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Highlights from Yahoo’s 2Q07 Earnings Call July 18, 2007

Posted by David Card in Media.
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Old hand but new ceo Jerry Yang led his first earnings call of the new regime. Slides are here. I’ll focus as usual on industry- rather than finance-related bits.

Total revenues up 8% to $1.7B. Ex-TAC (less revenue sharing to advertising partners) up 11% — owned & operated sites are growing much faster than affiliates and partners. O&O ex-TAC advertising revenue was up 18% to $877M, affiliate advertising down 17% to $154M, for a total ex-TAC marketing services figure of $1.03B, up a modest 11%. (That’s the number Jupiter uses for market share analysis.) Paid content and fees were up 12% to $212M. Yahoo lowered its full-year outlook (11% growth ex-TAC), and Yang sketched out his vision. The early reviews are not good. During commentary and Q&A, Yahoo execs more or less:

– Said they wouldn’t kill Panama and do a search deal with somebody else
– Said they weren’t going to try to buy Facebook, or any other ad networks
– Said Panama was working to raise revenue per search (RPS) in the US but display and affiliate performance diluted positive effects

Big Picture

Yahoo is an ecosystem for users, publishers, and advertisers, and it has to strengthen the marketplace of that system. The three pillars supporting it are

– Insights
– Open-ness
– Yahoo as partner of choice

That translates into:

– “We’re the leader in behavioral targeting” and Smart Ads (dynamically fine-tuned creative based on targeting). If you’re the leader, why can’t you make more money off your remnant inventory? It’s either poorly targeted or overpriced vs. the competition, apparently.
– We need to get Right Media working fast, and Panama working faster. Okay.
– eBay and the Newspaper Consortium prove that people like us better than Google and Microsoft. So why does your affiliate business stink and AT&T-SBC want to renegotiate its portal deal?

Yang is on a 100-day plan. There are no sacred cows. He’s going to have to work on corporate culture: decision and execution speed, and hiring and retaining talent.

Prez Sue Decker on what went wrong:

– Yahoo took too long to integrate Overture, which delayed its investment in Panama. Panama’s going strong, and the salesforce is integrated.
– Yahoo was “risk averse” on making hard personnel decisions.
– Yahoo stopped innovating in display advertising: it missed out a lot on performance-based display and hadn’t paid attention to self-service smaller advertisers.

The three-way re-org from December escalated publisher partnering and marketing to an equal position with product, which was too confused anyway.

Advertising and Search

– RPS for US O&O queries is up 15 to 20%. Should be up similarly in 2H.
– O&O search ex-TAC revenue grew just under 25%; display grew in the low to mid-teens. These are global figures.
– The new ranking algorithm is on in Japan last week, and switching on in the UK soon
– Smart Ads are the most significant innovation since behavioral. Launching first in Travel. Other categories by year-end.
– The majority of Yahoo remnant inventory will be in the Right Media exchange by year-end.
– Yahoo’s still pruning bad affiliates. But affiliate revenue should be only 10% of revenue by year-end.
– Yahoo won’t talk about its top 200 advertisers in the calls anymore. It feels detail on O&O vs. affiliates is a better picture.
– Disappointing display performance is not because of maturing verticals, but because Yahoo isn’t selling enough remnant inventory.
– Remnant inventory CPM pricing trends are actually improving, but Yahoo’s just not selling enough.
– Quality-based pricing is on in the US. Domain controls TK in 2H.
– Behavioral targeting will “extend to the exchange, and maybe even search, over time.”
– Yahoo danced for a tough question. Q: A lot of new companies are generating inventory that is potentially premium (ie, good audience, guaranteed placement, but still cheaper than Yahoo premium space). Is that your next competitive threat? A: no, those are partnership opportunities (for the exchange?).

Paid Content and Other

– 16.9M paid relationships, up 18%, and up 400K from the prior quarter
– That number is driven by premium access subscription deals
– Practically the only mention of social media: Yahoo Mail is “one of the world’s largest dormant social networks…we’re moving aggressively to activate it.”

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