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conference date: January 23, 2007
for quarter ending: December 31, 2006 (4th quarter)
Overview: Beat expectations on strong revenues, but earnings down from year-earlier.
Basic data:
Revenues of $1.702 billion were up 13% over Q4 2005. Excluding traffic acquisition costs (TAC) revenues were $1.228 billion, up 15%.
Gross profit was $1.012 billion, up 12% from Q4 2005. Operating income was $308 milion, down 6% from Q4 2005. Free cash flow was $278 million, a 16% decrease.
Net income was $269 million, down 60% from Q4 2005. That included $56 million in stock-based compensation. Earnings per share were $0.19.
Cash and equivalents ended $3.54 billion, down $463 million over the year largely due to stock repurchases.
Guidance:
For Q1 2007 revenues excluding TAC expected at $1.12 to $1.23 billion. Gross profits of $900 to $980 million. Other costs of revenues $220 to $250 million. Income from operations $138 to $163 million. Depreciation and Amortization $140 to $160 million. Stock based compensation expense $142 to $157 million. Cash flow range $420 to $480 million.
Factors influencing this are rising rates of TAC. MSN relationship wind down. RPS to trend up after Panama operates for a full quarter. Off network affiliates will cause variable changes because ranking algorithm will effect affiliates inconsistently.
Expects resulting Q1 growth rate to be lowest of the 4 quarters. Core O&O business to grow 20% for full 2007. Full year margin 39% to 40%. Free cash flow $1.2 to $1.4 billion. Cap ex $650 to $750 million.
Conference Highlights:
Goals in October were to improve search monetization, to widen lead in graphical advertising, and to make progress social, video and mobile spaces. Made progress on all three. Financial results were in line with outlook. Will roll out internationally in 2007, starting with Japan.
Search monetization US advertisers moved to Project Panama; will be complete by end of March quarter with overwhelmingly positive response. Exceded migration targets. New ranking model will be launched on February 5.
Display advertising did well, with top 200 clients showing strong (30% annual) revenue growth. European display "was a standout." 225 newspapers now on board; eBay partnership up and running.
Social media led by Yahoo Answers, with 75 million unique monthly users. Making acquisitions, including Bix.com, mybloglog.com. Signed a bunch of video partners and had success with ads. Lots of mobile partnerships were made during the quarter.
Expects revenues to ramp in second half of 2007 when Panama becomes fully operational.
Effective tax rate was 31%. NOL carry-forwards ended at almost $2 billion.
Free cash flow $278 million. $87 million received from procedes of exercise of employee stock options. $250 million in share buy backs. $140 million in acquisitions. Also has $9.7 billion or $6.70 per share in strategic investments.
Second half growth rates were slower than expectations. Global marketing services made over $1 billion in revenue. Off network affiliates had flat revenue year-over year, but excluding the loss of MSN, rose in the high single digits. Average TAC rate was up. "O and O" business, Search and display advertising: display ads were up over 19% year-over-year, search was up in high single digits.
Page views grew 22% to over 4 billion per day in December. Monetization of page views revenue per page was down from year-ago by 3%. This was with display higher and text lower. Fees revenue was $213 million, up 15% year-over-year. Had 16.3 million paid relationships at end of year.
US revenues were $1.145 billion, up 8% from year-earlier. International revenues increased 25% to $558 million.
Operating cash flow was $540 million, up 18% year-over-year. Headcount ended at 11,400.
Summary: cautiously optimistic.
Q&A:
Panama effects? Is incorporated into guidance. Begins at 8% growth rate and ends at 14% revenue growth rate. Expects Q1 to be the trough, though they had a good first few weeks.
CFO changeover? Just starting to look for new CFO.
Video ads? Very early still, experimental. Sponsorships indicate big opportunity in future.
RPS improvement? Has been testing new algorithm on a limited basis. Has been neutral so far, but believes will become positive over time.
Display yield acceleration? Modest, but definite. Page view growth includes email page views.
Material impact from Mobile? First need to build a big audience. 2007 will see more handsets with Yahoo products; learning to do advertising.
Right Media? Did allocate non-premium inventory, but mostly just testing so far. Can also buy inventory from them and repackage it.
RPS over time? Don't want to quantify, but should see increasing impact from Panama as time goes on. Thinks there is double digit opportunity in back half of 2007.
Lead management is a major benefit of Panama.
Display business expected to grow in double digits on annual basis throughout 2007. Off-network strategy is becoming more important to future.
Financial and Graphical businesses? 3Q was an anomaly for graphical business. Q4 is important quarter for advertisers. Ability to service large accounts with high quality needs is improving. Reorganized company to get better metrics on audience. Advertiser and publisher side will be dedicated to creating great engineering teams to build products for the future.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2007 William P. Meyers
