Source: Seeking Alpha
Yahoo! Inc. (NASDAQ:YHOO)
Q2 2014 Earnings Conference Call
July 15, 2014 17:00 ET
Mike Santoli – Business Reporter, Yahoo! Finance
Marissa Mayer – Chief Executive Officer
Ken Goldman – Chief Financial Officer
Eric Sheridan – UBS
Sachin Khattar – Jefferies
Carlos Kirjner – Sanford Bernstein
Ron Josey – JMP Securities
Justin Post – Merrill Lynch
Peter Stabler – Wells Fargo Securities
Youssef Squali – Cantor Fitzgerald
Good afternoon and welcome to Yahoo!’s Second Quarter 2014 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 our business reporter from Yahoo! Finance, Mike Santoli.
Before getting started, I’d like to remind you that today’s presentation will contain forward-looking statements about our expected financial and operational performance including business and financial strategies, revenue growth, products and ad sales. Actual results might differ materially from our projections. Potential risks factors that could cause these differences are described in our Form 10-Q filed with the SEC on May 8, 2014. All information in this video is as of today, July 15, 2014 and we undertake no duty to update it for subsequent events.
Today’s discussion will include non-GAAP financial measures. Reconciliations of our non-GAAP results to the GAAP results we consider most comparable can be found in our earnings slides, which also contain full versions of the financial charts and graphs you will see in today’s video. We encourage you to review the complete earnings slides in our Investor Relations website at investor.yahoo.com under the Earnings tab.
And with that, let me turn the program over to Mike.
Mike Santoli – Business Reporter, Yahoo! Finance
Welcome to Yahoo!’s second quarter 2014 earnings video webcast. I am Mike Santoli 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 bring you prepared remarks from both Marissa and Ken around Yahoo!’s second quarter performance. Later, they will be answering your questions submitted via email. Institutional investors were encouraged to submit questions and we have selected a few questions that were representative of the group.
I’d like to now turn it over to Marissa to discuss Yahoo!’s second quarter business update. Marissa?
Marissa Mayer – Chief Executive Officer
Thanks, Mike and good afternoon everyone. Thank you for joining our Q2 earnings live stream. I want to begin today’s call with some perspective on where we stand in the overall transformation of our business. We have transformed our culture by focusing on our strategy on speed and execution. We have transformed our products divesting in those that are non-strategic and investing in those that can drive long-term growth. Along the way, we have reinvented every single major consumer product at Yahoo! And now we are transforming the ways in which we generate revenue, countering declines with investments in new products, platforms and businesses.
What we know is this transformation is not a singular event. It is a series of events and quarters, some more challenging than others and some more successful than others and it will take time. In the case of Yahoo!, I have stated in the past that we believe a transformation of this size and scale will take multiple years and we continue to believe that is the case today. Even so given our top priority of long-term sustainable growth, we are not satisfied with our results this past quarter.
In Q2, we delivered $1.04 billion in revenue ex-TAC, which is down approximately 3% year-over-year. Looking at the core of our business, search hit $428 million in revenue ex-TAC representing 6% growth year-over-year. On the display side, we saw some specific challenges with $394 million in revenue ex-TAC or roughly 7% decline year-over-year. I will return to the specific revenue analysis around the challenges after our quarterly product update.
In the past, we have consistently talked about our products in terms of four areas: search, communications, digital magazines and video, all powered by two tremendous platforms, Flickr and Tumblr. We have also discussed our strategy of speed, quick decisions, quick execution, quick implementation. And I want to walk through our progress in Q2 and help connect this strategy to real-time progress in our business.
Let’s start with search. Last quarter, we acquired Aviate as part of our efforts to accelerate mobile search as a contextual personal home screen product for Android users. We are excited about the opportunity to deliver the right information and applications at the very moment of relevance. In late June, we brought Aviate out of beta, receiving an incredible response and rapidly growing users 2.5 times over in the first week alone. And we are seeing our users interact with the new Yahoo! Aviate, an average of 50 times a day making it a truly daily habit.
In terms of search monetization, we continue to make great strides with our Gemini marketplace, the very first unified mobile search and native buying platform in the industry. We are incredibly excited that for the very first time since 2010, we are serving our own mobile search ads in the United States and we continue to see the power of consolidating all mobile advertising into one marketplace. Gemini now represents 50% of Yahoo!’s mobile display revenue in the United States. I am also excited to report that our mobile display and our mobile search revenue each grew more than 100% year-over-year. In Q2, we continue to iterate on our search experience, servicing relevant information like event invitations, upcoming flights, packaged tracking data and more into the search experience. This sort of integration not only improves the user experience, but also brings a unique value proposition to millions of Yahoo! Mail users leveraging our scale and longstanding market position.
Now, let’s turn to communications. In Q2, we launched a re-imagined mail app integrating search, news and content into the ultimate daily habit communicating with friends and family. What’s notable here is that we are bringing the best that Yahoo! has to offer into one experience. So, now when you are checking your e-mail, you can catch up on the latest headlines, check the weather see how your favorite sports team is doing, or check in on your stock portfolio all in the same application. The result has been a more immersive engaging experience that users are responding to positively. On the iOS app, we have added one minute of time spent per user per day and page views have increased over 70% compared to the previous mail app. And on Android, we have seen time spent per user increased by 65%. Developed in under six weeks, our latest mail app is yet another testament to the abilities of our teams to be mobile-first, move fast and launch products our users love.
Next, I want to turn to our digital magazines. Digital magazines are fundamentally reinventing the way users experience digital content, making it more modern and immersive, complete with distinct editorial voices, and beautiful native advertisements. This past quarter, we launched three digital magazines Yahoo! Movies led by Josh Wolk previously an editor for Vulture and Entertainment Weekly; Yahoo! Travel led by Paula Froelich formerly of the New York Post and Yahoo! Beauty led by industry maven Bobbi Brown. And the launches continue. Just earlier today, we launched Yahoo! Health, the latest addition to our lineup of digital magazines.
The response to our digital magazines continues to be strong. I want to note something I mentioned on previous calls, content sharing. We are seeing share rates on these magazines at higher rates than on our other verticals speaking both to the quality of the content and the opportunity to connect with users beyond the Yahoo! network. This continues to be an area of investment and opportunity for us. More importantly, digital magazines are one of the driving forces behind growing our display business, especially our native ad inventory. Our digital magazine verticals are increasingly becoming attractive placements for brand advertisers, you are going to see themselves next to premium content.
We also made some exciting progress this quarter with the integration of Tumblr into our digital magazines. When we acquired Tumblr just over a year ago, we saw what many of you saw, a tremendous platform for creators and curators to share. We also saw something else, an incredible canvas to bring brands to life unconstrained by cookie-cutter pages or character limits. And in Q2, we began to make more meaningful steps forward in the monetization of Tumblr with native Tumblr-sponsored posts. This announcement effectively combines the creativity of Tumblr with the scale of Yahoo! allowing advertisers to seamlessly promote their content and their brands across the Yahoo! network. We are very excited about this move forward as it truly marks one of the most meaningful integration opportunities we see between Tumblr and Yahoo. As the industry shifts to more and more digital advertising, the need for high-quality engaging brand content will continue to grow exponentially and we are proud that 65 of the AdAge top 100 brands are already leveraging the Tumblr platform to create and share content.
And finally, I would like to turn to video and Yahoo! Screen. In the past, I have talked about building our video library in order to engage and grow our video audience. Q2 was no different. We have continued our focus on video with investments in unique premium content. Fundamentally, premium content draws premium advertisers and we have had early success bringing these opportunities to market. In April, we announced that two original series, Other Space and Sin City Saints, would be debuting on Yahoo! screen, both led by teams of Emmy-nominated directors and producers. We are confident audiences are going to love these two new shows. And in June, we announced that we will host the sixth season of the TV show community exclusively on Yahoo! screen with 13 new episodes. We are thrilled by the positive response from community’s passionate following and we are excited to welcome those fans to Yahoo!
We also made an exciting partnership announcement with Live Nation in April. Yahoo! will be broadcasting one live concert on Yahoo! screen everyday for a year. That’s 365 concerts over 365 days. And coincidentally, it all starts tonight with a Dave Matthews Band and their debut of their new acoustical format. Tune in at 7:20 Eastern Time at yahoo.com/live.
As I said earlier, we are building our content library bringing new audiences and younger viewers to Yahoo! While the reinvention of our video business is still in its early days, I am heartened by the user growth metrics we are seeing both in the broader market and internally. For example, in Q2, we saw a 22% increase quarter-over-quarter in daily active users on Yahoo! screen and we saw 29% increase in daily active page views, which represents a 67% increase year-over-year. Again, our video business is still early, but these initial strides are building the foundation for more meaningful user and advertiser growth in the future.
Moving from products to revenue, I want to discuss a bit of what we saw this quarter. In Q2, we saw two key issues specific to our business both were in traditional PC display. While traditional PC display is an area that is in decline across the industry, the two issues we saw were unrelated to this trend. We believe they will be short lasting and can be corrected in the next one to two quarters. The first issue concerned our delayed execution of our audience transition to Yahoo Ad Manager Plus. We took extra time to ensure the product was delivering for our advertisers. During that period buying, on Genome, our existing audience platform slowed and we were left with a revenue shortfall.
Fundamentally, Yahoo Ad Manager Plus is an important driver in growing our display business long-term, especially as programmatic buying continues to evolve and grow. While it is still early, Yahoo Ad Manager Plus has already been well-received. Throughout Q2, I met in small group settings with approximately 500 advertisers and agencies representing more than 350 brands. And we have been hearing consistent excitement and interest in the opportunities we are unlocking with Yahoo Ad Manager Plus.