kenneth A. Goldman - Chief Financial Officer

Yeah, it's pretty – it's basically a quarterly fee.

Mark A. May - Citigroup Global Markets, Inc. (Broker)

Okay, thanks.

Shibani Joshi - News Reporter, FOX Business Network

Okay, moving on to Youssef Squali at Cantor Fitzgerald. Go ahead.

Youssef Squali - Cantor Fitzgerald Securities

Thank you very much. Two quick questions for Marissa, please. Marissa, could you help us understand your Display inventory. How much of it is sold programmatically? And as more and more of it, particularly of the Tier 1 or the premium, is sold programmatically, how will that impact, will that be a headwind to your growth in Display advertising through the rest of the year? And then on SBC, it looks like your SBC guidance is for a 10% year-on-year increase, yet your full time employee number I think is down 22%. Just help us understand kind of how you guys look at stock-based comp as you move forward. Thank you.

Marissa A. Mayer - President, Chief Executive Officer & Director

Sure. In terms of our Display inventory, today we have about 70% of our overall inventory sold in marketplaces. And those could be our programmatic exchange, it could be the DSP. But about 70% of Yahoo!'s overall inventory is sold either programmatically or at auction. And that's a market increase from just a few years ago. It used to be probably somewhere around the 10% range. And we have been bringing large pockets of our inventory over into marketplaces, auctions, and programmatic offerings, in order to meet our advertisers more modern demands for programmatic access. And we think that that shift is largely done, because we do think there will always be some amount of inventory that is sold at a premium, sponsorships for, say, fantasy football for the quarter, or for a particular video program. Some of our home page offerings will always be sold likely at a premium or available as a premium sale.

And so to that end, one of the things that people have noticed, when you look at our overall, the various turnaround charts we've shown, in many cases you actually we started to see and anticipate not only a continued growth in Mavens, but actually some growth in the core. And a lot of that is driven from the fact that once we finish the full mix shift to programmatic offerings and auction based offerings, we actually do think we will start to see an accretion in price.

So for the past few years, we've been feeling the drag of taking premium ads that may have been $5, $8, $10 per thousand impressions and moving them into programmatic exchanges that today using rough numbers could be somewhere on the order of near $2 to $3. Once we get all of that inventory shifted over and met with demand, we actually think that we will see prices begin to increase, and overall revenue increasing in the programmatic piece. And we're almost finished with that mix shift, given it's now 70%. And I'll have Ken comment on SBC.

Kenneth A. Goldman - Chief Financial Officer

Yeah, there's two things going on in SBC. One is as employees do leave, there's a lag between the time they leave and the divesting falls off. And so that's one thing. And we have given a select number for retention. We have given a select number of grants to employees that we feel are very, very important to keep through this process, through this strategic alternative process. So you have two things going on. One is in Q2, there's a lag before the employees that have left, divesting will fall off, and, two, there are some select grants that we have given for retention purposes that do have a near-term RSU or expense impact.

Youssef Squali - Cantor Fitzgerald Securities

All right, thank you.

Shibani Joshi - News Reporter, FOX Business Network

Next we'll go to Ken Sena of Evercore. He's next.

Ken Sena - Evercore Group LLC

Hi, thanks. Just follow-up on Mark's question related to Yahoo! Japan, Ken, you mentioned that there's no expiration on the branded side. Are there any out clauses that we should be aware of? And then also on slide six on Search, over the course of the past year, pay-click growth has swung from positive 21% to negative 21%. Can you also mention traffic trends in desktop? But given the strength of the swing, anything else that you can point to in terms of maybe algo changes in your marketing channels or other? And that's it. Thanks.

Kenneth A. Goldman - Chief Financial Officer

Yeah, Marissa may take the question on Search, but I must admit, Ken, you were coming in a little bit in and out. If you could help me a little bit there on your first question, because your voice was not coming through clearly. If you could maybe help me understand or just repeat your first question so I can understand it a little bit better, that would be great.

Ken Sena - Evercore Group LLC

So just to follow-up on Mark's question related to Yahoo! Japan, you mentioned there was no set expiration on the branded side of the deal. But just are there any out clauses that you could point to or anything we should be aware of in terms of if or can that – if, when, or can that deal be negotiated on the branded side? And then also the question I had on slide six was just, it's a pretty big swing in terms of paid-click growth going from positive 21% to negative 21% in the course of the year. So you mentioned traffic trends in desktop kind of broadly. But was there anything you could maybe elaborate on in terms of maybe algorithm changes that you were experiencing from your marketing channels around Search or anything else that could kind of have impaired you on the volume side? Thanks.

Kenneth A. Goldman - Chief Financial Officer

Yeah, I would say on the Yahoo! Japan royalty, the agreement which I think was done actually 20 years ago does not have any expiration on the royalty. And so that's the basis that we're forecasting our numbers and assuming on our numbers a set royalty on the affected revenues from them. So no change on that. And that's the way we have basically set our plans and expectations.

Marissa A. Mayer - President, Chief Executive Officer & Director

And on the Search question, what I will say is, one of the things that we've overall seen is, as I mentioned we've driven up RPMs a lot, and RPMs not only comes with PPC increases but also comes with increased clicks. So if you make a Search results page, if you make it more likely that a user will click on an ad by making the ads better, by making them more visually appealing, by making them higher quality and richer with for example prices or pictures, that is something that can overall drive clicks, and 2015 was a very high-growth year for us in terms of clicks and that wasn't only based on Search query volume. That was also based on the fact that we were making the ads more likely to be clicked on by providing higher quality and more information on those ads.

Now as we mentioned, as we've actually gotten to a very good RPM overall in searches, we are now more susceptible to pressure overall on query volume, and so we certainly are pursuing some syndication opportunities, like Mozilla, like Oracle, and we're continuing to keep our existing syndication partners as vibrant as possible, but one of the things that happens here is there is a trade-off. If your Search isn't perceived to be high enough quality or perceived to be too commercial, people start to trust it less, they start to do less searches overall. So it's a tenuous balance in terms of how do you generate more clicks by making those ads more likely to be clicked on? But also maintaining the integrity of Search, which is ultimately going to be what causes you to get higher Search volumes over time and maintain higher Search volumes over time. We think we've struck that balance well. We do a lot of very detailed experiments understanding the effect the changes we have on not only our RPMs but on our Search retentions and our Search volume over time, and so we think we've struck the balance right? But that said as we've seen there has been some decline overall in Search volume just as people tend to associate the Yahoo! brand slightly less with Search.

Ken Sena - Evercore Group LLC

Great. Thank you very much.

Shibani Joshi - News Reporter, FOX Business Network

And the final question for the afternoon will come from Doug Anmuth with JPMorgan. Please go ahead.

Douglas T. Anmuth - JPMorgan Securities LLC

Great. Thanks for taking the question. Marissa, I was just hoping you could talk about the overall health of the ad market and in particular, do you see any potential examples of brand advertisers either slowing or pausing their transition to digital, perhaps as they move money over from TV more recently? And then also any signs of private companies tightening up their spend in particular. Curious to get your comments there. Thanks.

Marissa A. Mayer - President, Chief Executive Officer & Director

Sure. Overall I would say to us the ad business and the digital ad space looks to be growing quite nicely across many different segments. We saw a lot of growth particularly in Native, we saw growth in programmatic overall. We saw a large growth in video supply and we're now working to meet that with demand to make the pricing on video as robust as it should be. So, overall we tend to see a lot of health overall in advertisers spends, and it's usually the case in Q1 you see lower advertiser spends, at least in some pockets like cost per install ads we actually saw advertisers increase their spends even over their Q4. Q4 is often their high and we're actually seeing some advertisers that increased their budgets in Q1.

I do think we are seeing some tightening potentially of some of the private companies as you mentioned, as budgets get tightened, valuations get a little bit tighter in that market, there are some, we see some slowing, but then again for just this past quarter we added both Uber and Lyft as Native advertisers. We also – they did some programmatic with us as well, so we're really happy to be adding new strong advertisers both who are private as well as public and seeing some increasing trends quarter-over-quarter, so the market still looks quite healthy to us.

Douglas T. Anmuth - JPMorgan Securities LLC

Great, thank you.

Shibani Joshi - News Reporter, FOX Business Network

Okay, well, thank you very much. And that concludes Yahoo!'s first quarter 2016 earnings video webcast. Thank you for joining us this afternoon. And we'll see you next quarter.

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