Yahoo (YHOO) Clings By Fingernails To Low End of Range

Yahoo's Q2 disappointing:

• Gross revenue lower half of range (weak),
• operating income light,
  
• EBITDA light (dragged down by Microsoft defense/courting expenses),
  
• EPS light.
  
• Revenue and operating income guidance for year "narrowed" (high end of range reduced).

Revenue up a scorching 6% year over year. Even owned and operated properties, the pride and joy, managed only a 14% increase. (Cable companies often grow ad revenue faster than this.) One positive note: US revenue was up 13%. Unfortunately, international plummeted, despite favorable currency trends. All in all, not good, certainly, but also not a disaster. And this was indeed one hell of distracting quarter.

Specifically:

Gross Revenue lower end of the guidance range: $1.78 billion vs. $1.73-$1.93 billion guidance.

Net Revenue below consensus: $1.346 billion versus $1.37 billion consensus

Operating Income weak, despite mass firings: Paltry $101 million vs. $135-$155 guidance

EBITDA okay if you exclude $22 million in Microsoft advisory fees: $427 million versus $425-$455 guidance. Even after backing out Microsoft fees, still missed consensus of $450ish.

Free cash flow only $231 million, down 30%. Remember when Yahoo used to gush cash? Those were the days.

EPS: $0.10 vs. $0.12 consensus. Ouch.

Outlook:

• 2008 Gross Revenue: guidance now $7.35-$7.85 billion vs $7.2-$8 billion previous ("narrowed")
  
• 2008 EBITDA: guidance now $1.825-$1.975 vs. previous guidance of $1.775-$2.025 ("narrowed")
  

FUN FACT: Total explicit cost (so far) to Yahoo shareholders to fight off Microsoft and then try to win it back: $36 million ($22 million this quarter, $14 million last quarter).

CONFERENCE CALL NOTES

5:06PM Still preamble

JERRY:

Happy we settled with that bastard Icahn. And now, on to the business...
Did pretty well considering extraordinary distractions.
Two quarters in line with plan [sort of]
Now, even greater focus on growing business [thank goodness]

Strong double-digit user growth. [This is huge. If this stops, company toast. If users keep growing, can be saved]

Hit by economy: Consumer products, finance. Display revenue weak.
Acknowledges miss revenue. Operating cash flow okay because managed expenses.

Now blowing smoke up employee posteriors (I'm one). "Passionate Yahoos have done a great job."

SUE:

Despite weak economcy, on track to hit targets 2008 [sort of].

Laying groundwork for why forthcoming display ad platform is so critical, as well as for why Yahoo needs to remain a principal in search.

Can Yahoo succeed in search? Query growth accelerated in Q2. [Good news, but can still lose share while growing queries, as Ask.com demonstrates every day]

Search monkey: 1000s of developers active.
BOSS: custom search pages on Yahoo.

US search revenue up 19%

Henry Blodget signing off--thanks. Jonathan Kennedy taking over for SAI:

Display revenue worldwide grew double digits.

Response to Buzz and BOSS indicative of things to come.

"Business model holding up well despite current economic environment." Cash up to $3.22 billion.

No share repurchasing this quarter due to trading restrictions.

Excluding AT&T, revenue ex-TAC would have been up 11% yoy

Softness in finance, travel, and retail... result of declining economy. Entertainment was up.
Internation revenue ex-Tax was 14%. Effective tax rate for the year to be between 41% and 44$

Maintaining mid-points of outlook range. Ranges narrowed to reflect completion of first 2 quarters. GAAP revenue to be between $7.35 billion and $7.85 billion, OCF between $1.825 billion and $1.975 billion, FCF between $900 million and $1.05 billion and capex between $675 million and $775 million.

Q&A begins... RBC analyst asks about non-guaranteed inventory growth rate. What percent of YHOO inventory is non-guaranteed? Answer... Seeing strong growth from non-guaranteed business.

Thomas Weisel analyst asks about Asian assets, what benefit have they had?... Answer: Don't want to speculate on potential transactions. Have examined various alternatives. Assets have been critical to expansion of franchise into Asia. We have excellent partners in these markets.

Jefferies analyst asks about weakness in display, what kind of growth assumption do you have? Will you racapitalize? Answer... We have looked at just about every alternative you can imagine to drive share holder value. We continue to have strong balance sheet and ability to generate cash. Trading restrictions have limited options. Not assuming significant change in display growth. 3rd quarter is seasonally the weakest.

JP Morgan analyst asks about international growth, why is it underperforming your competitors. Given underperformance in search, does it make sense to remain in this business?... Answer: weakness in international do mostly to weakness is search affiliates. We think Search is a "critical component." We have a broad product road map. Partnership with Google will help. Narrowed RPS gap this quarter.

Citi analyst asks about automation of display advertising, how automated can it be?... Answer: In terms of timing, expect strategy to be a 3-year time frame. First phase is upon us. Will be rolling out more broadly at end of Q3. More difficult to do because of more variables.

BofA analyst asks about the time it will take to implement Google deal... Answer: After review period, if we implement, will be some time in Q4.

Merrill analyst asks about lower profitability, what are the drivers?... Answer: U.S. business bears all impact of restructuring of AT&T deal, which was a drag on revenue. U.S. economy is weaker, seeing impact. 3Q is seasonally weakest quarter.

Call ends...

Yahoo Q2

Yahoo (YHOO) reports Q2 this afternoon after the close. We'll be covering the results and conference call live here. Press release probably out around 4:15/1:15 call starts at 5PM/2PM. Details and webcast here.

Preview

We expect Yahoo's results to be...mixed. Why? In part because Yahoo slices and dices its results in so many different ways that, by the end of the call, we'll be groping for the brevity of a single adjective. And in part because we expect the results to be, well, mixed: uninspiring revenue, okay bottom line (thanks to those firings), uninspiring guidance.

Specifically:

Gross Revenue: $1.73-$1.93 billion guidance
Net Revenue: $1.37 billion consensus
Operating Income: $135-$155 guidance
EBITDA: $425-$455 guidance, consensus higher ($450ish)
EPS: $0.12 consensus
Outlook:

• 2008: Net Revenue $5.72 billion, EPS $0.48 (Gross Revenue guidance: $7.2-$8 billion
  
• 2009: Net Revenue $6.47 billion, EPS $0.61

Lehman's Doug Anmuth has the details:

We look for gross revenue to be in the lower half of guidance and likely below our estimates given overall macro-headwinds and display in particular, but we expect EBITDA to fare somewhat better given recent headcount reductions and cost containment efforts.

For the quarter we project net revenue of $1.38 billion (+11.3% Y/Y), EBITDA of $460 million (-2.9% Y/Y, 33.2% margin), and GAAP EPS of $0.10. Our estimates are essentially in line with consensus for net revenue of $1.37 billion (+10.4% Y/Y), EBITDA of $457 million (-3.5% Y/Y, 33.3% margin), and GAAP EPS of $0.10. We believe this morning’s settlement between Yahoo! and Carl Icahn—in which Mr. Icahn and two of his nominees will be appointed to the Yahoo! Board—likely takes some of the edge off of 2Q results and reduces the significance of Yahoo!’s annual meeting on August 1.

We believe much of the focus on the call will be on Yahoo!’s display business given the weakening macro backdrop and recently evident impact on companies such as Microsoft, Valueclick, and Bankrate. While we expect Yahoo!’s gross display revenue to grow 25% Y/Y to $509 million, this number will be helped by Yahoo!’s newer premium display partners such as eBay, Comcast, and WebMD, as well as the acquisitions of Right Media and Blue Lithium. We think Yahoo!’s O&O display growth is a better proxy for the core business, especially as its third-party ad management platform is just beginning to ramp up. For the quarter, we project O&O display to grow 16% Y/Y to $462 million, but this projection is likely too optimistic given signs of a softening display market and Yahoo!’s large exposure as the industry leader.

Turning to search, Yahoo! gained modest share in May and June off of its all-time low of 20.4% share in April (comScore), and Marketplace Reserve Pricing—which went into effect in mid-April—could boost monetization, but tougher comps (2Q07 was the first full quarter of Panama) and a continued focus on the quality of affiliates are likely to impact overall growth. We project search gross revenue of $1.03 billion (+3.2% Y/Y), of which we believe O&O search net revenue will grow 13% Y/Y to $447 million. We look for Yahoo! to provide more detail on the early effects of Marketplace Reserve Pricing, Search Monkey, and potentially any update to the status of the search partnership with Google.