Yahoo Struggles To Reignite Q3 Revenue Growth, But Triples Profits With Cost Cuts

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YQ3_Q309EarningsPresentationFINAL

Yahoo announced third quarter earnings today, showing net income more than tripling to $186 million, or $0.13 a share, nearly double analysts estimates of $0.07 a share.

This was definitely a financial achievement for Yahoo CEO Carol Bartz, but it was done almost entirely through cost cutting. Total operating expenses of $775 million was pared down by $169 million from a year ago. In comparison, net income rose $130 million from a year ago.

What investors really want to see is revenues go up again. Unfortunately, Yahoo’s total revenue was down 12 percent from last year to $1.6 billion. And revenues minus traffic acquisition costs (the money Yahoo shares with advertising partners) declined 14 percent to $1.1 billion. On the bright side, revenue were flat with the second quarter by both measures. On the conference call, Yahoo is characterizing revenues as “stabilizing.”

Yahoo’s advertising business was down on all counts. Search revenues declined 19 percent annually to $354 million. Display revenues were down 8 percent to $399 million from last year(but at least that was $6 million more than last quarter). And affiliate revenues were down 6 percent to $526 million

Below are my notes from the conference call Q&A:

Q; display, RPS [revenue per search]?

Tim Morse, CFO: $15M impact from ad quality, overall display grew, guaranteed side grew relatively strongly, things are starting to loosen up, ad dollars are starting to flow a little bit better.

In terms of results in search, tough to compare to Google, I’ve got to focus on Yahoo and what we . this quarter only down 1%. That feels to us like stabilization. RPS only being down slightly. Year over year queries grew double digit

Q: Impact of changed relationship with eBay

Time Morse, CFO: Extremely small.

Q: seeing TAC rates go up, do you have to guarantee more to keep that business intact?

Tim Morse, CFO: our focus is definitely on owned and operated. There is make whole provision for affiliates who leave to MSFT, there is no make whole provision if they go to another competitor. We do have to pay more. MSFT monetizes better. No question.

Q: Q on display, year over year trends, what needs to happen for it to get back on its feet

Morse: I think we are in a good position. We saw better yields this quarter. Economy starting to loosen up a bit, and brand spending coming back.

Q: Gross margins were flat year over year. Do you feel gross margins in net revenue basis can be flat on sustainable basis.

Morse: There is something changing in Yahoo, getting your hands dirty, reducing costs any way you can, that is rewarded at Yahoo now.

Q: Any changes that you’ve made in terms of enabling more rich media ads, how are sell-through rates.

Morse: nothing out of the ordinary to improve quality of the home page. We relaunched it.

Q: looking at guidance, doesn’t look like you are looking for improvement on any line. Is it a lack of visibility or conservatism?

Morse: You’ve got $15M impact going to $25M impact on revenue initiatives, s a little bit of a revenue drag. But we anticipate a good strength in display business because of seasonality. Search also does well in Q4. Perhaps a drag in fantasy sports, since we reduced fees to improve the experience.

Q: pageviews?

Morse: We grew pageviews 5% year over year. Mail was a little more than that, homepage was double digits, upper teens. Sports doing well. tough comps with some verticals, closed some properties. last Q 7% up YoY, this Q 5% up.

Added 200 people to headcount.

Q: Performance of premium end of the market Vs. non-premium end? Yahoo’s exposure to each?

Morse: We talk about them as guaranteed placements and non guaranteed. Guaranteed was stronger than non-guaranteed for the second straight quarter.

Q: What % of users are on the new homepage? What is difference in terms of user experience? What will you talk about next week on Analyst Day?

Morse: We won’t be giving 2010 guidance. Home page we are up in pageviews, still opt-in. rolled out in 8 countries total. A lot of operational metrics we are still sorting through.

Q: Can uyou give us color on mobile monetization? Are you factoring affiliate losses into Q4 guidance?

Morse: On Mobile, you’ve hot on a focus for our future. Have some new iPhone apps, Flickr. On 19 devices. As that becomes more established, monetization will improve.

In terms of affiliate losses for 4Q, no I am not factoring that in. I am assuming rather neutral.

Q: How much of cost savings from MSFT deal will be headcount related?

Morse: $650M of GAAP improvement in GAAP expenses, $425M of cash costs, the majority of which are headcount related.

Q: looks like search query growth accelerated, but monetization didn’t. Why?

Morse: Look at this sequentially, queries were up a little bit, RPS was down just a little. Search was down 1% QoQ, but comparing to a tougher 3Q last year.

Q: Branding campaign. What was the thinking? Were you losing audience to competitors? What response have you seen, attracted users?

Morse: It is very, very early. Some very encouraging input and early stats. We definitely expect this to translate into more users over time. It really is about revitalizing the company. Refreshing how people think bout Yahoo externally and internally. And returning to a normal level of brand spending. Just getting back to where we ought to be. Using this not just as an external catalyst but an internal catalyst too, identifying who were are and where we want to go. Will be an ongoing part of our cost structure.

Q: We are hearing that Right Media is being de-emphasized.

Morse: That is incorrect.

Q: Updates to outsourcing non-core businesses like dating or Hotjobs?

Morse: We are not going to comment on acquisitions or divestitures that are in process. Look at Xoopit, we want great technology , great people behind that technology, getting into new markets. That is what our acquisition and divestiture group is constantly doing.

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