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Highlights from Yahoo’s 4Q06 Earnings Call January 24, 2007

Posted by David Card in Uncategorized.

Highlights from Yahoo’s Q4 earnings call yesterday. As usual, I’ll focus on industry rather than financial things. The slides are here.

Ad revenues (search and display) ex-TAC (that means, minus the revenue-sharing that Yahoo pays out to its search partners) were up 11% sequentially compared with the miserable Q3, and up 15% year over year, to $1.02B. Fees paid by consumers, small businesses, and broadband partners were up 1% from Q3 and 15% from a year ago, to $213M. Its outlook is 8% ex-TAC revenue growth for Q1, and 14% for the year.

After a re-org and a lousy quarter, a lot of the talk on the call was on focus and strategy, as well as “we’re doing better than you think we are,” which, in fairness, is true. The big news is that Yahoo is ahead of its own schedule on transitioning US advertisers to its new search platform, known as Project Panama. US search results will incorporate the new algorithm (not just the highest bid, but also a click-through factor, something Google’s been doing for years) beginning Feb 5. And oh by the way, though nobody really said this before, lo and behold, Panama is not just about search but will also handle other ad formats and platforms, and work within Yahoo properties as well as off-network. Hey, isn’t that Microsoft’s strategy? Why, yes it is.

Big Picture

Similar to last quarter, Yahoo said its strategy is to focus on 1) fixing search, 2) opening the gap in display and 3) capture new opportunities in social media, video, and mobile. This makes perfectly good sense, peanut butter be-damned. There’s nothing wrong with Yahoo’s strategy that a little execution can’t fix. In fact, ceo Terry Semel sounds the same theme that I do about Yahoo: it’s the best-positioned online media company to tap into the broadest trends in behavior and advertising.

That said, this seemingly real-time expansion of the scope of Panama is suspicious. “We have a roadmap, we’re just not willing to discuss it yet.” That’s weak, guys. And if I hear another word about Yahoo Answers without a solid explanation of why it matters… Actually, it’s supposed to affect search. That’s the line. Okay. Still waiting. How come Wall Street doesn’t hammer Yahoo on its so-far lame social media efforts the way they attack revenue per search?

Advertising and Search

– The advertisers that represent the “large majority” of US search revenues are all on Panama now, a little ahead of schedule. The transition in the US will be done by the end of 1Q07.
– As noted, the new ranking model will kick in on Feb 5.
– Panama will start to roll out in international markets in 2Q07. Japan will be the first market.
– Yahoo’s top 200 US display advertisers grew just under 30% in the quarter. CPG, Financial Services, and Pharma were very strong. When asked about FS, which was blamed in part for Q3, Semel called Q3 an anomaly, not a trend.
– While display is up nearly 30%, search is up high single digits. Revenues per search is still declining; Q1 should be the trough.
– Yahoo is playing with “audience-based selling” across demographics, geographies, and behavior — across search and display.
– Business with Right Media, which Yahoo took a 20% stake in, is still immaterial. Yahoo is looking to sell its own remnant inventory more efficiently, but also to buy inventory from the Right Media exchange, and package that with its own inventory — both premium and remnant.
– Yahoo says it gets over 100M UV on its social media properties (Answers, FlickR, delicious) and that 50% of that audience is under 35, so take that, MySpace and Facebook. Yawn. Page view growth is from e-mail and that social media stuff. Again, why aren’t people asking about $$?
– There’s a strong underpinning of behavioral to many of Yahoo’s comments and answers. It’s unclear to me whether this means “true” behavioral (super sophisticated targeting) or the usual application, i.e., following someone who’s just been to the autos page to use “remnant” inventory better. Not that there’s anything wrong with that.
– Mobile and video are both gonna be HUGE, but not anytime soon. Yahoo seems to think mobile means “graphical” — it says nothing about SMS, which is where all the money is right now.
– Asked directly, Yahoo responded that the opportunity for Yahoo to leverage its advertising network off its own properties — regardless of all the “clean up the affiliates” and rising TAC talk — is equally important. Not just search, either. Can’t say I’ve heard them say this before.

Paid Content and Services

– As usual recently, almost no color on fees. 16.3 million paid relationships, up 29%.
– Yahoo has added roughly the same number of paying customers for the past two years, and expects to do so again. Forecasts 19M by year-end 2007.
– ARPU should be $3 to $4 per month per relationship. Yahoo said “trending toward the low end” of that figure for the first time.

Outlook Assumption Detail

Four factors:
– Rising pay-outs (TAC rates) to network affiliates
– MSN relationship totally done (it represented $75M in 05 and $25M in 06)
– Revenue per Search effects: the ranking algorithm should start paying off on Yahoo’s own sites in late Q2
– The impact of Panama on affiliates will be varied: no benefits in 2007

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