Home » Yahoo!’s (YHOO) CEO Marissa Mayer on Q3 2014 Results – Earnings Call Transcript

Yahoo!’s (YHOO) CEO Marissa Mayer on Q3 2014 Results – Earnings Call Transcript

And while our display revenue has been flat to down, the components of our display have not been. Traditional PC advertising is a sector of advertising and is in decline across the industry. That decline has been steep here at Yahoo! with legacy PC display advertising creating a drag on the business of $60 million or more per quarter.

However on the flip side, our native advertising offer through our Gemini platform has becoming credible strong. This product didn’t even exist six quarters ago. In Q3 native ads had revenues across mobile and desktop of more than $65 million.

In Q4 we anticipate native ads will approach $80 million of revenue. Native ads have been experiencing triple-digit year-over-year growth. And have moved from being an idea and the prototype to being a nearly $250,000 [quarter of billion dollar] business.

The advertising industry is constantly changing and the fact that we are able to response to this trend so quickly and meaningfully is a testament to our teams. This growth in native ads used on social and mobile has worked to offset the declines in traditional PC display.

As Gemini native ads and programmatic ads sold through Yahoo! Ad Management Plus gain momentum. We believe that their growth will overpower the declines in traditional PC display. In fact already in Q3 setting aside PC display and revenue classified as other our core revenue at 8% on a GAAP basis and 10% on a revenue ex-TAC basis.

This summarizes the key pieces of our core business in Q3. Obviously one of the biggest events for our company in Q3 was the Alibaba IPO on September 19. I’d like complement Jack Ma, Joe Tsai, the Alibaba management team and the underwriters on a very successful IPO.

I’d also like to complement our Founder Jerry Yang, on his foresight to invest in Alibaba where he has now joined the board. I want to use the next part of the call to discuss that actions that Yahoo!’s Management and Board have take to capture additional value from our Alibaba stake.

In May 2012 prior to the current management’s arrival at Yahoo! myself included Yahoo! entered into the agreement with Alibaba regarding the sale of our shares. The May 2012 agreements specified a numbers of things including one the immediate sell of approximately 520 million shares of Alibaba at a $35 billion market valuation.

Two, the sale of 262 million shares in the IPO, and three, the lockup of those shares not sold in the IPO approximately 262 million shares for one year after the IPO. Upon current management’s arrival in Q3 2012, we immediately recognized two things.

Alibaba had the potential to appreciate considerably in value and also that we need to improve the relationship between the two companies. Unable to modify or revisit the agreement at that time, we focus on rebuilding the relationships.

I immediately directed my team to begin healing years of tension and hard feelings. I sign Jackie Reses to the Board of Alibaba and Ken Goldman to the Board of Yahoo! Japan, our Joint Venture with SoftBank. Jackie and Ken have done a tremendous job, building the bridges between Yahoo! and our very important Asian allies. In fact, long-term Yahoo! shareholders will recall that as a result Alibaba allowed us to reduce the number of shares we sold in the IPO in two different instances. These reductions were made with no direction concessions on our side, and stemmed from better relationships between the companies.

Ultimately our management team negotiated to an outcome of selling 140 shares in the IPO. As you can see on this slide, this reduction in shares sold in the IPO netted nearly an additional $2.5 billion to Yahoo! on a pretax basis.

The first sale completed in 2012, the other $4.3 billion to the company and after tax proceeds. In September 2012, we promise to return $3 billion of those proceeds to shareholders. Over the past two years through Q2, 2014 we went on to return $6.2 billion to shareholders, more than double our commitment.

In Q3 and Q4 to-date we returned an additional $1.6 billion bringing the total to more than $7.7 billion in capital returned during Ken’s and my tenure. To facilitate these buybacks we went beyond our committed $3 billion amount from the Alibaba sale.

We utilized free cash flow from the core business, raised $1.4 billion in convertible debt to facilitate further buybacks as well as use the proceeds from a well-timed hedged on the Japanese yen. All-in-all we bought back 24% of the Company’s share and have done so continuously from the stock price on the day I started $15.65 to today.

On the share sold into the IPO we have already discuss the $2.5 billion of additional shareholder value captured by reducing the number of share sold. The IPO sales netted approximately $6 billion and after taxes to the company. We have committed to return at least half of that capital, approximately $3 billion to shareholders. And in Q3 we undertook an accelerated share repurchase as part of that return.

Today our share count stands at approximately 976 shares down from over $1.2 billion two years ago. On the remaining stake we continue to hold 384 shares of Alibaba valued at $34 billion on a pretax basis. These shares are subject to a one year lockup agreement. We worked hard to negotiate and achieved more favorable terms on that agreement.

Those terms allow us to communicate our intensions and take preparatory actions during the intervening year. Though there are some restrictions on what we can say today. Many have pointed out the value accretion that would occur at this final tranche were to be taxed upon sales at a lower rate than the previous sales. We are acutely aware of this.

We have the best tax experts in the country working intensively on structures to maximize the value to our shareholders of our remaining stake in Alibaba. Further, we are pleased with these efforts to-date and our considering promising alternatives that we are optimistic would maximize value.

We continue to refine our thinking on our approach and will report back to shareholders by our next earnings release in January. Management is committed to being a good steward of capital. The board is also committed to this stewardship and is and will be appropriately involved with the return of capital and investment decisions.

We are proud of our accomplishments to-date on capital allocation and the yield they’ve had for our shareholders. To recap, we have bought back 293 million shares for $7.7 billion with an average price of $26.37 and we’ve been executing these purchases continuously over the past 27 months.

We worked hard to build our relationships with Alibaba and SoftBank to reduce our sales in the IPO as we felt that would be immediately accretive to shareholder value. And we used cash from retiring Japanese Yen hedges and issued convertible debt to access cash to continue to buyback shares.

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