Press release is out! Reviewing now…
QUICK TAKE: Revenue was in line with expectations, earnings were considerably stronger than expected. The Q2 outlook was, on balance, in line with expectations.
Yahoo has gotten good control of its costs and has stemmed the revenue bleed. But it has yet to gain real growth traction. Most revenue lines declined, and overall revenue was only up 1% (-1% after adjusting for currency exchange). Search was very weak. The one bright spot was what is now Yahoo’s core business, display, which grew 20% year over year.
EPS of $0.22 benefitted from $0.07 of one-time boosts from the sale of Zimbra ($0.05) and search-deal reimbursements from Microsoft ($0.02). Still, adjusted EPS of $0.15 was much better than the consensus estimate of $0.09.
The outlook for Q2 revenue expectations is slightly below expectations. The outlook for operating income is slightly ahead.
The revenue is what is critical here–cost cuts will only take you so far. And, again, with respect to revenue, Yahoo has stemmed the bleeding, but it still has yet to gain real growth traction.
Here are the earnings slides:
The conference call starts at 5PM ET. Listen here. Rory Maher will provide live coverage below.
CONFERENCE CALL NOTES
Carol Bartz on the line.
O&O display up 20% (ahead of market), guaranteed display up 24% (encouraging).
Search – we told you last quarter we were focusing on volume – and have since stabilised search share (we’re sceptical).
CFO, Tim Morse on the line now.
GAAP rev (up 1%) – first time in a number of quarters.
Op Income up 44%, margins up to 9%. Microhoo deal already showing some cost benefits.
Demans shifting to guaranteed placements in improving economy.
All regions grew in quarter, N. America and Asia up double-digits.
7 of 10 ad categories grew during quarter.
O&O search rev down 14% y-o-y (not good). CPG/Telecom strong. Finance weak.
Share started stabilizing in March after some losses. Believes search query share has bottomed and should grow next quarter.
On the cost side:
TAC were 29.2% of rev, a bit above projections.
Microhoo cost benefits ($78 million): Transition cost – Microsoft pays them for costs associated with transition to their systems (legal, consulting, training etc.).
9% operating margin a 3oo BP improvement over last year’s 6% margin.
Sale of Zimbra $66 million pre-tax gain (no tax impact).
Effective tax rate improved too.
Cash Balance: $4.2 Billion at end of quarter (bought back over 20 million shares during the quarter).
Asian assets: valued at $10.4 billion at end fo quarter taking public market quotes (does not include private Alibaba businesses).
4% y-o-y growth for rev of $1.6 Bill to $1.7 Bill.
Looking for operating income of $155 Million to $195 Million.
Will benefit from Microhoo costs of $75 to $85 million.
Excluding Microhoo benefits, costs will be up modestly q-o-q.
Bartz Is Back:
Advertisers looking for new formats, packaging in campaigns. Using Yahoo’s superior targeting to accomodate them
Focusing on Behaviorial Targeting and increasing yield.
Executive transition issue: Bartz surprised at how much attention this has receieved (really, many of your tope executives have recently left – that’s news)
Olympics users were 70% more than NBC.coms, but didn’t pay any money for broadcast rights.
Also using a content engine to auto publish highly-searched content. CTR have increased significantly on content like this.
Sports is particularly strong (especially fantasy). Social media a priority too. Integrated Twitter on search and homepage. Increasing integration with Facebook.
Signed major search deal and mobile ad deal with Telefonica overseas. Rolled out a bunch of new mobile products this quarter.
Sponsored video programs across all verticals. Most were produced in-house but recently been using professional studios. Viewers and advertisers love them. Will roll out more of the original “video snacks” in the future.
Three important takeaways:
1) Hard at work on Microhoo
2) Investing in growth and efficiency
3) Leaders in online advertising.
Search – Won’t give full-year guidance.
Display – feel “great” about positiong. Advertisers starting to spend more.
On increasing engagement: engagement is the most important metric. Impacted a lot by mail. When mail hiccups it moves the whole company around. Focusing on controlling that more. Interactive content, more real-time content, better targeting.
RPS down y-o-y, but was up for 2nd straight quarter sequentially. Improvments put in place during Q409 are starting to pay benefits.
O&O Vs. Affiliate: saw strength in display, search was a little weaker than expected. So, the mix between the two was a little different than expected from expectations at the end of Q409.
International – display in Asia very strong, pretty strong in Europe (though not up double-digits).
Putting consistent video platform across all platforms (used to be separate platforms for each vertical). makes managing this process more efficient and inexpensive. Will see more “real-time” like video on their sites.
Monetizing Asian assets – see them as a terrific investment that gets more valuable over time (read: We’re not selling them anytime soon).
Will probably buy back more shares before the end of the year.
Looking to produce much more original content – both internally and through partnerships. Hired some old media people recently to spearhead some of this. Entertainment content is very unique.
Paid migration in Microhoo deal should occur before the holiday season, but won’t pull the trigger if they are not completely ready.
The Bottom Line: Industry reports and Google’s Q110 strong search results should give investors some confidence that online advertising (search and display), turned the corner after Q409.
Still, the YHOO shares are up 25% since early-February lows (versus 16% for the NASDAQ) so much of the first quarter strength is likely priced into the stock.
There is likely limited downside to the YHOO shares in the near-term since signs so far point to continued strength in online advertising for the remainder of the year and Yahoo is largely a bellwether for display. However, we’re concerned about the company’s long-term prospects given increased competition from niche publishers and rapidly-growing social network sites.
Background: YHOO trades at about 6-times 2010E EBITDA so are inexpensive compared to the rest of the Internet group. The inexpensive valuation indicates limited downside this year, in our opinion, given an ad recovery. However, long-term the company is in a tough spot since it needs to generate stronger growth from its display business despite the fact that display is experience significant rate pressure from an influx of competing inventory. As a result, multiple expansion is going to be difficult.
Key Consensus Estimates:
- Net Revenue: $1.17 Billion
- Operating Income: $108 Million.
- GAAP EPS: $0.09.
- Key Items To Watch Out For: 2010 outlook, Microhoo search deal, mobile, any signs of innovation (leverage on BT campaigns, new products, leverage on engagement ad campaigns), and details about what the company plans to do with its nearly $5 Billion in cash.
Here is an excellent snapshot from Citi analyst Mark Mahaney (to enlarge, click here):
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