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 as noted, our location strategy review led to eight office closures and consolidation of functions in our remaining locations which will create more collaboration in key regional offices. In conjunction with this, we engage a top tier management consulting firm to help us achieve cost and structural efficiencies we are benchmarking and implementing best practices. We continuously look to find efficiencies to our business structure that will enable improve performance for our shareholders and fifth, revenue growth. Revenue engagement growth remains a top operational goal as a management team.

For Q3, we are reporting revenue above our guidance range as we saw continuous surge strength in our core business in improvements on fee revenue. We reinvested much of the cost efficiencies into our key initiatives to drive future growth. For example, we increased our mobile headcount to over 500 and as noted I am proud of the more than 200 million mobile GAAP revenue achieved in Q3. Considering especially of that significantly smaller mobile presence a number of mobile products two years ago.

M&A has been critical to rebuild our core business through our investments and mobile social native and video. In summary, led by Marissa the management team has provided stability and renewed pride throughout our company. Our employees are energized and focused as we are able to retain high performance and to attract top talent to develop the best products which we expect will ultimately to revenue growth. I have great confidence in the strength of our business as we continue through this transformation to a sustainable market share growth and further value equation for our shareholders.

With that, let’s go through our third quarter financial results. Once again I will focus most of the discussion around non-GAAP results which exclude stock-based compensation expense of $106 million and restructuring charges of $8 million. I will note though, while we exclude stocks based compensation from non-GAAP financial results, we take the stock dilution seriously, including shares granted and the resulting compensation expense.

And as a reminder you can find complete reconciliation between GAAP and non-GAAP results in our earnings slides in our Investor Relations website. So now starting with the financial highlights for Q3 as seen on Slide 5. Q3 GAAP revenue was $1.148 billion and revenue ex-TAC was $1.094 billion well above our guidance. Looking at our search and display businesses, the combined core revenue ex-TAC was flat versus prior year. Other revenue was up 6% as Alibaba related fees and patent license revenue more than offset declines in leads and listings.

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We are pleased to see continuous strong performance in our four investment areas as noted Mobile, social, net and video with approximately 80% GAAP revenue growth and the aggregate for those four areas year-over-year. Adjusted EBITDA was $206 million in the quarter which was also above our guidance range has improved revenue performance flow through and we managed cost ahead of our guidance.

Non-GAAP operating income was $156 million. Earnings and equity interest of $399 million grew 71% year-over-year driven by the strong Alibaba Group Q2 financial results in which we recorded our share on a one quarter lag. Non-GAAP EPS was $0.52, up 52% year-over-year and our Q3 average fully diluted share count decreased year-over-year by 3% to [$1.08] billion and was down $7 million from Q2. Our ending diluted share count was 993 million and since the end of Q3, through today, we have repurchased an additional 17 million shares of which 8.4 million was from the ASR. Free cash flow was $212 million for the quarter marginally down versus prior year as we had decreased capital spending to support company growth initiatives.

In our cash of marketable securities balance was $12.3 billion resulting primarily from receipt of the Alibaba pre tax IPO proceeds of $9.4 billion. Lastly, our headcount at the end of the quarter approximately 12,500. Let’s take a couple of minutes to go through the financial results in a bit more detail. And beginning with search, GAAP search revenue grew 4% and revenue ex-TAC grew 6%, once again without the benefit of the RPS guarantee. Similar to the last quarter, the search strength resulted from PPC improvement of 17% year-over-year.

We continue to see favorable traffic mix come from higher monetizing segments of the Americas revenue, Americas region and the Yahoo! properties. Paid clicks were flat year-over-year compared to a strong Q3 of 2013 that experienced 21% year-over-year click growth. In the Americas region as noted, we achieved 9% click volume growth, while the majority of negative impact came from Asia Pacific. This underlying operating matrix delivered a 17% year-over-year increase in search, click driven revenue. Once again, strong double-digit growth in the matrix that we believe best measures the health of this business.

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Mobile search GAAP revenue continues to more than double year-over-year. Now moving to display. GAAP display revenue declined 5% and revenue ex-TAC declined 6% year-over-year. Sequentially GAAP revenue was up 3% driven by a new formats including native ads, premium programs and and fancy football. Additionally we expect completion of the U.S. migration of audience campaign through a yen plus platform this month.

Growth in a number of ads sold held strong in Q3 at 24% as we continue to build our native and mobile inventory. The PPA decline of 24% offset the volume increases in Q3 as we saw increased contribution from our native ads. For revenue detail by region, please refer to slide 12.

Let me now move on to expenses. Traffic acquisition costs were down 7% compared to prior year, while up 24% quarter-on-quarter as we saw more growth on display network. Non-GAAP total operating expenses were up 3% versus prior year driven by work force expenses as we continue to invest in our tactical workforce and increased marketing spend for premium programs, while managing to lower other costs, such as data center consolidation and T&E.

On a sequential basis cost were up primarily through the patent sale contra expense that we had in Q2 and increased marketing. As noted we ended the quarter with approximately 12,500 employees nearly half of which are now in tactical functions and focus on creating the kind of strong products that attract consumers and ultimately grow revenues. However our total workforce including contract is down 11% versus the prior year, because we have aggressively reduced our contract workers by more than 1600 over the last year.

EBITDA was $306 million in Q3 with a margin of 28% based on revenue ex-TAC basis compared to $331 million in Q3 of 2013. Non-GAAP operating income was $156 million for the quarter resulting in a margin of 14% on a revenue ex-TAC basis. D&A remained consistent over the past several quarters at approximately $150 million. Rounding out the income statement other income includes our $10.3 billion pre tax gain on the Alibaba IPO. We received cash proceeds of $9.4 billion and recorded additional gain reflecting our proportionate share of the new stock issued by Alibaba net of our original basis.

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