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

Yahoo!, Inc. (NASDAQ:YHOO)

Q1 2016 Earnings Call

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...


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