Yahoo 4Q05 Earnings Call Highlights

David Card | January 17, 2006, 09:55 PM

Yahoo grew 15% sequentially and 36% for the year and, wotta surprise, is getting hammered by the Street for it. As opposed to my usual Wall Street bashing, I'll observe that Yahoo execs sounded almost excrutiatingly defensive. They don't call Google by name. They haven't convinced the Street that a balanced, healthy media business is sexier than a one-trick pony. (They've convinced me, but I don't count.) Or that the combination of brand plus search advertising is more fun than search alone. Yahoo really needs to work on its spin, or hope for a Google meltdown.

Yahoo's revenues from marketing services (ads and search), minus fees paid to partners (ex-TAC) were up 16% sequentially and 36% year over year to $882 million. Fees (consumer and small business) were up 9% from Q3 and 38% year to year, to $186 million. It gave 1Q06 ex-TAC revenue guidance of $1.04B to $1.1B, and CY07 total ex-TAC growth of between 24% and 31% to $4.6B to $4.85B.

Industry-related, rather than financial, tidbits from the call include:

Advertising

- Gross revenues up 13% sequentially and 39% year over year to $1.32 billion
- Average revenue per US advertiser has doubled over the course of the last two years. Top 200 US advertiser spending outpaced that from other Yahoo advertisers again this quarter. Display ad spending from financial, tech, retail, and auto all had strongest quarters ever. Search spending was solid from auto and financial, and retail spending growth was "also meaningful."
- Yahoo thinks it again gained share in Internet advertising (Jupiter agrees). It thinks it is "holding its own" in search and that it and Google remain at parity in share, while gaining against the competition. Yahoo complained that traffic data doesn't show its strength in Asia, but highlights Google's strongholds in western Europe and Canada. Yahoo Japan, Brazil, and Taiwan are solidifiying.
- Yahoo reiterated that very profitable MSN affiliate search revenue will decline from $75M in 05 to $25M in 1H06, then to nothing. It blamed that deal and rising TAC fees (competition) for relatively lower 06 margins. (For comparison, Google site revenues already outgrow network revenues, and its TAC payouts are growing even slower. But Yahoo/Overture invented the search affiliate business, and is more exposed.)
- Search algorithm improvements will be rolled out verrrry sloowwwwly and not have material impact till 2007. Self-service for small publishers should have an impact by 2H06.
- No explicit comments on video or deep sponsorship stories.

Paid Content and Services

- Active registered users totaled 193K, up 4% sequentially and 21% year to year.
- Paying relationships totaled 12.6M, up 11% sequentially and 50% year to year. Leading growth categories were small business (that's a switch), access bundles (Verizon kicked in), and Music. Another solid quarter for net adds - 1.2M is a little less than Q3 where fantasy football began, but pretty high.
- Raised its guidance for 07 - Yahoo expects 16M subscriptions for CY07. ARPU will be steady-ish at $3-$4/month.
- Organic (non-acquisition) growth for fee revenues was about 38%, similar to Q3's 41%. I'll get back to you on Yahoo Music Unlimited vs. Musicmatch.
- The average number of properties Yahoo users use is up just under 25% for the year. "Engagement" is everybody's buzzword.

Strategery

- CEO Terry Semel said Yahoo's top four 2006 priorities were:
1. Build better tools and solutions for advertisers. That includes better content matching, small biz search support, and measurement.
2. (a distant second place) Increase audience reach and engagement
3. Make better consumer tools for integrating Yahoo content and services into other devices and media -- the "three-screen world"
4. Keep hiring the best talent

That order and emphasis sounds about right to me.

- Semel (a movie guy, but in distribution, not a producer) said Yahoo's content strategy is the same as it's always been. Lots of aggregation, increasing consumer-created, and some original creation. I don't think Yahoo's dumb enough to deeply engage in risky, big-budget content creation, but that might not be what Wall Street wants to hear. Semel said "you probably mean entertainment stuff", which Yahoo will do "a little of", to lead the industry, learn what works, take advantage of user data, and make traditional media companies think of Yahoo as the best partner.

This also makes tons of sense to me.

But Yahoo -- Semel, especially -- still needs to work on spinning versus Google. Or find someone who can. There's a perceived lack of the "Vision Thing" that's hurting Yahoo in comparison with Google, whom nobody understands (but for some reason, that doesn't matter). At least he's got it easier than Microsoft.