Operator: Good afternoon, ladies and gentlemen, and welcome to the Yahoo! Third Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session. Please note that this conference is being recorded.
I would now turn the call over to Ms. Marta Nichols, Vice President of Investor Relations. Ms. Nichols, you may begin.
Marta Nichols - IR: Good afternoon, and welcome to Yahoo!'s third quarter 2010 earnings conference call. On the call with me today are Carol Bartz, Chief Executive Officer; and Tim Morse, Chief Financial Officer.
Before we begin, I'd like to remind you that today's call will contain forward-looking statements concerning matters such as our expected financial and operational performance and long-term financial objectives, as well as our expectations for the economy in general and online advertising in particular, the financial and operational impact of our search alliance with Microsoft, and our strategic operational and product plans. Actual results may differ materially from the results predicted in our statements and reported results should not be considered indicative of future performance. Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are described in our Form 10-Q filed with the SEC August 9, 2010 as well as the earnings release included as Exhibit 99.1 to the Form 8-K we furnished today to the SEC.
All information discussed on this call is as of today, October 19, 2010, and Yahoo! does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances.
On today's call, we'll also discuss some non-GAAP financial measures as we talk about the Company's performance. These may include total expenses less traffic acquisition costs or TAC, and revenue excluding TAC. Reconciliations of those non-GAAP measures to the GAAP measures we consider most comparable can be found on our corporate website, info.yahoo.com, under Investor Relations.
We'll begin with the prepared remarks, then we'll have a brief Q&A session with Carol and Tim.
And now I'd like to turn the call over to Carol.
Carol Bartz - CEO: Thanks, Marta, and thanks everybody for joining us. On today's call, we'll discuss how we're executing on our plan for Yahoo!, talk about our performance during the quarter, answer questions we know are top of mind, and of course as Marta said open the call to Q&A.
Before I get to how we did during the quarter, I want to reiterate our vision for Yahoo!, our plan, and how we're executing against it. Yahoo! is an innovative technology company that operates the largest digital media, content, and communications business in the world. The key words here are innovative, technology, media, content and communications. That's what we're all about.
Technology certainly makes Internet possible, but content and communication is widely used. Content drives everything from search to social network. The creation and curation of content is more important than ever, and will continue to be as the use of Internet grows and evolves.
As for our plan, it revolves around the two things we have always told you – growing our revenue and increasing profitability. Everything we are doing is designed to drive us towards these two goals. To do that, we're working to reverse years of decelerating growth. To increase profitability, we have to be extremely focused and efficient, and to grow our revenue, we have to grow our users and engagement.
When I first arrived here almost 21 months ago, we stepped back and took a good look at the company. To deliver higher profitability and stronger growth, we realized we had to make a series of substantial changes. We had to reorganize the company to breakdown silos, so we can move faster, eliminate redundancy, and improve our cost structure. We had to organize and make better use of the incredible amounts of data we collect to improve the user and advertiser experience. We had to answer the big question about how best to compete in search, which at the time was another declining trend for the company; and we needed to create fundamentally better platforms and infrastructure across the company so we could move more quickly to deliver the kind of quality content and experiences our users and advertisers deserve.
Since then we've been working hard to create a stronger, more disciplined and focused company. This also includes making our organization more efficient, more lean, and more nimble. One byproduct of any change is always movement of people. Some people leave, some get promoted, and some good new people arrive. The most important thing is making sure the right person is in the right job at the right time.
So with that said, what have we done to reengineer Yahoo! First, we partnered with Microsoft in search, and are executing a massive transition of our algo and paid platforms beginning in the U.S. and Canada all on schedule. Second, we continued to enhance our APT platform to make buying and selling display advertising easier. We've been working hard, beginning to move off our old systems. The result of that will be higher yields through better targeting, inventory management, and serving systems. Ultimately, we will be able to combine our Class 1 and Class 2 inventory on APT into a unified marketplace.
Third, we've divested parts of the business that did not fit with our vision or our plan for profitability and growth and we acquired companies that did. Fourth, we are increasing efficiencies bringing down our operating costs by more than $1.1 billion over the past two years. Fifth, we've been working hard to revamp our engineering processes, so we can innovate and get new products out as fast as the market demands. Sixth, we're pulling our data out of silos, so we can optimize in conjunction with the technology we use for our content grid in the cloud. The result will be a more personalized experience for users and advertisers that continues to get better and better.
Seventh, we have completely revamped Mail and Messenger to deliver better modern functionality and speed. And lastly, we've been working hard to rollout new infrastructures, like our just opened datacenter in New York. That is one of the most advanced environmental friendly in the world. A new platform that allows it to better deliver content and experiences with a focus on local, mobile, social and video.
This last part is especially important because content is a huge driver of engagement for us. Our legacy platforms just weren't able to scale. It was complex, time consuming, and expensive to get a feature or a product to market.
So we began rebuilding and modernizing our platforms across the entire company to allow us to innovate and rollout new sites, features, and functionality much more quickly. We've talked about this with you several times, about the need to improve our underlying infrastructure. This work is ongoing and we expect it to have huge payoffs.
For example, just yesterday, we rolled out our first global platform, News. Our previous news platform was made up of nine different code bases. It maxed out at 24 countries and 12 languages. The cost of adding additional countries and languages were prohibited. We could hardly change anything even here in the U.S.
The new platform by contrast is light years ahead. It's on one single code base. It's not limited by the number of countries or languages we can support. In fact, we can bring up new countries in a fraction of the time it used to take. We can do multiple experiments with content and ad placements in a single day. We can create a new page in less than five minutes as opposed to weeks, and it's infused with an incredible amount of science and personalization. It's search-optimized. It runs our content optimization engine and much more.
I met with the teams that worked on this just last week and the engineers and editors are very excited. They can do things they used to only be able to dream of. It will dramatically change the way we innovate. It will improve both our user and advertiser experiences worldwide. That's just one example, yet it illustrates the point I want to drive home here. To grow revenue and improve profitability, we have to move forward in a disciplined sequential way. First you walk, then you run, finally you fly. Once we get the right things in place like the new global News platform or the completion of the search transition to Microsoft, we can really fly.
We told you earlier this year on our Q1 call that we expect the majority of our product platform work to be completed by next summer. This includes our efforts to implement the next phase of functionality for our display advertising platform, APT, and our exchange platform, RMX.
So we're going to be relentlessly pounding away at these and other initiatives we have planned for our users and advertisers in the months to come, and we're well on our way. As I just told you, we have two main goals increased profitability, reinvigorate revenue growth. Let's take a look at how these played out during the quarter.
For profitability, we continued to deliver increasing margins and operating income. Operating margins more than doubled for the second quarter in a row to 12% compared with 6% in the third quarter of '09.
Excluding restructuring charges from Q3 this year, and last year income from operations grew 80% in the quarter. So we're seeing very good progress with profitability.
This past quarter we delivered revenue near the midpoint of our guidance, which amounted to a 2% increase over last year, driven by 17% growth in O&O display.
Advertisers are clearly impressed by the science, art and scale we can bring to their campaign. It’s a big reason why CBS chose Yahoo! for the online promotion of its fall lineup. The program spanned more than a week and included two homepage and three log-in page placements, in addition to buying out 90% of our entertainment properties. And it’s why companies like State Farm and Dodge recently launched sponsored video entertainment to connect with the consumers they want to reach. Our team in Asia continues to knock the ball out of the park with the highest year-over-year display growth of our three regions, well ahead of the market. We’re also seeing strong advertiser response to our innovative targeting products like Smart Ads and new ad units like OPA Formats on the log-in page.
So we had results this quarter. Our revenue growth would have been even better if not for two items related to the search transition. First, search campaigns slowed as advertisers waited to move to Microsoft adCenter rather than entering their campaigns twice. Second, as Tim will explain later, when we transitioned the algo search, the new results were so much better that users clicked on the top organic results more and clicked on paid ads less.
Despite these transitional items, RPS was up roughly 1% over last year and last quarter. The last time RPS was up year-over-year was eight quarters ago in Q3 of ‘08. We’re also intently focused on growing search volume and we feel very good about the steps we’re taking. Case in point, the first in a series of enhancements of the search experience that we just launched are showing promising results with increases in click-throughs and engagement.
The very good news, as I’ll talk about later in the call, is that we expect the paid search transition in the U.S. and Canada to be completed this month, which will improve the quality of our paid results over time.
In the background of all of this, we also continued to effectively manage our balance sheet. We recognize the value of our assets and believe our stock is undervalued; that's why this year alone, we bought back more 7% of the Company's stock.
I have more I'd like to share with you about our progress this quarter and some topics I know are on your mind, but first let's turn the call over to Tim to talk about our Q3 financials in more detail. Tim?
Tim Morse - CFO: Thanks, Carol. Good afternoon. Today's we'll address third quarter results, fourth quarter outlook, and also a cosmetic accounting change impacting revenue presentation that's required as we transition to Microsoft's paid search platform.
Highlights of our third quarter performance include 17% O&O display growth, 107% operating income growth and meaningful progress transforming our search business. Let's begin with an overview of headline revenue, core profitability, and EPS metrics.
Revenue grew 2% year-over-year to $1.601 billion in the third quarter. The difference versus midpoint of our guidance was driven by the divestiture of HotJobs, which was completed in late August, and our algo search transition to Microsoft, which I'll touch on more in a moment.
Operating income was $189 million more than doubling prior year for the second straight quarter and above the midpoint of our guidance. Excluding restructuring charges from both years, operating income improved 80% versus third quarter 2009.
GAAP operating margins were 12% for third quarter, again more than double last year's rate on a reported basis and up more than 500 basis points excluding restructuring.
Finally, EPS grew 126% year-over-year to $0.29 per diluted share. The current quarter included a $0.13 gain from the divestiture of HotJobs and third quarter 2009 included a $0.04 gain from the sale of our direct stake in Alibaba.com. Excluding both of those non-recurring gains, EPS grew 86% year-over-year.
Diving into the top line narrative, let's begin with another good quarter for owned and operated display. Revenue grew 17% year-over-year to $465 million led by guaranteed revenue growth of 20%. Both Americas and Asia Pac display grew strong double-digits, while EMEA grew strong single-digits. From a big picture perspective, quarter end customer dynamics were stronger in September than June.
With respect to category performance in display, revenue in seven of 10 industry segments rose versus last year, with particular strength in retail and technology. Telecom was notably weak.
Turning to search, third quarter O&O search revenue was $331 million, a decline of 7% versus the prior year, but notably flat sequentially. Excluding our paid inclusion ad product, which was discontinued as of January 1, 2010, our search revenue was up 1% year-over-year. This quarter we saw half of our search categories rise, and half decline with particular strength in auto and retail largely offset by softer results in entertainment and finance.
Operationally, search query volume was flat both year-over-year and quarter-over-quarter, and RPS was up roughly 1% versus both comparisons. That's the first year-over-year RPS growth we've seen since third quarter 2008, an encouraging sign of stabilization. While the RPS trend is improving, it did fall roughly $10 million shy of expectations this quarter, the reasons related to our transition to Microsoft's algo platform.
Specifically as users experience fresher and more relevant results on Yahoo! search pages powered by Microsoft, they clicked more on the organic results and less on the paid results lowering RPS. This accounted for the majority of the revenue difference relative to our expectations. We also noted a search page view decline as users found what they needed faster, and therefore clicked through to the next page of search results less often, lowering volume.
Despite the unfavorable revenue impact in the third quarter, the user experience is clearly better, and we're confident that will lead to longer term volume and market share improvements.
Likewise our initial tests on Microsoft's paid search platform are increasing our confidence that once the combined marketplace is fully tuned the RPS uplift will be even greater than originally anticipated.
Moving to our affiliate business revenue grew 6% year-over-year to $557 million. Affiliate TAC rates were in line with what we expected. The traffic acquisition cost as a percentage of total GAAP revenue exceeded our guidance range principally driven by the mix impact related to lower RPS and the HotJobs divestiture.
Finally with respect to our listing leads and fees businesses as expected revenue declined year-over-year by 16% to $248 million. On our last call, we had guided second half revenue for these segments to decline 15% to 20% versus prior year, so we've made it at the low end of the range for 3Q despite divesting HotJobs.
That rounds out my comments on revenue for third quarter, so let’s move down the income statement and discuss costs. For the quarter, total expenses less TAC were down 10% versus the prior year to $935 million. The midpoint of our guidance was $955 million or essentially flat with second quarter, so we’re pleased to have generated roughly $20 million of cost efficiencies versus both prior quarter and the guidance.
We’re making great progress on becoming more efficient and that focus will continue in the upcoming quarters.
Before moving on two cost-related housekeeping notes. Operating reimbursements from Microsoft landed at $81 million for the quarter in line with our guidance. Transition cost reimbursements of $18 million from Microsoft once again were equivalent to the incurred transition cost themselves and consequently the impact to our P&L this quarter was neutral as expected.
Continuing down the income statement, other income this quarter included a pre-tax gain of $186 million related to our disposition of HotJobs. Further down, earnings in equity interest grew 52% compared to last year driven by solid results from both Yahoo! Japan and Alibaba Group.
Finally our effective tax rate was 23% for third quarter. We had guided a range of 35% to 40%, but noted that outstanding discussions with the IRS could reduce our rate to the low 20% range. The lower rate this quarter stemmed not from the IRS dialogue, but from our ability to offset most of the HotJobs divestiture gain with capital losses we generated in prior years.
The IRS dialogue is ongoing and expected now to be resolved in the fourth quarter.
Now let's take a moment to review a few key balance sheet metrics. Cash and marketable debt securities ended the quarter at just under $3.5 billion. During the quarter, we stepped up our repurchases buying roughly 62 million shares for $868 million and average price of $13.89 per share. For the year, we've repurchased nearly 120 million shares for roughly $1.750 billion, an average price of $14.68 per share. That means we've repurchased 7% of the Company's shares since January 1.
Our cash flow from operating activities was roughly $347 million for third quarter and $837 million year-to-date. CapEx was $164 million for third quarter and $467 million year-to-date. We continue to focus on modernizing our datacenter infrastructure to drive operational and cost efficiencies in the coming years.
Finally, as of September 30, the pre-tax value of our 35% stake in Yahoo! Japan and our 29% indirect stake in Alibaba.com was roughly $10 billion or approximately $7.74 per share. These figures are based on public market quotes and do not include estimates of the value of Alibaba Group's privately held businesses.
Before moving to fourth quarter outlook, I'd like to take a little time to walk you through how our GAAP revenue will change as we transition our paid search business to Microsoft's platform. Transition will include two components. The first is an accounting change that will not have any economic impact on our results. The second of course is the 12% revenue share with Microsoft that you already know about.
Today, we present our revenue on what's known as a gross basis. That is, we record 100% of the advertisement revenue for our O&O properties, and 100% of the advertising revenue generated on our affiliate sites. As you know, our Affiliate business carries with it substantial traffic acquisition costs or TAC, and for GAAP purposes that TAC is recorded as a cost of revenue on our income statement. As a result, TAC offsets the vast majority of affiliate GAAP revenue, so that the net effect is much smaller.
As the Yahoo! and Yahoo! Affiliate search transactions begin running through Microsoft's paid search system in each market, accounting guidelines require a change in our GAAP revenue presentation for that market to net basis. That simply means that we will no longer recognize 100% of the advertising revenue generated on affiliate sites, we will only recognize the net revenue after traffic acquisition costs.
Since the newly required accounting will take affect literally market-by-market as we move to Microsoft's platforms, this transition will take until early 2012. Once we have fully transitioned paid search to Microsoft, our GAAP revenue at that point will look very similar to how our revenue ex-TAC looks today. In the meantime, we believe it is most helpful and consistent to guide and report our top line on the basis of revenue ex-TAC going forward. Doing so will much more accurately reflect the underlying dynamics of the business, and facilitate comparisons to prior periods.
For a simple example of the impact of both our TAC-related accounting change and the 12% revenue share, please see slide number 14 in the quarterly earnings presentation on our IR website.
Now let's turn to the fourth quarter outlook itself. Revenue ex-TAC is expected to be in the range of $1.125 billion $1.225 billion, this outlook assumes that the paid search transition to Microsoft's adCenter platform in the U.S. and Canada is complete by the end of October. And it incorporates our expectation that some of the algo-related RPS and volume shifts we saw in September continue into 4Q. Given the transition timing, we anticipate revenues share to Microsoft to be in the range of $30 million.
It's important to point out that given the magnitude of the search platform transition we're undertaking this quarter variability is inherent in our projections, as literally thousands of search advertisers migrate budgets to adCenter and adjust to a larger more liquid marketplace, some of the operational implication and related financial impact are difficult to predict, including those related to our RPS guarantee.
While we believe any adverse volume and RPS dynamics will be transient in nature, caution is warranted nonetheless. We are committed to transparency throughout the transition to Microsoft search platform. We recognize that this quarter is particularly challenging to model. So we are additionally providing guidance for ex-TAC display revenue to grow 18% to 22% compared to the September quarter. (Top half) of that range is in line with the seasonal average over the last four years.
As a reminder, when comparing revenue to prior year the search alliance transition, Zimbra and HotJob divestitures, and discontinuance of paid inclusion together represent roughly an 8 point impact on growth.
Shifting to 4Q costs, our total expenses less TAC are expected to be in the range of $925 million to $945 million with the midpoint flat to third quarter despite the upward pressures associated with a higher volume quarter. The operating reimbursements from Microsoft will decline slightly in this quarter and the underlying expenses will be removed from our cost structure.
As a final cost related note, this outlook yields a full year midpoint for total expenses less TAC of $3.765 billion, that’s a 12% reduction from 2009, and a 23% reduction from 2008, and we’re not done yet.
Returning to fourth quarter at the midpoint of our revenue and expense ranges operating income is expected to be $240 million once again double that of the comparable period in 2009. Concluding 4Q guidance, we’re forecasting a 15% to 20% effective tax rate as we expect a number of discrete initiatives to be favorably resolved.
To summarize where we stand financially, we are pleased with our third quarter results, display growth remained healthy, the search transformation is progressing well, and profitability has improved significantly even as we invest to reposition Yahoo! for both greater efficiency and innovation in the coming years.
We also continue to generate significant cash flow and to redeploy funds to benefit shareholders by nearly $1.8 billion of share repurchases year-to-date.
With that, I’ll turn the call back to Carol.
Carol Bartz - CEO: Thanks, Tim. I’d now like to address two areas I know are top of minds for you. A little bit more about the search alliance and our relationship with Alibaba. First, the search alliance; we are making extraordinary progress. As we’ve told you many times this is an enormously complex undertaking with tens of thousands of advertisers involved. The fact that this transition continues on schedule says a lot about the talent, skill and determination of the teams here at Yahoo! and Microsoft.
Last month, we completed step one of the transition completing the algo search move to Microsoft for the U.S. and Canada, our biggest marketplace. It happened on the exact day we planned and after the algo switch, we were really pleased to see a big improvement in the freshness and relevance of the search results.
Step two is a transition of paid search in the U.S. and Canada. Over the last two months, we've been working closely with our advertisers and their agencies to move their campaigns from Yahoo! to Microsoft's adCenter. As a result, 86% of billing transactions are completed, 97% of our premium accounts have transitioned to adCenter, and we're now more than half way through shifting our Yahoo! search queries to use adCenter. We expect the full shift to be completed on schedule this month.
Step three is running the fully transitioned unified marketplace with Microsoft, enabling our advertisers and publishers to (recap) the benefits and efficiencies of the larger marketplace. Recall that Yahoo! is exclusively managing the premier search sales and related relationships for the largest advertisers. This puts us in an important strategic position to advise our advertisers and agencies regarding optimizing their online spend across our large combined search marketplace as well as our display offerings.
Advertisers will in one buy get a full online advertising solution based on Yahoo! superior relationship and user insight. We've undertaken immense amount of training for our sales team so they can best anticipate and meet advertiser and publisher needs.
Of course, it's going to take time to get the marketplace to the state we want it. We'll need time to fine tune and get the gears to mesh perfectly. It’s a big transition, and advertisers will also need to adjust. There's a lot for our advertisers to get used to. For example, Microsoft editorial and trademark policies are different. Some shopping aggregators will have to alter their campaigns significantly to generate the same results. And as advertisers adjust to the new bigger marketplace, we're expecting to see days when advertisers will literally submit tens of millions of updates, causing some temporary swings in marketplace performance.
Together with Microsoft we plan in advance for these and many other situations. Our teams are ready to work alongside our advertisers, while we aim to deliver a stable marketplace by the holiday season. By Q2 next year, we expect the U.S. marketplace to be fully tuned.
Next up, Alibaba. Yahoo! made the investment in Alibaba five years ago, and it was great foresight by Jerry and the team to invest in a strong local player in the Chinese market. To this day, no other internet company outside of China has done as well with their investment in the country as we have; no one. I have tremendous respect for Jack Ma, the Alibaba team and what they've accomplished. We know there is tremendous value in the businesses they are growing. It's an important investment and we're committed to a good productive business relationship. Beyond that I'm not going to speculate today, or in the future on our investment with them. Just know that as with any investment, we're focused on maximizing value for shareholders.
Before we close, I'd like to briefly discuss some of our accomplishments last quarter. The main focus is on our content strategy, and how we use mobile, local, social, and video to drive user engagement. On the search side, we unveiled the first in a series of new, more visually compelling search results for information-rich topics like music, movies and news. We also improved our local search relevance.
With content our recently launched Ask America program is creating a social experience around the News, combining interactive polling with content, enabling users to read about important issues and vote. This kind of unique content experience is something only Yahoo! can do. It's also leading to impressive engagements. We've had more than 7 million votes in a short time the program has been up.
For mobile we launched a raft of new apps. On Android, we released 8 new apps, including the Yahoo! Mobile Homepage, Finance, OMG, Movies, Fantasy Football, Sportacular and more. On the Apple side, we upgraded the Yahoo! mobile homepage. Released Sportacular for the iPad and iPhone, as well as Fantasy Football and an updated Yahoo Messenger with video chat for the iPhone. Users can now make voice and video calls over 3G and Wi-Fi networks and connect with the PC.
Lastly, we introduced fantastic new mobile experiences for Yahoo! Mail on both the iPhone and Android. Video mail, as you know, it’s a big driver of user engagement. Very soon we'll launch our new mail beta. It has great new communication, social and photo features, and a lot more. It's also incredibly fast, which is important to everywhere, but especially in emerging markets where load times are so important to successful adoption.
Lastly our social integration with Twitter will go live with the mail beta. Similar to our integration with Facebook, people who use Yahoo! and Twitter will be able to link their accounts to view and share updates across both networks. It's one thing to talk about the power of your Yahoo! Mail combined with your Facebook wall and your Twitter Feeds, it's another to see it in action. We get lots of wows every time we show people the Yahoo! Mail at high speed, fully integrated with their favorite social services; it's just awesome.
All of these items are part of our plan to grow our revenue and increase profitability. As I shared earlier, we are solidly executing on that plan, margins are expanding, revenue growth is stabilizing after a long period of decelerating trends. Display advertising continues to grow and is up 18% year-to-date.
Product roll-outs are accelerating as we modernize our infrastructure. Our search alliance with Microsoft continues on schedule and more. At the end of the day Yahoo! is a company with tremendous potential. Our 600 million users and hundreds of thousands of advertisers are testament to that. We've a lot more work to do in the months ahead but we’re clearly making progress, and the pay off I believe and return to our shareholders will be substantial.
So with that let’s open it up to your questions. Operator?
Operator: Youssef Squali, Jefferies & Co.
Youssef Squali - Jefferies & Co: As your transition search to adCenter, how long do you think it would take for you to recoup the 12% of rev share you are paying to Microsoft? And if so, do you think it will be mostly from pricing or volumes. I am trying to figure out how to reconcile the negative 6% you reported this quarter would it be 3% to 6% positive growth you were looking to achieve by 2013?
Tim Morse - CFO: Well, I would say that obviously the 12% revenue share is a headwind that we'll obviously throughout most of the 2011. Thereafter, obviously the comps get much easier. As you look at it I think what we plan to do is grow both volume and RPS. We have a certain mid-single digit RPS uplift baked into our modeling that we've talked about previously. We're starting to feel certainly better at initial testing that that could be more, so we feel good about that. I'm not going to go out and say how long it will take us to overcome the 12% but over the period, we're clearly, clearly aiming to grow search revenue. I mean that's one of the big reasons we did this deal. It's RPS uplift from the bigger in more liquid marketplace and we're innovating like crazy on search to improve volume. We feel good about both of those.
Operator: Jason Helfstein, Oppenheimer.
Jason Helfstein - Oppenheimer and Company: I guess it's a two part question I'll ask it as one I think what you are trying to telling us is any drag that you see in the fourth quarter is more search driven than display and display accelerated in the back half, so if I can we need to just get some color on that. Then just secondly, are there any statistics you could provide on mobile on any of these apps that suggest that once people move to a smartphone that their engagement, their time spent still remains high with the site with Yahoo!?
Tim Morse - CFO: So looking to fourth quarter obviously if you're looking sequentially you've got $30 million worth of rev share that will hit us in the fourth quarter that did not hit us in the third. You also, as I said, have the continuation of some of the volume and RPS trends related to algo that cost us roughly $10 million for a partial piece of third quarter. So, you've got those two dynamics, you've got all the advertisers coming into the bigger marketplace. There is a whole lot of moving parts there on search. On display, we're going to see, I think some pretty good sequential growth in line with kind of what your expectations would be not necessarily strong and sequential growth as last year. We felt that last year there was a lot of momentum building into the economy and it showed in our numbers. This year, I think, any of us would say maybe the economy isn't quite as strong as we would have thought it would have been looking forward from a year ago.
Carol Bartz - CEO: So it's more normal.
Tim Morse - CFO: So a little bit normal, I think, yeah exactly. So, we have a little bit more of a cautious stance on that. And then, fees listings leads will be, as I said, down 15% to 20% somewhere in there. I gave that guidance before HotJobs was divested. HotJobs has now been divested, so you probably want to adjust where you have the midpoint of that range. Just a little bit heavier, but aside from that that's the color I have got on forth.
Carol Bartz - CEO: Yeah, and Jason on the app side, of course this was the quarter we really focused on apps, so a lot of these apps are new. We've got over 50 million uniques in the U.S. and it looks to us like there is a lot of momentum. In fact, one of the interesting issues we have with mail is many of our mail users' check in all day long on their mobile phones, and that's not actually counted by comScore as a mail page view. So, Fantasy mail and especially our new mail client that's coming out, Messenger, we're seeing a lot of uptick on these. So, it's still new both for Apple and Android, but you're going to see a lot more of those apps coming out from us so that we have our users no matter what size screen.
Operator: Mark Mahaney, Citi.
Mark Mahaney - Citi: Just a question on the display advertising outlook. I know, at your Analyst Day you talked about a CAGR of 13% to 16% at the high end of your sequential guidance range for the fourth quarter display advertising, you will be at that 13%, comps get tougher, and that means the growth rate could decelerate from there, is there something more you need to do organizationally, product wise, are you expecting a big pick up in the display ad market that gives you confidence that the growth rate that you exit this year at will continue to grow from that level?
Carol Bartz - CEO: Mark, one of the important things that we haven’t talked much about with you guys lately is the APT launch, which we’re in the process of migrating at the same we’re doing search is really important to display market, because it has much better forecasting, much better economic engine and prediction, and with the next release we’ll actually unify the guaranteed and non-guaranteed market so you can have visibility across your entire campaign. So I think, this is the promise that you guys all got couple of years ago, as you recall, I was very confused when I first came in about why everybody wanted to talk about APT, but now I know, and it's a product that we were talking about then, it's here now and it's going to do a lot for our ability to sell an audience as opposed to a site or a position on a site, which is the next step in launching (step for) display. The other thing, the fastest growing area of display advertising is video, so it's really important for us to not only have video advertising, but interactive video advertising, so that's important. Frankly, when we talk about the four Os, I mean, video is important, mobile of course, local, a lot of advertising is going to go to the local market, and we're focused on local with a passion here. So I think there is a lot of areas that we can see with smart selling and product backing up with data and the right monetization platform with APT, I think, we see a lot of ability to move forward on display in the next two years.
Mark Mahaney - Citi: Carol, could you very quickly comment on these private equity rumors, if nothing else than to state that if some private equity firm came in with a massive premium you would respectfully entertain the offer?
Carol Bartz - CEO: Well, as tempting as it is, Mark, to tell what I really think, I cannot – you know, I can't comment. I can't comment on rumors, and I can't talk about hypothetical this or hypothetical that. It's just not what I'm allowed to do, nor I should do as a CEO. We like our strategy, we like our progress, and that's what we're focused on.
Operator: Jeetil Patel, Deutsche Bank Securities.
Jeetil Patel - Deutsche Bank Securities: A couple of questions, your display ad business comped easier 6 points in Q3 versus Q2 on a year-on-year basis, revenue has decelerated to 17% growth, I guess, slowing up from what even Mark said just the sequential growth or the year-on-year growth seems to be by 11 to 12. Are you seeing just less improvement in pricing, or is that you need to build up your video ad capability, since that is a important and rapidly growing piece of the business. Yes, so how do you get back into the growth rate range that we've been seeing in display, which is about 15% in that business as you look ahead over the next year to two years? And then second, I know that obviously the model is changing a bit with the Microsoft deal, but you talked about 7% to 10% revenue growth from 11% to 13%, something like 18% to 24% operating margins, that implies about $1.6 billion in operating profits I guess. Can you talk about how you're progressing thus far against that metric in 2013?
Tim Morse - CFO: So, with regard to display, I think we had a huge fourth quarter last year. It was up something like 27.5% sequentially. That's the highest of any of the last four or five years that we've seen. I think, there was a tremendous kind of upward pressure in the economy at that point, so it was a little bit unusual. Against that tougher comp, we think we're still performing well. As you observed, we'll be in the double-digits, that's some nice growth. Even at that, it puts us in the 15%, 15% plus range for the entire year, so well within that longer term 13% to 16% range we want the display. We're going to continue, as Carol said, to work on the local aspect, video, mobile, social, they're all going to be a piece of the volume part of the equation, and then the APT side of things, the combined marketplaces for C1 and C2, very big in terms of the pricing and visibility there, that capability. So we feel good about the yield side too, especially as we continue to leverage as we've said our science, art and scale, and work with the really big customers and the big branded campaigns. So, we feel good about where we're positioned on display. As for progress, in terms of getting to the operating income goals by 2013, I feel good. I feel that this year we’re getting our cost structure in line as I said, we’re down 12% versus last year, 23% versus 2008. We are not done yet, we’re going to keep going, we’ve got – as you heard at Investor Day an awful lot of things in offer that we’re actively working. We’re many of them, again, streamline us make us go faster Carol gave you number of examples of platforms that we’ve improved. She talked about the Buffalo Data Center that’s much more economical in addition to be more eco-friendly. So really across the board we’ve got a lot of initiatives underway that will help us become a much more higher margin business. You look at this year and you see last year’s 6% operating margin rate going to 12%, doubling the operating margin that’s terrific progress in one year. Not too much obviously revenue uplift, so there is not a whole lot of volume leverage in that number. We are going to obviously as I said in 2011, I talked about this at Investor Day also, many of the headwinds over the three year period are much heavier in 2011, but we still are executing on our growth plans and over the period we feel great about our ability to leverage off the investments that we’re making this year – last year and this year to get where we need to for 2013.
Carol Bartz - CEO: Let me just add to this. As you guys know we made several very deliberate decisions, whether that was Zimbra, Personal, HotJobs, paid inclusion, revenue we didn’t like on the mail pages and so forth to clean up our market place and to make some definitive decisions about what kind of company we wanted to be. We also are listing, keep listing small business as we’ve been telling you and you can see is has been falling in that 15% to 20% range. Let me comment on that one first that will change and start going in the upside by Q2. By the end of this next year all of that compare that you're suffering with and we're suffering with will get clean. So all of the stuff I talked about will be off as part of a drag but the most important thing other than turning, lease and listing around which we have and we told you the timeframe. The main drag on our growth has been search revenue. I mean it's very hard to outgrow I mean outperform something is dropping in the mid to high single digits every quarter. So one, we get search stabilized which we honestly believe we can that's why we did the search deal with Microsoft we get search stabilized from a revenue standpoint and start going positive, listing leads, positive and display in these areas we're talking about in that 15% to 20% we've got a entirely different company here. But you can't basically I mean if you look at the data from 2004, these growth rates have been falling every year. This is the first year, we're going to start seeing an upside relative to the data over the last six years. So 2011 is still going to be kind of messy because of all these compares I just talked about. Once we get to the end of 2011, 2012, we're going to have the correct TAC compared to Microsoft and as we talked earlier perhaps hopefully if not the full 12% and all of these other things and us inherently growing our business either with great content or technology acquisitions and of course with our own inherent growth and of course Tim just talked about profits. I mean that, what we're not trying to do is take so much profit out of here we can't grow. So we're going to be very – as we told you repeatedly – very careful about that, because revenue growth is number one.
Operator: Justin Post, Bank of America-Merrill Lynch.
Justin Post - Bank of America-Merrill Lynch: First, just on the display traffic which, you've pages down 4%, can you give us any clarity on how fast your home page or other important revenue pages are growing? And then secondly on search, Microsoft hasn't reported yet, I think it's in a couple of weeks. When you look at their search revenue growth, is that a kind of bogey for Yahoo! if you think about a year from now, or do they have the marketing budgets that you might not be able to compete with, but do you see any read from Microsoft's growth on the search side?
Carol Bartz - CEO: Let me first talk about – Justin, let me talk about engagement and page views and so forth, because we pay a lot of attention to that of course. I actually think there is two big areas of engagement. And one is better content, more content, more interesting content. We think of content, I think of it as sort of a content stack that at the top is our own original content, our original voice which we have some of the best editorial talent in the online space. And of course license content, you know our deals with the various, AP, Reuters et cetera. Pro-blogging, we had a – we put our first news blog, pro-news blog up six months ago, called the Upshot, and in six months we've gotten 80 million page views and seven million minutes – I'm sorry, from seven million minutes to 270 million minutes. So basically, 80 million page views, 270 million minutes, because we put professional blogging on News, and I want to comment more on that in a minute. Then of course the bottom of the funnel, if you will, is crowd sourced, and that’s what associate content is all about. So better content and then interactivity, I mean, one of the problems we’ve had with our site, the last year and a half is we couldn’t get as much interactivity because of our platform problem. So to do a blogging event was extremely hard engineering feet, six to eight weeks of recoding and you just can't have that if you’re trying to move with the marketplace. So blogging, comments, video, all the way that one does interaction. If you look at our Yahoo! original videos, year-over-year uniques have grown 52%, minutes are up 35%, streams are up 92%. In Europe the page views on our media properties year-over-year on average are up 18%. So the way, we’re talking about page views and minutes of engagement is great, better content, more interesting, more modern, more interactive.
Justin Post - Bank of America-Merrill Lynch: Then the Microsoft search, do you look at their numbers and do you see any kind of read across for Yahoo!?
Tim Morse - CFO: No. I mean, we’ve put our guidance for that, put that out at the Investor Day last year, that’s what we’re focused on. It includes our expectation that RPS will be a nice lift with the combined marketplace, incorporates our innovation to grow volume on the Yahoo! network. We really don’t see any read through to Microsoft, so we’re focused on executing our plan and we believe that the underlying trends are really going in the right direction for that.
Operator: Imran Khan, JP Morgan.
Imran Khan - JPMorgan: Two questions. One, if I do the math it seems like your average revenue per headcount on a net basis is $318,000, on a gross basis, $450,000. That sounds relatively low compared to some of your peers, so how do you think – what can you do to grow the revenue per headcount. Do you think that the organization is bloated and you need headcount reduction? And secondly, Carol, are you concerned that you are losing ground on the display advertising? I think, Google talked about doing $2.5 billion run rate gross revenue on display. Some of the press report we see that Facebook and some of the smaller companies are growing faster, so are you concerned that in next 12 to 15 months we might have a situation that you are losing ground on the display?
Tim Morse - CFO: So, Imran, I don't tend to calculate revenue per employee. So, I'm not going to comment on that other than obviously we're trying to grow revenue. We're trying to improve our cost structure. We've done a very nice job on the cost structure, cost down 12% versus last year, down 23% versus the prior year. Are we bloated? No, I don't think we're bloated. Is there more to go? Absolutely, there is more to go, and there is a whole lot more of shifting cost out of places we're investing today and into places that will generate better returns for us tomorrow. So, look, we're expanding margins, we're – absent a lot of the headwinds we've talked about, we're beginning to see a lot of things going in the right direction on revenue, display revenue being up again at the midpoint right around 15 points percent for the year is a good indication of that. So, the best way for those metrics, as I call derivative metrics that you just referenced to get better is to us, just keep executing on our plan of getting into growth mode on revenue, letting that work through the bad comparisons, things will get better, and just dividing by headcount doesn't do a whole lot for me, but as we see margins expand, and especially expand in this 18% to 24% range, we'll feel terrific about it.
Carol Bartz - CEO: Relative to display competition, actually this competition out there, we think we're actually unique, we're a leader in display and our uniqueness comes from the fact that the creativity that you can do on the Yahoo! site because of the kind of content we have, really allows the display advertisers to grab emotional attention to advertise in a way that's different than they might on a social network, or another network, I mean. So, that's what we talk about science, art and scale, because it is not only scale which clearly the two competitors you have mentioned have. But it's our unique ability to work with these large advertisers for great campaign to use the science and data we have to allow them to reach their intended consumer as perfectly as possible. So, there is always competition. I think competition is just going to make us better. And let me tell you, we're running really fast. We're not going to give up this leadership in display very easily.
Operator: Brian Pitz, UBS.
Brian Pitz - UBS: Given this significant ramp up in mobile usage and apps, and you even mentioned the Fantasy Football application, could you talk about what you're doing to really start to monetize display on mobile? And just a quick housekeeping, can you talk about what your D&A assumptions are embedded in your Q4 guidance?
Carol Bartz - CEO: Well, mobile advertising is a very fast growing area for all of us off a small base, and we have exactly those kind of numbers. The advertising, the campaigns, the kind of full platform campaigns that large advertisers are looking to do. We’re working with them on that, again from the small screen through the netbook size screen or iPad size screen right onto the PC. So we are working extremely hard with these advertisers to help them understand how best to put creativity on that small screen. We’re all looking in that together, it’s a new area but all major brands want to have a pull through again to optimize the side screen. We use – it’s interesting launch, when I got here a couple of years ago, we actually could believe all the people that would advertise on mobile devices. And we had a meeting just recently, the list is so long, all the major brands obviously internationally its important especially in emerging parts of worlds where that phone is there they are on trade. So we’re working with these big brands to make sure we have our piece of the growth here.
Tim Morse - CFO: On the housekeeping Brian, in third quarter stock-based comp, depreciation and restructuring were about little less than $220 million, we see it probably peaking up a little bit in the fourth quarter call it low 220s. Thank you very much everyone.
Operator: Ladies and gentlemen this concludes today’s conference. Thank you for participating you may all disconnect.