Yahoo! Reports Q1 2012: No Word, Yet, On Right Media Exchange And Ad Stack Strategy Ahead

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Yahoo! reported its first quarter 2012 earnings today and results looked good as the company beat Wall Street estimates by about $60 million according to Reuters.

From the release, "Revenue excluding traffic acquisition costs ("revenue ex-TAC") was $1,077 million for the first quarter of 2012, a 1 percent increase from the first quarter of 2011. Income from operations decreased 11 percent to $169 million in the first quarter of 2012, compared to $190 million in the first quarter of 2011." Read the release.

CEO Scott Thompson started the investor earnings call with optimism about his company's assets and the market opportunity. He trumpeted that the company beat estimates in spite of the fact that he's still not happy with the Microsoft Search alliance - the alliance is fed by a revenue per search guarantee which continues to make up for revenue short falls. Also display results yielded this admission from Thompson, "Display is nowhere close to where it needs to be in any of our three [geographic] regions." Thompson wants higher returns. In spite of better than expected results, Thompson was projecting to the Street and his own employees that current results need to be built upon. Later CFO Morse said display revenues display revenues slid in the U.S. and EMEA with a 6% increase in APAC. From the release on display results in the U.S.: "Display revenue ex-TAC was $454 million, a 4 percent decrease compared to $471 million for the first quarter of 2011."

The coming quarter's prediction for revenue included 1% year-over-year growth with single-digit growth in display according to Morse. Restructuring, write-downs and more will continue on through mid-2013. CFO Morse detailed new financial reporting that included ex-TAC (Traffic Acquisition Cost) reporting.

Thompson took back the call and said that the new financial model Morse outlined will show growth in the future. Thompson saw bright spots ahead including "content that matters" and offerings that he said were #1 in their categories. He admitted that the company has lost "time spent online" over the years (Facebook!) and he wants to reverse the trend, grow the business and move fast. Enlightening the investment crowd on how he and his team viewed the restructuring of Yahoo!'s business, he said, first, Yahoo! had been doing way too much and one of the key parts of growing the business is deciding what his company won't be doing.

He said 50 properties are being shutdown, and he said that company defined core properties that the company would continue to grow like Mail, Sports and the like. Thompson also want to move engineers "closer to users," accelerate deployment of properties, exploit the use of the company's data, and stop development of platforms outside of Yahoo!'s core. Does this mean Apt? Right Media Exchange? The call continued.

Thompson several times emphasized remaining nimble, responsive and innovating, and said that restructuring and layoffs were part of this plan.

Regarding a board update, Thompson reiterated that the company had appointed 5 new members. He also said the company had moved to protect its IP - including Facebook's alleged use of Yahoo!'s IP. Thompson said, "Facebook must do the same (as in pay up) or change the way it operates." Alibaba (the China web assets) remains under negotiation as there is a "gap" between what Yahoo! thinks there stake is worth and what a potential buyer thinks its worth (Alibaba's Jack Ma).

And then the call was turned over to the Wall Street hordes.

Who will ask about Apt, Right Media Exchange, ad tech?...

The first question was from Ross Sandler of RBC Capital Markets who asked about new commerce division strategies and the value of Yahoo!'s patents. Thompson said core commerce properties (auto, travel, etc.) would leverage data and "connect users with what advertisers are trying to sell them." It would seem that Dapper tech and interclick could be active in here. He said more details are on the way regarding this division in the next couple months. CFO Morse added that, yes, Yahoo!'s IP is valuable.

The next question was about an update on the sales team - was it improving? - still getting up to speed given the turnover? Morse said yes effectively and held up as proof that guaranteed media yield was up double digits and that "front page sold" metric held steady with the holiday-driven Q4 - impressive according to Morse. Thompson said that he won't be satisfied until the company starts "taking share." On the RPS gap with Microsoft, Morse said the guarantee has another year left. Morse said he's confident things will improve before the guarantee runs out. I'll bet Yahoo! gets Microsoft to ante up again. Microsoft wants a healthy (or healthier) Yahoo! to compete with Google.

Citi's Mark Mahaney asked if mobile will be something Thompson concentrates on going forward. Thompson says his company needs to get "good real fast in mobile and devices, which includes mobile." He wants to be a leader in mobile content.

Wall Street is being very nice with their public questions thus far. If Yahoo! turns around, the Street wants to be on Yahoo! and CEO Scott Thompson's good side.

Regarding amping R&D, and tech spending, an RMX question! What's the future for RMX asked an analyst. Thompson hedged and said they're still analyzing on steps moving forward with Right Media Exchange. So my guess - something is cooking. Seems like a sale or some kind of exit from that business could be possible unless RMX (and/or Apt) turns into a Yahoo! inventory-only strategy or an Aol-Microsoft-Yahoo!-inventory-only strategy given their non-guaranteed display ad alliance.

Next, CFO Morse saw positive revenue trends with interclick revenues.

Search remained a hot topic on the call as analysts wondered about how things would shake out for RPS (revenue per search) in the future. Page design seemed to be part of the solution and Microsoft is apparently working hard on a solution says Morse.

Morse reiterated supply and sell-through were down but better yield and pricing were up in premium display.

Noting comScore search share at Yahoo! continuing to decline, analyst Ben Schachter asked how Yahoo! would turn it around. Pretty simple - do people go to Yahoo! to search? No. CFO Morse said the company is concentrating on revenue growth. Trouble is revenue from search is an important part of Yahoo! revenue and the end of the Microsoft revenue guarantee has Wall Street worried.

A Sanford-Bernstein asked about how data was being used to personalize experiences, Thompson said there were three main areas for this: personalization - meaning uniquely relevant, personal content; targeting for advertisers - right ad, right time, right user; and providing data, insights and analytics for advertisers in "almost" real-time. Thompson wants to help advertisers optimize.

More search questions ended the call. Yes, the company wants better results.

The bigger theme from a display point-of-view is that display is flat, premium is up but needs to scale. RMX and Apt's futures are uncertain as their remains a question as to whether Yahoo! will continue to own both or move to focusing on core, Yahoo! property initiatives. Could an Alibaba scoop up RMX or Apt as part of a China asset deal?

By John Ebbert

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