Here’s the press release…
Quick take: Modestly better than expected. Revenue of $1.575 billion (-12%) slightly ahead of consensus of $1.5 billion. EPS of $0.13 ahead of $0.07 estimate, but this includes a gain on the sale of the Alibaba stake (~$0.05). Importantly, the outlook for Q4 is also better than expected.
On the negative side, search and display revenue continues to collapse, even on the “owned and operated” properties. Search dropped 19% year over year, which was an acceleration. Display dropped 8% (an improvement). After adjusting for FOREX and divestitures, revenue dropped 7% year over year, which is modestly worse than 6% in Q2.
Free cash flow improved versus last year (cost cuts): Up 20% to $258 million.
Bottom line: Carol needed to demonstrate that business has stabilised and is starting to improve. The business is now stabilizing. “Improvement” still seems to be a quarter or more away.
The conference call starts at 5PM ET / 2PM PT. Please join us for live coverage. Earnings slides below.
CONFERENCE CALL NOTES (Jay Yarow)
5:05: NO CAROL BARTZ! SHE’S SICK! There goes the dream of hearing an “F-bomb.” CFO Tim Morse, instead.
5:06: Q3 Rev above guidance, theme was stabilisation. Because of changes in economy since 2008, I’ll refer to sequential since they are more related to current economy. Revenue performance exceed by $75 million. Ad quality initiatives had intended impact on users, affiliate business stronger than expected.
5:07: Display, 2nd straight quarter of improvement. U.S. 2% growth. Guaranteed grew by mid single digit, non-guaranteed declined sequentially due to ad quality improvement.
5:08: o and o search rev down 19% y/y. Q3 only down 2%, query slightly up, rps slightly down. Industry segment, no segment up or down materially.
5:09: Affiliate business down 6% y/y up 1% q/q. Long term is netural focus growing own properties.
5:10: TAC 28% of revenue.
5:11: Didn’t hire as fast as we thought. Taking time to get right people in the right places.
Lowered bandwidth costs, lowered costs elsewhere. Invested $18 mill on branding, which launched in the last week of the quarter.
$17 mill charge from facilities cost. $98 million gain from Alibaba, that’s embedded in other income. In 2008 wrote down by $50 million
5:12: Repurchased 91 mill of stock.
5:14 Don’t have plans to liquidiate Alibaba or Yahoo Japan. Plan to experience Chinese growth with them.
5:14: 1.6 bill to 1.7 bill guidance.
5:15 Biggest increase will be brand campaign in Q4. While this will be high point, expect it in the future as well.
5:15: MSFT Update: Not exiting search. Continue to generate search revenue and innovate. next revolution is in better more personally relevant experience. This is where we differentiate without spending billions. Consider basic search to be Intel–it’s in Dells and Macs. The differentiation isn’t the chip, it’s the user exp. on top. Same for us.
Regulatory review–still think it will close in early 2010, esp. with Ad support we got yesterday. Until then we’re focused on search to keep them the best they can be.
When we do being, migrate the Algo platform. Moving ads will be more challenging.
5:17: Good news we have experience thanks to Panama and thanks to many former Yahoos at MSFT. If we close in early 2010, hope to make transition in significant markets.
5:18: Next week is analyst day, get pumped!
5:20 Talk about display run rate? We’re not going to break down results into monthly trends. But 1st display grew in total for second quarter despite $15 million impact from ad quality initiatives. Things are loosening, and ad dollars starting to flow. Didn’t see anything in 3 Q that’s one timeish. In terms of results in search tough to compare to Google, I focus on YHOO. We feel stabilisation. Queries grew y/y.
5:22: Your changed relationship with EBAY? Just on search side, small on a GAAP basis, and small revenue ex-TAC–immaterial even.
5:23: On stock buy back is this start of consistent buy back? On guarantee? On guaranteed only strategic that’s where we feel we have strengths, nothing unnatural in Q3, ad spending free up, we’re grt value prop. Offset dilution of our equity programs. We saw an opportunity in 3Q, we took advantage. In future, we’ll be opportunitstic, but also battle dilution.
5:25: TAC rates keep climbing, how do you perceive the Afflitiate business? Fairly neutral. Our focus on owned and operated. there is a make whole provision in the MSFT deal. We know that GOOG monetizes better than us, we have to pay heavier TAC to afflilates. We’re trying to win some back. Ones that moved moved for a reason, the ones that stayed stayed for a reason. If we’re good now, it’s only going to get better.
5:27: What needs to happen to get display on its feet? I think we’re in good position, our product roll outs and reach and engagement are great. Need ad dollars to loosen. Good good sign that guaranteed was strong in Q2 and Q3.
5:28: Margins, sustainable? Will they be flat? I won’t look out and predict. We’ll talk more later on that. There is a change at Yahoo, good old fashioned get your hands dirty and save money. Pragmatic view of costs–energy, data centres, whatever. Tough to talk about overall trend, but i am confident the right team in place.
5:30: Display, quality on home page is improving, any changes on rich media for home page? Nothing out of the ordinary, relaunched the home page. It’s a better and better propistion. Always expect strong seasonality for Q4. We’ll experiment with creative.
5:31: Not much improvement anywhere in Q4, can you talk about that? You’ve got 15 mill impact going to 25 mill for revenue initiatives. We don’t break guidance by products. expect strength in display, search has some benefits, a couple of other drags, like fantasy sports since fees are cut to get user growth, overall you see o and o growing, drive ex-Tac, seasonal thing, 5% Q/Q increase, i feel good about.
5:34: What’s the plan to focus on core business? Pageviews grew about 4%, home page growth very strong upper teens. Tough comps because of Olympics, financial crisis, and closed some sites. Last Q up 7%, this Q up 5%, not a big diff. y/y comps are a little tougher. If you look at males, and sports improving nicely.
In terms of divestures, won’t talk publicly. Continue to look at the landscape.
Paid inclusion program is in $300 mill for rev initiatives, in the revised $240, $60 per quarter on an on-going basis.
5:38: Positive metrics about home page? What’s diff between new and old pages? expectations for analyst day? Not going to steal thunder for next week. We’re not giving 2010 guidance, doesn’t make sense. On home page, we’re up strong teens in terms of pageviews. Not all US users have switched, it’s opt in. Rolled out in 7 other countries. Awful lot of operation metrics we’re sorting through. It takes time to get data in to reach conclusions, it’s just early on to share too much. Here’s why: because it’s opt in you expect pos. feedback, so all the metrics I’ve seen are really positive, but want others feedback.
5:45: What’s booked for Q4? We don’t break that out. Haven’t heard anything that’s diff from last quarter. It’s seasonal.
5:46: Search monetization, query growth grew, but revenue declined? Nothing to do w. MSFT. Look sequentially, queries up, rps only down a little bit. All of search is basically flat. Year over year is tough. 3 Q of 08 was a peak last year, so it’s a tough comp. tougher 3 q. Part of product roll out, search is more personalised, scientific way of getting to the results, a lot on that side, we’re not slowing down at all.
5:48: Branding campaign? Were you losing audience? What reaction have you seen? Again, it’s very very early. Just like on homepage roll out, very encouraging, but I’ll leave it to people that know what they are doing. We expect more users from this. Pretty comprehensive. It’s about revitalizing the company. revitalization campaign. Get us back to where we were after we’ve had fuzziness. Return to normal level of brand spending. High correlation between rank of brands and how much you spend. It’s both external and internal catalyst. early phases this about us and our corporate identity. In future it will be more product focused. Expect for a while.
5:51: How’s the ramp up in behavioural targeting? AT&T campaign? AT&T sales not material yet, but we’re encouraged. Great deal, strategically smart. Targeting–this is what I was talking about w/ the science of display avertising. Have ads follow you from property to property, increasing part of our value prop. We’re with 580 mill people or more, that’s great reach, so its our value proposition. That is the lifeblood.
5:53: Right media exchange? You stopped selling non-guranteed inventory, what impact that has on business? I don’t know anything about that decision, certainly not part of the $240 million. Exchange is an open exchange, about 120,000 buyers and sellers and 9 billion daily transactions. What you hear about class 2, is incorrect.
5:55: Divesting the business or any acquisitions? Were not commenting on that. We want great technology and great people that will be accretive. Get into new markets, strengthen markets. Work with business, evaluate. Drive where growth makes most sense.
Waiting for the call to begin…
- Revenue of $1.57 billion versus $1.5 billion estimate.
- EPS of $0.13 vs estimate of $0.07 (GAAP). Non-GAAP $0.15.
- Revenue and EBITDA outlook for Q4 slightly better than expected (positive–Street was looking for a cut)
Online advertising appears to have stabilised in Q309 so management’s guidance of about 15% declines in display revenue and 20%-plus declines in search revenue should be achievable.
Q409 street estimates are fairly agressive even with easy comps. Thus, there’s a risk of an estimate cut. We believe the company will likely issue guidance around what the street is expecting given easy comps and stabilised conditions. However, any backpedaling will likely hurt the YHOO shares, which are up about 20% since the beginning of September.
Background: Trading at just 7 times 09 EV/EBITDA (accounting for hidden value of Asian investments) Yahoo is a bargain relative to other big tech stocks. The recent 20% move reflects investors getting back into the shares given valuation afer a year of poor performance and signs of stabilisation in the online ad market. Still, though we expect it to maintain guidance, we would be surprised if management banged the drum on a meaningfully recovering ad market in Q4 so don’t expect any major upside surprises from this release.
Here is a snapshot from Citi’s Mark Mahaney:
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