Yahoo! Q1 2006 Earnings Call Transcript

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Yahoo! Inc. (YHOO) Q1 2006 Earnings Call April 18, 2006 6:00 PM ET

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Marta Nichols - Director, IR

Terry Semel - Chairman and CEO

Sue Decker - CFO and EVP, Finance and Administration

Dan Rosensweig - COO

Jerry Yang - Co-founder and Chief Yahoo!


Youssef Squali - Jefferies & Company

Ben Schachter - UBS

Jeetil Patel - Deutsche Bank

Imran Khan - JP Morgan

Mark Mahaney - Citigroup

Anthony Noto - Goldman Sachs

Mark Rowen - Prudential Securities

Scott Kessler - Standard & Poor's

Jordan Rohan - RBC Capital Markets


Good afternoon, ladies and gentlemen, welcome to the Yahoo! First quarter 2006 earnings conference call. (Operator instructions) I will now turn the call over to Ms. Marta Nichols, Director of Investor Relations. Ms. Nichols, you may begin.

Marta Nichols

Good afternoon, and welcome to Yahoo!'s first quarter earnings conference call. On the call today are members of our executive team: Terry Semel, Sue Decker, Dan Rosensweig and Jerry Yang.

Before we begin, I'd like to remind you that matters discussed on this call contain forward-looking statements that involve risks and uncertainties concerning Yahoo!'s expected financial performance as well as Yahoo!'s strategic and operational plans. Actual results may differ materially from the predicted results and reported results should not be considered as an indication of future performance.

The potential risks and uncertainties include, among others: the Company's ability to compete with new or existing competitors; reduction in spending buy or loss of marketing services customers; demand by customers for Yahoo!'s premium services and risks related to joint ventures and the integration of recent acquisitions.

All information discussed on this call is as of today, April 18th and Yahoo! does not intend and undertakes no duty to update this information to reflect future events or circumstances. Other potential factors that could affect the Company's business and financial results are included in the Company's annual and quarterly reports which are on file with the SEC.

On the call today we will discuss some non-GAAP financial measures in talking about the Company's performance, including operating income before depreciation and amortization, which will be referred to as operating cash flow; revenue excluding traffic acquisition costs; free cash flow; adjusted net income; and net income per share. Reconciliations of those measures to GAAP measures can also be found on our website under Investor Relations.

Terry and Sue have prepared remarks that should last about 30 minutes and then we'll have a brief Q & A session. Now, I would like to turn the call over to Terry.


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Terry Semel

Good afternoon, everyone. Thank you for joining us. Yahoo! is really off to a good start in 2006. During the quarter, we continued to lead the industry in building the next generation of web services for our users, while also expanding our comprehensive online advertising offerings to deliver greater value to our marketing partners.

This is evident in our continued growth in audience size and engagement as well as our strong financial results in the quarter. Our strength is largely due to our commitment to our users through research and development, innovation and product quality and to our clients by providing the best services and tools. These are the key ingredients that we believe put us in an excellent position to take advantage of the growth and evolution of the Internet today and for years to come.

Yahoo! reported revenue of $1.6 billion for the quarter, our 12th straight quarter of record revenues and up 34% from the first quarter of last year. We achieved balanced growth with contributions across the board from our multiple lines of business and geographies.

Demonstrating the leverage in our business model, operating income before depreciation and amortization in the first quarter was $435 million, up 26% from the first quarter of last year.

The strategy that we have talked about for the last couple of years, to lead the shift from mass media to my media is starting to coalesce and the next phase of Yahoo! is becoming much more visible. You can see it through the continued development of communities on our network, the expanded programming of head and tail content and the evolution beyond web search to social search. All while providing personalized services for our users whenever and wherever they are.

Our innovative programming model is the reason why we can turn non-exclusive content such as music or news into unique experiences and subsequently some of the most popular offerings on the web. We believe that we have the powerful business model and that the course we have taken to be both a great search engine and provide deep and more innovative experiences in our vertical offerings is a compelling and winning strategy.

In fact, testament to the strength of our product offerings, Yahoo! was chosen ahead of all other Internet companies for PC Magazine's Annual Award for Technical Excellence, citing what they call our big basket of imaginative services. Innovation has always been and always will be a hallmark of Yahoo!.

We made strong head way during the quarter to extend our leadership position in some of our key services. We have substantially upgraded our communications offerings in the last few months and the next generation versions of Yahoo! Mail and Yahoo! Messenger with Voice. The new Yahoo! Mail beta was expanded to six additional countries and we extended our lead as the number one web mail service in the world.

We also introduced P.C. to phone calling in Yahoo! Messenger in the United States, now providing our Voice-over-IP customers with high quality voice calling across P.C. to P.C., P.C. to phone, and phone to P.C. to complete calls to anywhere in the world.

We expanded the beta of Yahoo! Answers from the U.S. to also include Canada, the United Kingdom and Australia and added personalization and community enhancements to My Web, and Flickr. The vibrancy of the Flickr community is really evident, having just celebrated its 100 millionth photo uploaded this March.

Notably, the improvements we have made in search also enabled Yahoo! to significantly increase its lead in search share in Yahoo! Japan and Taiwan.

Our content strategy is also winning over users as we apply our new programming principles to integrate the full spectrum of content, more advanced design, rich media and Yahoo!'s pillars of community, personalization and search. Despite TV viewership being down for the Oscar show and the Grammy show recently, our event sites both doubled their traffic and increased engagement year-over-year.

In the case of our Winter Olympics site, we had the number one audience, despite the fact that we had no official tie-in with the Olympics or the advantage of a broadcast network promotion. You should look to us to apply these same principles within our existing content verticals.

One of the best examples of Yahoo!'s integration of user-generated and program content, and frankly also was a great deal of fun, was our compilation of user-submitted videos to Shakara's latest hit, which was the number one video on Yahoo! Music in March, with over 4 million video screens.

It is these unique experiences on Yahoo!, combined with the largest audience on the web that makes us the programming partner of choice, which is what led 60 Minutes and CNN Money, Dow Jones and The Wall Street Journal to sign or extend content deals with Yahoo! during this past quarter. You can expect to see us continuing to enter into exciting new partnerships in the months ahead -- that's for sure.

The category of video is also growing very quickly. We continue to distribute more video throughout each of our verticals, add content to our industry-leading video search engine, and increase advertising opportunities, both in-stream and embedded in content pages.

Our success at building relationships with users globally has enabled Yahoo! to grow its audience at a rate that is significantly outpacing the overall growth of the web. In fact, today I am thrilled to say that we've reached the remarkable milestone of an estimated 500 million monthly users on Yahoo! branded web properties. Actually, that means that one out of every two Internet users around the world is using a Yahoo! service each month.

On a consolidated basis, excluding Yahoo! Japan and China, we delivered approximately 402 million unique users, which was up 27% year-over-year from approximately 317 million and up from 365 million last quarter. Our consolidated active registered users grew to approximately 208 million, up 23% from the 169 million in the first quarter of last year and up from the 193 million the previous quarter.

Four years ago, imagine this: our entire user base was the size of what is now our active registered user base, and we still think there is a lot more to come. What is really exciting to me is that we maintained the largest share of time spent on the web, even while outpacing the user growth. Our extraordinary user and engagement numbers positively impact all parts of our business, including premium services.

Our paying subscribers are the fastest growing subset, as you know, of users on the Yahoo! Network. We ended the quarter with approximately 13.3 million unique paying relationships, up approximately 700,000 from the previous quarter and up approximately 4.4 million, or almost 50%, on a year-over-year basis.

Our innovation and leadership extends beyond our consumer products to our marketing services businesses. We delivered $1.4 billion in marketing services revenue, representing a 35% year-over-year growth. Yahoo! is the only company with leadership in all forms of internet advertising.

As a result of our range of advertising tools, targeting capabilities and scale, we believe we are in the best position to work with marketers to deliver the right message, in the right format to the right customer, at the right time.

A significant initiative related to that goal is the continued improvement in our search monetization capabilities. The new service, which we are introducing shortly, will provide advertisers with a redesigned, easy-to-use platform that will enable advertisers to maximize their opportunities on the Yahoo! Network.

Last quarter we shared with you that we expected to be testing in the first half of 2006 and rolling out the service beginning in the second half of this year. We also communicated that we planned a phased and deliberate rollout so as not to disrupt of our hundreds of thousands of advertisers and publishers.

I would now like to provide greater clarity to what we mean by phased and delivered. First, as was true with our roll out of algorithmic search, which I'm sure many of you remember, we plan to approach this process by geographic markets, which we think is the prudent way to do it.

Second, there are three elements to the new system design which we will be rolling out sequentially. The first, which is almost complete, is building the foundational and core data platform upon which the services will scale and be delivered. This will be adequately tested before moving to the full roll out of the market designed features.

Next, we'll begin rolling out the new advertising management application. There are some wonderful features in this front end that will make the application much easier for advertisers to use and that have already received very positive feedback from some of our advertisers who have already had a chance to preview an early version.

After our customers have had some time to try out the new tools and to modify their own systems to take advantage of this new front end, then we'll start the third stage which is introducing our new marketplace design in which text-based results will be ranked to improve relevance. This new design will rank listings based on price paid as well as incorporating other variables.

In summary, our goal is to complete this rollout in a way that is most productive for our advertisers and in the geographies and over the timeframe that makes the most sense. We're very excited that we will be providing a more detailed overview of the product itself at our scheduled analysts' day on May 17th.

Within graphical advertising, we continue to deliver outstanding results and believe that we are, again, outperforming this segment. Every vertical sales category delivered year-over-year growth, in large part due to our powerful verticals and our advanced targeting capabilities allowing advertisers to reach the most valuable audiences across the network.

We experienced significant increases in pharmaceuticals, telcom, CPG, autos and financial services, frankly, just to name a few. We believe we are also seeing a growing trend across all categories of more advanced buying, of graphical and video solutions; an indication that we are becoming a more integral part of the media companies' buying plans.

Additionally, it's really significant to note that the revenue from our top 200 domestic advertisers in this group has more than doubled over the past two years. More and more, marketers are coming to understand that the Internet really can help them meet their needs across the full marketing spectrum from brand awareness, consideration, intent to purchase, trial, all the way through to transaction.

To help accomplish this, Yahoo! is making the right investments in audience size, demographics and engagement as well as exciting advancements in our advertising technology to seek to deliver even better results.

So in conclusion, I'm very excited about Yahoo!'s prospects. We are operating from a position of strength as a company today, benefiting from our large engaged audience and some of the industry's leading advertising solutions. Additionally, we are focusing our energies on developing platforms that are important to our future growth in both advertising and content delivery.

We have enormous opportunities ahead and I believe the right people, resources and strategy to get there. It is exciting to see the next generation of Yahoo! evolve. With that, I'd like to turn it to Sue for our key financial highlights.

Susan Decker

Thanks, Terry, and thanks to all of you for joining us today. We're pleased to report that we're off to a strong start in 2006. We have an ambitious agenda for a year that includes investment in our user experience, and our advertiser offerings, designed to drive growth and profitability in future years. At the same time, we're thrilled to be able to make those investments while also delivering very strong and balanced current growth in both our key financial measures and also in our key user metrics.

Before I review Q1 results, let me start with a few housekeeping items. First, as anticipated, we adopted FAS-123R in Q1 and begun expensing the fair value of stock options granted to employees in our income statements. The Q1 expense was $109 million.

Second, our reported effective tax rate was approximately 43% for the quarter and it is currently anticipated to be in a range of 43% to 45% for the year. As a reminder, our cash tax rates are expected to run at only 4% to 6% for 2006, significantly below our reported tax rate because of our NOL carry-forward position.

The reported tax rate is higher in '06 as expected for two reasons: one is impact of FAS-123R which adds about two points and the other is the impact of a global restructuring project which will also add about 1 or 2 points to our reported rate in '06 and '07; but thereafter we believe we'll begin to reduce our tax rate from today's level by about 1 to 2 points per year ultimately reducing our current book rate by 6% to 8% per year. This will reduce our cash taxes once our NOLs have been fully utilized.

Let's now talk about the financial highlights from the quarter, starting with free cash flow which we view as our most important financial metric as it relates to value creation. As a reminder, we define cash flow as cash generated from operations plus excess tax benefits from stock options that were previously included in cash from operating activities, less capital spending and dividends.

Free cash flow for the quarter was $343 million, up more than 8% from a year ago. For the quarter, it represented 32% of revenue ex-TAC and 79% of operating cash flow, which we believe demonstrates the ability of our unique collection of businesses to consistently and efficiently deliver strong cash returns.

Our ending cash and marketable securities balance was $3.8 billion, down about $167 million from last quarter. Please note that this ending cash balance does not include three other important sources of incremental balance sheet value:

  • Our interest in Yahoo! Japan which was valued at $12.4 billion at the end of the quarter, representing more than $8 a share.
  • Our investment in Alibaba, which at the time of transaction was valued at $1.4 billion and is currently carried on our balance sheet at that value.
  • The $635 million in structured stock repurchase transactions that are currently outstanding and that upon maturity will result in either the repurchase of stock, or the cash being returned to the Company during the year.

So moving back to the quarter in terms of cash generation, in addition to free cash flow for the quarter our other significant sources of cash collectively amounted to $360 million. These sources were: the proceeds of exercise of employee stock options; and, the receipt of cash back from a previously initiated structured stock repurchase on which we earned an annualized rate of 20%.

Turning now to how we invested that cash. We invested close to $900 million this quarter in direct and structured stock repurchase transactions that we believe will yield substantial returns to investors. Of this amount, almost $640 million was done directly in the open market through transactions.

Also during the quarter, one of our previously entered into structured stock repurchases matured and settled in shares. Our aggregate repurchase of shares totaled almost $750 million in the quarter, representing 22 million shares at an average price of just under $34.

We continue to believe the active investment and management of our cash will be value creating for shareholders. We are very pleased that our cash balances are essentially constant year-over-year, notwithstanding the repurchase of close to 29 million shares entering into close to $500 million net in structured stock repurchases and the use of $1.6 billion in cash for acquisitions in the last 12 months.

This is a testament to the substantial free cash flow we are generating and the sagacious reinvestment of our proceeds from the sales of non-strategic investments and from stock options.

Moving now to the P&L. The overall summary is that consistent with our financial strategy, we are successfully supporting a massive and growing base of more revenue-productive users, producing strong growth and profitability.

Specifically, first quarter revenue ex-TAC came in at $1.088 billion, our second quarter of more than $1 billion on that basis, advancing more than 33% over year-ago figures, despite the effect from the deconsolidation of our China operations in the quarter. Ex-China, the growth rate was 35%.

Now let's look at the revenue breakdown by lines of business. Global marketing, our largest service, generated $901 million of revenue ex-TAC for the quarter, up 34% year-over-year.

In the past we've discussed the trends in our marketing services business under the categories of brand and search. However, this language mixes an objective -- that is branding -- with a specific product, which is search and doesn't adequately express the integration of how marketers are now using both forms of advertising to complement and reinforce each other.

Let me give you two examples. First, many of the advertisers that buy links served on our search property are seeing branding benefit, in addition to generating a strong ROI, making the search/brand distinction somewhat ambiguous.

Second, our content match offering, typically considered to be search, neither runs in our search product nor is prompted by a search query. Instead, it is targeted to a content landing page more similar to graphic or text advertising that runs on our various properties traditionally described as 'brand' like autos and entertainment.

Consequently I am going to communicate the trends in our business slightly differently now. I am going to comment about our Yahoo!-owned and operated network, which includes the breadth of what I previously referred to as brand and search-related advertising and represents what we do on the inventory that we own. And, I'll provide directional information on the growth trends of the inventory that we don't own but that we monetize for our distribution partners.

Within the O&O properties and services we continue to lead the market in offering of graphical solutions to the nation's top 200 marketers. In this quarter, both of these sources of inventory -- O&O and affiliate -- grew fairly comparably to each other.

As we indicated in the past, we expect off-network affiliate inventory to grow more slowly than our O&O inventory for the year as MSN's business winds down, due to its decision to take its search part in-house. Excluding MSN, however, our affiliate business is performing quite nicely, led by international.

For the quarter, our average TAC rate was essentially flat. Where adjusting for MSN, it was up modestly, in line with the expectations we communicated to you in January.

Turning to the O&O network, I will discuss both volume-related and monetization-related growth. On the volume side, our best measure is overall page views which were seasonally strong, but nevertheless rose a very strong 24% year-over-year to an amazing 3.8 billion per day.

In this quarter, I will also provide additional color on U.S. search queries, a subset of those overall global page views. Specifically, these queries grew at 15% to 20% year-over-year. Not quite as fast as our overall page view growth, which tend to be benefiting from international operations and also user-generated content, but very healthy increases nevertheless.

Moreover, we have roughly maintained this pace of growth for each of the last four quarters, closer to the high end of that range a year ago, and closer to the mid-point today. I mention this specifically because there's been some confusion of late due to third-party data, which has implied a massive deceleration in our search query growth to levels significantly slower than what we're actually witnessing. You should not consider this to be an ongoing statistic that we plan to release. This is a one-time disclosure to help clarify trends.

Net-net, the overall volume summary is that our Yahoo! O&O network is vibrant and growing, as consumers are finding more and more relevant services on our network, enhanced by our community and personalization offerings.

Turning to the other source of growth, the rate at which we monetize our page views across the totality of our O&O global inventory, we generated 10% more revenue per page view year-over-year in Q1. If you combine that 10% in revenue per page view with the 24% growth in overall page views, this explains our 34% marketing services growth.

Again, given the very high degree of interest in the relative monetization of our search product inventory as a small subset of the overall rest of our network, I'll provide a little more color here, as I have in the past. This 10% growth in revenue per page view works out to a weighted average blend of roughly 10% to 20% growth for the inventory sold in our communications, entertainment, information and commerce properties; and between 5% and 10% gains in U.S. revenue per query in our search inventory. This is very consistent with what we've seen in the last few quarters. After our new advertising platform is fully up and running in 2007, our monetization growth rates should be even higher.

In summary, we believe Yahoo! is wonderfully positioned to offer marketing services to clients seeking both mass reach and also very surgical targeting. We sell this in multiple formats -- text display and video, and through both direct and self-service sales channels that enable our clients to purchase advertising both in markets in which we set the price, and in markets in which they do.

Lastly, we serve these messages via a variety of matching and targeting algorithms to ensure relevance to the consumer. Strategically, we believe we are in the sweet spot of online marketing services. We offer an unparallel set of turnkey marketing solutions and consumer insight on a global scale.

Turning to fees, we produced $186 million of revenue, up 25% from a year ago. Adjusting for the year-ago -time catch up payment from Yahoo! Japan and the deconsolidation of China, fees grew 30% year-over-year. The primary driver of this business line is our premium offerings, in which consumers and businesses pay us for our services. We exited the quarter with approximately 13.3 million paid relationships, up 49% year-over-year and 700,000 from Q4 levels, despite the normal seasonal loss of our fantasy football subscribers from Q4 to Q1.

Last quarter, we indicated that we expected to grow our paid relationships to 16 million by year end. Based on our first quarter experience, we now believe we are on track to exceed that target and we continue to expect them to produce an ARPU of about $3 to $4 per month.

Turning to revenue by geographic segment, top line growth remained very robust internationally, up 29% ex-TAC for the year-ago quarter to $261 million, boosted in particular by strong growth in sponsored search. Holding currencies constant with Q1 '05 and adjusting for the deconsolidation of China, our international revenue ex-TAC actually increased 41% year-over-year, outpacing the also strong 34% increase domestically.

Let's turn now to some of the details behind our strong and growing profitability. Specifically, operating cash flow came in at $435 million, up 26% year-over-year producing strong global operating cash flow margins of 40% for the quarter and in line with what we had planned given the seasonality on the brand side of our marketing business, the impact of prior year acquisitions and the expected decline in MSN's business.

As you know, the major driver of margin leverage is compensation costs, our largest expense which continued to yield productivity improvements. Head count into the quarter at around 10,100 up about 280 from Q4 '05 levels and up about 30% from a year ago. This was primarily related to planned investments in key talent in various products and infrastructure, collectively designed to improve our user experience, strengthen our market position, extend new verticals and support our growing businesses.

We are very pleased that we have been able to make these investments in talent while still delivering improvements in productivity and margins. We see this as a testament to the network effect of our model and our relentless focus on key priority areas.

Let's turn now to our business outlook. We're introducing a business outlook for Q2 and reiterating our previous business outlook for the year. Starting with Q2, we expect revenue ex-TAC to be in a range of $1.080 billion to $1.160 billion, up 28% at the midpoint of the range and reflecting broadly similar seasonality compared with Q1 in marketing services.

However, as is typical in Q2, the market for graphical advertising is expected to be seasonally stronger in Q2 while search queries are seasonally weaker in Q2 than in Q1, consistent with what we experienced in the last two years and adjusting for the impact of the incremental country rollouts in search last year.

Turning to profitability, at these revenue levels we expect to operate within an operating cash flow range of $415 million to $455 million, up 18% from Q2 a year ago, at the midpoint.

For the full year of 2006, we expect revenue ex-TAC to range from $4.6 billion to $4.85 billion, up about 28% from a year ago at the midpoint of that range. Recall that our outlook for both Q2 and the full year includes the impact of a strengthening dollar relative to other currencies in which we operate; the impact of rising TAC rates; deconsolidation of our operations in China in Q4 '05; and the anticipated impact of the MSN search relationship ceasing during 2006.

Returning to full year 2006 operating cash flow, we continue to expect to operate in a range of $1.915 billion to $2.055 billion, representing growth of 27% year-over-year and yielding a full year margin of 42%, even after absorbing the loss of some highly profitable affiliate search revenue.

On a segment basis, our expectation is that there will be some modest margin expansion in our international operations resulting in margins being generally similar to those in the U.S.

Moving to our most important financial metric, free cash flow. We're maintaining a 2006 range of $1.4 billion to $1.55 billion, representing an OCF flow-through of approximately 73% to 75%, consistent with our longer term target range of 60% to 80%.

This outlook contemplates capital spending for 2005 of approximately $525 million to $625 million, consistent with what we indicated to you last quarter. We believe this range both allows for strong free cash flow conversion and also proactive investments to drive our product strength and to support our user growth.

To sum up, as we complete our first quarter out of the gate in 2006, we are very pleased with how we performed. As we look ahead, we're even more excited. Financially at the midpoint of our ranges, our full year outlook for '06 suggests a financial model that is extremely attractive. It calls for organic revenue growth, ex-TAC approaching 30%; it suggests delivering more than 40% of that to the OCF line; and it anticipates yielding more than 70% of that to free cash flow.

Moreover, the health of the financial model is allowing us to both show strong current growth while also absorbing significant investments to drive future growth. This led us to repurchase more of our shares in the quarter than we have at any time in our history.

In addition, we're on track with our efforts to begin to introduce a new advertising platform in the back half of this year that will help drive our search advertising monetization efforts by better matching, increased relevance and an improved advertiser experience. We continue to plan for a deliberate and staged rollout by major country; a rollout that ensures the best operational execution for our advertisers and for our investors. With that, I would like to turn it back to Terry.

Terry Semel

Thanks, Sue. It is hard for me not to resist to just mention one of the numbers that I mentioned before and then include one that Sue just raised. So when we think of Yahoo!, we think of the fact that there are approximately 500 million users using Yahoo! at least once a month throughout the world; and Sue gave us the other statistic of 3.8 billion page views a day. So if you don't think we continue, we do.

We continue to focus on innovative ways to create unique and sustainable environments to deliver the greatest value to our users and ultimately our marketing partners. I strongly believe our diversified strategy will enable us to fully take advantage of both current and future growth opportunities. With that, I'd like to open it up to questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from Youssef Squali from Jeffries & Co.

Youssef Squali - Jeffries & Co.

Thank you very much. Sue, just two very quick questions. Was there a sequential increase in branded revenues, Q1 over Q4? In other words, looking at your top 200 brand advertisers, did those grow faster than your Marketing Services revenues on an ex-TAC basis? Second, your fee-based revenues were flat sequentially yet paying relationships were up 700,000. Why the decline in ARPU? Thanks.

Susan Decker

Thank you, Youssef. To your first question, Our top 200 advertisers ex-TAC did grow faster than our overall marketing services growth rate, ex-TAC, as is consistent with past quarters.

In terms of the second question, the fees revenue, as I mentioned in my comments there was one factor which was the $3 million catch-up payment from Yahoo! Japan from a year ago that made it a tough comparison in the quarter. So actually the sequentially flat comparison had more to do with that than it did the underlying subscriber-based revenue. So it wasn't so much an ARPU decline as it was the other portions of revenue had a tough comparison. We also, of course, sequentially had a tough comparison with the fantasy football. So there is a mix of subscribers that are slightly different in this quarter from last quarter. Next question?


Our next question comes from Ben Schachter from UBS, go ahead.

Ben Schachter - UBS

Hi guys. First, congratulations on keeping the monetization efforts on track. I think we are all glad to hear that. Terry, in the past you have discussed the three types of content Yahoo! has in terms of Yahoo! generated, partner and then user-generated. In the past, you have said these are all equal priorities. Is that still the case? In terms of revenue, how have each performed relative to expectations, thus far? Finally on video ads, can you talk about if they have had any meaningful impact on revenue now, or if you expect that going into the year?

Terry Semel

Yes, I will start off backwards on video revenue, and Dan, feel free to complement this. Not a huge impact so far. The place where we've had the greatest amount of experience with video revenues would be in our music. Music is a very strong advertising area. We do have the leading Internet company in video overall; led to a great deal as a result of our video streaming sites. It has turned out to be an excellent business for us.

There is no question about the fact that video is just beginning. I don't think people two years from now, three years from now will refer to it as 'video'. It will be accepted as a great form of content on the Internet the way text is today, and other forms of content have been. So it's only just begun. It is very early days and to that you see us building lots of infrastructure right now and have been this past year, to accommodate what we think the real future is.

On the three types of content, it is almost like I've often said about our advertising businesses, we have these two brilliant children. There are three -- at least at this moment and there could be many more coming up in the near future -- they're all terrific for us. As you know, we continue to license and therefore aggregate content. We continue to spend more and more of our energies, and you'll see a lot of it coming up front in terms of user-generated content; I mentioned one.

We have all sorts of very, very successful blogging areas, news, entertainment, and in games today. So user-generated to us is going to be a significant area. You'll see more coming of user-generated in other areas of Yahoo! including entertainment.

Of course, the last would be-- well, license, user-generated and/or some original content as we go, stuff that we might produce either alone or with other people. You're going to see a lot of that. The big, big change for us as an industry has been probably prior to the last six months there have been lots of potential partners coming to talk about not doing very much and protecting pretty much what they already had. All of those partners today are coming to talk about what they might do with Yahoo! and it is very, very exciting. Next question, please.


Your next question comes from Jeetil Patel from Deutsche Bank.

Jeetil Patel - Deutsche Bank

Thanks. Two questions; first of all, you talked about the new page solution price times other variables. Do you think that has impact of obviously improving monetization, but how do you think it does in term of pricing? Or, do you think it is more of yield issue is where you see the biggest enhancement on monetization?

Second, on behavioral targeting can you talk about how that drives monetization growth in the business longer term as you interact the PPC-based versus the display advertising the business? When do you start to see the impact of behavioral in the business?

Susan Decker

I am going to take the first part of your question, Jeetil and Dan is going to follow up on the behavioural targeting piece. In terms of the new advertising platform, I think it is fair to say that we see our biggest competitive opportunity on the yield enhancement side. We optimize today for price and do pretty well on that variable, so we would see the biggest opportunity more on the relevance and the potential click-through rate.

Dan Rosensweig

On behavioral targeting, we already see nice impact today. It has so many benefits to us and to our marketing partners in particular and our users, which is it allows us to work with the largest advertisers to not only place their advertising within relevant verticals, but also to extend it across the network.

In addition to that, it allows us to create more value for every piece of inventory that we sell, because it is more relevant content for users and more relevant advertising targeting capabilities which helps the rates continue to go up.

On top of that, the more efficient we are with our inventory, the more inventory we are actually able to create for more advertising. So it is a virtuous cycle for us. We are already beginning to see the impacts, even though we have had great impact already, we think it is very early days and what we can do in the future. We continue to roll out new capabilities each quarter in this area. Next question.


The next question comes from Imran Khan from JP Morgan.

Imran Khan

First, if you could give us some color; as you roll out your monetization technology, what do your total number of advertisement links on your site or your coverage; will you have to reduce those numbers? If so, what kind of offsetting factor it could be to your monetization upside? Secondly, what kind of reductions you have been seeing from social search? Can you give us some sense of how you plan to educate users on these features? Thank you.

Terry Semel

May 17th, Analysts' Day will be the first time that we will talk about some additional details of our plans and of our aspirations. So to respect the fact that we probably have many competitors also listening to this call, we'll hang on that for a while. In terms of social search, Dan, you want to try it?

Dan Rosensweig

Yes, social search -- clearly we think search is at the very beginning and we think there is going to continue to be meaningful change in that category and we tend to continue to strive to be the best in that category and have seen great success, particularly in changing the game with social search.

Terry mentioned a number of the products that we have rolled out. Yahoo! Answers in particular has had very good success. We have been able to roll it out in Asia, the U.S., Canada and the UK. Everywhere we put it we are beginning to see tremendous user feedback and response by balancing the combination of technology as well as humans to be able to answer the questions more relevant and more quickly. We think that will continue to grow share which will give us increased advertising opportunity.


The next question comes from Mark Mahaney from Citigroup.

Mark Mahaney - Citigroup

Sue, thanks for clarifying some of the data about the queries. The question has to do with some of the demographic trends you're seeing. One competitive issue that's come up has to do with the younger demographic on the Internet going to places like MySpace. Are there particular trends that you are seeing? Are there particular applications that you find to have been particularly enticing on Yahoo! for that younger demographic? Is there a concern on your part about the ability to continue to attract that demographic?

Dan Rosensweig

On the demographic trends, we continue to do exceptionally well against all demographic groups. In fact, we're the leader in reaching all the demographics as well as the youth demographics. A number of our products and services are obviously services that people of all ages use like mail; our communications products are also huge in that demographic. Music and games, of course.

The demographic changes that we see is that we imagine the next five years almost every demographic group will be equally penetrated and we have products and services for all of them to start early, whether it is Yahooligans, youth services like mail and communications products, Messenger, and then continue to grow up through Yahoo! We have had tremendous success in doing that.

Susan Decker

Just to add one more thing, not specifically on the demographics but as Dan said, the demographics of Yahoo! represent the demographics of the nation and the world. We have had a lot of questions on companies like this of late who have grown very, very rapidly. I think an interesting stat to look at is, if you look at our overall user numbers, we have, in six months, added 50 million users which is as much as the amount of users that MySpace has, for example.

It is very important to note that we're growing very rapidly in users from a very large base. It is in large part because of the community strategy that we have adopted across every one of our verticals.


Your next question comes from Anthony Noto from Goldman Sachs. Please go ahead.

Anthony Noto

Thank you very much. Sue, Terry and Dan, staying on this topic of usage, I guess the first question I have is your page view growth accelerated year-over-year to 24%. It looks like it was driven by an acceleration in user growth up 27%, both faster on a year-to-year basis than Q4. Did you launch new products or new services that drove that? What was the specific initiative? You alluded to something so I would love the specifics.

Second part of that question is, do you actually think page view growth is the best measure of your engagement? Page views today aren't what they used to be, especially on the music side. I could not change a page view for 30 minutes and be fairly engaged.

My last question is, a lot of advertisers that we talk to as it relates to search spending, advertising spending, talk about unspent budgets in both Overture and in Google. As you make this transition of the monetization, you do the deliberate rollout, one of the concerns is the second and third order impact of pricing going down. But if there are a lot of unspent budgets in there, in your Overture systems and accelerate because of the more relevancy, relevancy you could overcome the second and third level risks. Can you talk about that a little bit? What is the amount of unspent budgets and could that offset the risks? Thanks.

Dan Rosensweig

Obviously the quarter we just closed is a seasonally strong quarter for users and for page views. In terms of specific products that we've rolled out, we've been talking for quite some time about the enhancements that we built into each product. Our move, as Terry pointed out, into the My Media space, building greater personalization, greater community, greater capability, making our products easier to find and easier to use.

And then in particular some of the social search products and social products that we're rolling out have really improved retention of users on the site which includes things like time spent, page views, and frequency in which they visit, number of services which they use; all of those are up.

There isn't one particular metric that we use to measure engagement, but we do think the frequency in which they come, the number of services they use and using us as a primary service in these areas is what we focus on. That creates tremendous business opportunities for us going forward.

Whatever the percentage of the budgets that can be spent, the more inventory that we have, our ability to target more aggressively either by the user or by the content or some combination both on the network or through search provides tremendous upside for us in the future.

Susan Decker

So picking up where Dan left off, to hit the engagement question. The page views are a decent measure of engagement. They're not the only measure of engagement. Clearly time spent is becoming an increasingly important measure. As we introduce Ajax and other technologies into some of our products, the number of page views they generate for revenue may or may not be exactly parallel to the past.

The way that will show up is we'll end up with more revenue per page view. Either way, page views times revenue per page viewed equals our revenue. It is the best overall metric that we have today. If we get a better metric over time, we will certainly share that with you.

In terms of your last question, in terms of unspent budgets, that is probably a little more detailed than we're prepared to go into today. We are going to talk more about our new platform in the coming months as is appropriate and we will share with you the relevant details. Next question.


Your next question comes from Mark Rowen with Prudential Securities.

Mark Rowen - Prudential Securities

Thank you. A couple of questions. First Sue, Terry was a lot more specific about some details on the new platform and when it's going to roll out; and yet your guidance for the year is unchanged. So my question on that is, are you being conservative in the testing that you've done initially? Are you seeing a lot of monetization increases? If so, why be conservative on the full year guidance? Does that not factor it in? Does that give a lot of potential for upside in the back part of the year?

Second, there was an article in the paper yesterday about CPC advertisers spending a lot more online and some of them doubling their budgets and more off of small bases. My question is, some of the early adopters like the auto companies -- who are spending significantly more than average online today -- are you seeing those growth rates starting to flatten out as some of the companies get to 10% or 15% of their budgets? Or, is it still increasing pretty rapidly? Thanks.

Susan Decker

Thanks, Mark. I will start and pass it on to Dan. Yes, Terry gave some specific details by what we meant by phased and deliberate when we spoke three months ago. As we discussed three months ago, we are having a phased and deliberate plan of implementation and therefore we would expect the financial impact of the new advertising platform and search to be a 2007 event, as the year goes on. The business outlook that we discussed today was not affected in any way by any of the efforts that we have on the search monetization front.

I think the quarter was strong, but it was within the ranges that we provided for Q1. We think that it is reasonable to maintain the same kind of range that we had for the year, in light of what's happened with currency movements that have created a bit of a headwind as we look through the rest of the year.

The combination of delivering within the range that we provided three months ago and the fact that the currency, for all companies that have international operations, are a little bit stronger relative to the dollar, were factors behind our business outlook.

Dan Rosensweig

On the question over spending in certain verticals, is it flattening and new categories growing? We see all categories growing right now. We don't see anybody who has reached anywhere near 15% of their budget in a category, in the auto category. Yahoo! strength in the brand and the graphical space allows these vendors to continue to spend because they cannot only spend in the verticals, but they can continue to target all sort of demographics throughout the network. It is the largest network in the world and it gives them the opportunity to do different parts of their marketing. Everything, as Terry said, from the branding all the way through to the transaction part.

We believe we'll continue to see growth in all of the categories that are already finding great success on the web. CPG is moving aggressively, and frankly on a global basis because they, too, know that their consumers are here and they see opportunities to reach people all the time and during the day, which they have rarely had the opportunity to do.

We believe that category is only at the beginning but we're seeing very nice growth across multiple product lines.


The next question comes from Scott Kessler from Standard & Poor's.

Scott Kessler - Standard & Poor's

Thanks. Terry and Sue, I took note that you both mentioned Yahoo!'s assets and prowess in Asia. Can you talk a little bit more about how you are doing in Asia? Any details about Alibaba would be appreciated.

I also have a second question which is, with a number of media companies indicating that they're putting video content online on their own websites, I was wondering how you think this is going to affect Yahoo!? Will it potentially detract from Yahoo!'s traffic growth? Thanks.

Jerry Yang

I'll talk about Asia first. I think in general we're seeing a lot of strength in what we're doing in Japan. I think Terry talked specifically about how we continue to do well in search and the overall advertising market in Japan. Although we don't consolidate it, we see Yahoo! doing well there and it is certainly a big part of our overall relationship.

As far as the rest of Asia goes, in China we are very pleased with our joint venture in Alibaba; it is coming up on six months of working together. They are obviously a private company so we can't specifically talk about what they're doing, but in general I think they continue to make a lot of headway in their business of B2B commerce as well as C2C and B2C commerce. Their efforts with Yahoo! China is starting to take hold as we continue to introduce a lot of communications and search products.

As we have said all along, China is in early days. In other parts of Asia, I think we're starting to really see our strategy of community and search and personalization really take hold. In a country like Taiwan, which is small but I think is a good example of how we can put a lot of those assets together and make it work and make it a very strong portal and a search.

Terry Semel

It is great. So the fact that some of the folks who own content and who have made content are starting to put it on their own sites (a) I compliment them all. I am thrilled to see them take these things out from lock and in a cell, which is really where it was before, and worried about who might touch it and look for various ways to monetize that content.

There is no doubt in my mind, when one is monetizing their own TV shows they have an awfully small audience relevant to the Internet. If they simply wanted to, in effect, make those same TV shows available to either stream or download on their own sites exclusively, that would not be a very good business.

These are smart people and, yes, we have all talked; and yes, they would like Yahoo! to participate in many of the things they are doing. There are just great opportunities for Yahoo! now in each of these areas.

As I mentioned before, where we did not have content, say in the Olympics or if you look at Yahoo! Music and say, well what in the world does Yahoo! have as it relates to content and music? Well fundamentally, it is non-exclusive content. We have music videos, they happen to be the same music videos that all of our competitors have access to. Notwithstanding that, we have the largest music audience on the web globally and in the United States. We video stream an extraordinary amount of videos to that site.

What we really have are all the things we talked about a little earlier. We combined all of the assets of Yahoo! -- the personalization, the ability to trade playlists with your buddies and use IM tied in and Mail tied in. It is all of the pieces that we bring together that makes it an extraordinary experience. It is the ratings and reviews and the personalization.

The content is going to be important and at the end of the day it's going to be all of the tools and all of the engineering capabilities that a company like Yahoo! has. So that is going to fully enhance whether the content is non-exclusive or someday semi-exclusive or not. This will be our last question.


The final question comes from Jordan Rohan from RBC Capital Markets.

Jordan Rohan

Thank you so much. My questions are about the World Cup in Europe in a few months. Could you please detail the nature of the agreement with FIFA for those of us who don't quite remember the specifics from '02? Can you discuss the impact on what you may see in terms of page views and search queries and potentially the financial impact. How much is the license fee that is left to be amortized and what do you expect in incremental advertising revenues? Thank you.

Dan Rosensweig

Yes, the nature of agreement which was signed, as you said, in 2002 and expires after this World Cup, basically gives us the opportunity to build with FIFA the FIFA World Cup website, the official website for FIFA World Cup and allows us to be a sponsor. You'll continue to see Yahoo! visibility all through the World Cup and all through the games. You will see us on the boards and all the things you saw historically.

Mostly, it is a play for us to get tremendous visibility and brand. It will particularly help us in Europe. We have a number of exciting things that will roll out in terms of products which will be mostly focused on usership, particularly in the mobile space in Europe as it relates to working with each of the teams.

You will see things that we will be able to do on our sites and in search that have to do with images and the use of Flickr. There will be a lot of the community and social capabilities that we built around the world that will allow each of the countries to be able to participate in a fun way with FIFA and get more brand and more visibility and more usership for Yahoo!.

In terms of the revenue opportunity, it is all built in to our forecast. It is an exciting relationship and we really enjoy the relationship with FIFA.

Terry Semel

With that I want to thank you all for joining us today and have a very nice afternoon or evening depending upon where you are. Thanks a lot.


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