Operator: Good afternoon, ladies and gentlemen, and welcome to the Yahoo! Second Quarter 2010 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will be conducting a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Ms. Marta Nichols. Ms. Nichols, you may begin.
Marta Nichols - IR: Thank you and good afternoon. Welcome to Yahoo!'s second quarter 2010 earnings conference call. On the call today will be 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, long-term financial objective and search alliance with Microsoft, as well as our expectations for the economy in general and online advertising in particular 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 on May 10, 2010 as well as in 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, July 20, 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 total expense less TAC, depreciation and amortization and stock-based compensation expense. 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 have prepared remarks and 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. Hello and thanks for joining us. It was great to see so many of you in person at our Investor Day. On today's call, we'll recap the recent quarter, discuss our efforts around engagement as well as our performance in the search and display ad market. We'll address some key milestones we've hit in our transition with the Microsoft Search Alliance, as well as what to expect next with the migration, and of course, answer your questions.
Now, let's start with Q2. We continued to deliver on our promise to improve operating income and margins, but we were on the low end of our revenue guidance. We saw operating margins expand more than 600 basis points to 11% year-over-year, and excluding restructuring charges in 2009 and 2010, income from operations grew 32%.
So, we did great on operations and controlling expenses, but why did we hit the low end of the revenue? Well, it's a combination of factors. Of course, one is FX, but the majority of the story is split evenly between the search and display marketplaces. With regard to search, we gained share in the quarter, but we didn't monetize searches as much as we expected.
On the display side, with our owned and operated sites, we saw healthy ad spending of 19%. But in the second week of June, we saw demand slowdown as a handful of big advertisers pulled back. There was also no last minute spot market this quarter. We believe it was due to quarterly expense management for their companies.
The first three weeks in July indicate we're back to normal. In June, we attended the world's largest ad conference, where we had numerous conversations with advertisers. It did not get the sense of a persistent problem. Before we turn the call over to Tim to discuss the quarter in detail, I'd like to answer a question that most of you ask me. How do we measure our business?
Obviously, we watch revenue and operating margin very closely. Those are our most important metrics. We also have many internal metrics that we used to run our business, and of course, we track third-party reports. While there is no one metric that captures everything, we concern ourselves our most with users and their engagement on our network. This includes how engaged are our users around our communication and social products like mail, messengers, Flickr, Answers. How engaged are they with search, and how engaged are they with our rich and varied content sites.
So, let me talk a bit about what we're doing to drive engagement. On the content side, having great content that's real time, interesting, and entertaining is one thing, but that's not enough to ensure engagement. Users today want to go beyond words presented on the screen. They want video, they want to interact, they want a social aspect, they want it anywhere, anytime, on any device, and they want it very personally relevant and local. These are the four Os I talked about it at Investor Day, video, social, mobile, and local.
The big content move we made in Q2 was our acquisition of Associated Content. Their proud source approach with 380,000 contributors rounds out our content strategy. We now have an incredible resource to tap that extends our ability to provide high quality, personally relevant content to our users and advertisers.
Meanwhile, we also continue to make investments in our existing content and media sites. With Yahoo! News, we're focused on building out a voice and identity for the site, much like we've done for sports.
We've recently established a politics and opinion team in Washington, D.C, and since then we've seen click through rates increase up to 50% on political content. In early July, we launched The Upshot. The blog focuses on politics, the media and breaking news. The team behind it uses their incredible reporting skills as well as analysis of what's trending on Yahoo! to deliver content that's designed to be relevant for our audience.
What's great about both Associated Content and new products like The Upshot is how we use Yahoo!'s unique strengths. We are pairing editorial expertise with a huge treasure trove of data on Yahoo! about users, their interests and their intent to deliver content that we know they want and we'll respond to.
We also continue to build other platforms that enable us to quickly and effectively launch new properties around the globe. For instance, we've recently launched our Lifestyle site in the U.K. In its first five days, the site garnered 7.8 million page views and 2 million unique. After just two weeks, it's landed in the top 10 lifestyle sites for the country. I ask you, what other website besides Yahoo! could have such an impact in such a short amount of time? We have plans to rollout similar sites using the same platform to France, Germany, Italy and Spain in Q3, and look for us to follow this model in LATAM and Asia as well.
Now let's talk about those four Os. First up is social. One of the leverage we're using to create engagement and distribute our great content is through social channels. Our acquisitions of Citizen Sports is beginning to pay off in this area. We've already signed a number of multimillion dollar joint partnerships with major consumer-facing brands.
Fantasy Football is big business, and this season users will be able to like their own Fantasy team on Yahoo! and receive personalized updates about players, injuries and advice delivered directly to their news feed on Facebook and their Yahoo! Updates, all sponsored by Miller Lite.
College football passions run deep. This season users on Yahoo! will be able to pick who they believe is going to win and broadcast it and debate it with their friends on Facebook, sponsored by Southwest Airlines.
Big brands love these unique social campaigns that allow users to engage more deeply with Yahoo! content and interact with friends and advertisers.
Speaking of Facebook, we deepened our integration with them in a big way this past quarter. Now, users who are on both Yahoo! and Facebook can link their accounts to view and share updates with friends across those networks. We call this new level of social integration Yahoo! Pulse. It's still in early innings, but so far we're encouraged by what we're seeing. The good news is users who connect their Facebook accounts with Yahoo! view more pages and spend more time on our network.
Social games are also a big engagement draw, and it's why we announced our recent partnership with Zynga. Starting in August, we'll integrate Yahoo! IDs with Zynga and publish updates into Yahoo! and notifications into Yahoo! Mail. Then in Q4 we expect to begin hosting hit games like Farmville on the Yahoo! network.
Now turning to mobile, our reach continues to grow. In the U.S. alone we've grown almost 15% quarter-over-quarter with 45 million users and a 52% reach. We continue to release apps and form partnerships. We recently launched new Yahoo! Mail and Yahoo! Messenger apps for Android, as well as HTML5-based Yahoo! Mail and Yahoo! News sites to the iPhone. These new apps and sites get user a faster, more sophisticated mobile browsing experience.
We also deepened our value partnership with top handset makers Nokia and Samsung to make sure Yahoo!'s industry-leading services are front and center with their users all over the globe. Our new alliance with Nokia have the added benefit of leveraging their strength in map and navigation to enhance our products and it helps us gain access to Nokia's users in emerging markets where their phones are especially popular.
Another important content vehicle for us is video. We all know that video adoption has grown exponentially, especially now that's easy for people to consume at their desk or on the phone. It's a format that advertisers really like. That's why we're working hard to integrate more of it into our properties where we see video driving even more engagement for us. We're also finding more ways to monetize it. Our front page now points to video with pre-roll ads, and next month, the video that appears in line on the front page will have a new interactive ad format.
At the same time, we continue to launch more of our original sponsored video snacks and they are performing well. Early this month on Yahoo! News, we launched the Newsmaker series and already the first video in the series about Warren Buffett generated more than 2.3 million video streams.
On Yahoo! Shine we also launched my favorite Bikini 101 with NIVEA. It targets women who are looking to get into shape for this summer's swimsuit season. Pairing content with video is the perfect fit. This series is reaching roughly 200,000 uniques a day and over delivering what we promised for page views to nearly (about 460%).
Remember, all the moves that I just talked about across content, social, mobile, video and local were made with one goal in mind; improving user engagement, and it will continue to be a major goal for us in the quarters to come.
So, with that, let's hear from Tim about the quarter's financials. Tim?
Tim Morse - CFO: Thanks, Carol. Let's begin with an overview of revenue, operating income and earnings per share, then progress to a more detailed discussion of the dynamics impacting our second quarter financial results. Before turning the call back to Carol, I'll also provide third quarter guidance and an updated outlook for second half expenses.
Revenue grew 2% year-over-year to $1,601 million in the second quarter. That result was roughly $40 million below the midpoint of our guidance, with $6 million attributable to adverse foreign currency movements and the remainder split roughly evenly between search and display.
Operating income was $175 million, more than doubling last year's $76 million and right at the midpoint of guidance, despite the revenue shortfall. Excluding restructuring charges from both years, operating income improved 32% versus 2009.
GAAP operating margins were 11% for second quarter, again more than double last year's rate on a reported basis and up approximately 260 basis points excluding restructuring.
First half GAAP operating margins were also 11% on a reported basis and 10% excluding the $43 million first quarter search alliance favorability related to prior year. It's early yet, but we're clearly making progress toward our goals of 15% to 20% margins by 2010 and 18% to 24% by 2013.
Finally, EPS grew 53% year-over-year to $0.15 per diluted share. As a reminder, prior year earnings were impacted by two largely offsetting events, a gain on a sale of our Gmarket stake and the restructuring charge referenced a few months ago.
With that brief overview of headline metrics, let's turn now to our revenue components and begin with owned and operated display. Revenue grew 19% year-over-year to $468 million. Sequential growth registered a healthy 5% as well.
We saw a good momentum for most of the quarter, but, as Carol described, a few moments ago, we did experience a pull back in the latter half of June by a handful of large customers. The beginning of July has returned to a more positive trend line, so the data isn't conclusive enough to draw any macro conclusions at this point.
Revenue from guaranteed placements grew 23% in second quarter. Graphical display impression volume was strong and overall yields followed suit. Non-guaranteed revenue also grew in the low-single digits.
With respect to category performance in display, revenue in 5 of 10 industry segments rose versus last year, with particular strength in retail, technology, and CPG. Telecom and travel were notably weak.
From a geographic perspective, display in Americas and Asia Pac grew double digits, and EMEA grew middle-single digits. As a housekeeping note, on April 1, we reorganized our business segments into a three-region format - Americas, EMEA, and Asia Pac. Our external disclosures now mirror the structure. The supplemental financial data in our press release contains revenue and direct costs for each region.
Turning to search, second quarter O&O search revenue was $331 million, a decline of 8% versus the prior year. Excluding our paid inclusion ad product, which was discontinued as of January 1, 2010, our search revenue was flat year-over-year. Query volume grew by a little more than 7%, but that was essentially offset with an equivalent decline in revenue per search.
However, it's interesting to note that RPS in each of our individual geographies was closer to flat year-over-year with the U.S. actually registering 4% growth. With lower RPS internationally and international volume growth outpacing the U.S., the mix shift brought overall RPS down.
With regard to U.S. search query share, in second quarter, we grew headline numbers as expected but fell a little short of our internal goal to improve the trajectory of monetizable searches. Nevertheless, underlying share dynamics did beginning trending upward.
For instance, the reach of Yahoo! Search improved to 41% in 2Q up nearly 150 basis points from 1Q, an increase that outpaced all of our competitors. In other words, we succeeded in leveraging our assets to induce more people to Yahoo! Search.
Consumers are engaging with search in different ways and the products and experiences we are building are evolving too. Our strength in media, content, and communications enable us to interpret user interest and intent with ever greater precision and at massive scale regardless of whether a traditionally search box is involved.
While not all of these contextual searches, as we call them, monetize at similar levels as traditional search today, overtime, we believe they will. For example, the Trending Now box on our homepage is contributing three times more search volume this year than it did last year, and monetization has improved materially as well. At several hundred million Trending Now searches per month, that's a big deal. Looking forward, we intend to leverage our strength in both contextual and traditional search to engage users and grow revenue.
Finally on search, from a category perspective, revenue was up year-over-year in 5 of our 10 industry segments. We saw particular strength in telecom, CPG and health, and weakness in entertainment.
Moving to our affiliate business, revenue grew 7% year-over-year to $557 million. Once again, Asia Pac, and specifically Korea, led the way. On a global basis, affiliate TAC rates finished the quarter slightly favorable to expectations.
Rounding out the top line picture, I'll now provide more color on our fees, listings and leads revenue. These businesses performed essentially in line with our expectations for the quarter, but both the year-over-year and sequential comparisons clearly reflect the fact that we're progressing through a transition period.
Our repositioning plans fall into three categories; divestitures, outsourcing partnerships and internal reinvestment. Zimbra and HotJobs are obviously the lines we've decided to divest. Personals, Local, and most recently, Real Estate are examples of our intent to increasingly partner with best-in-class websites to help power our offerings.
Finally, with respect to reinvestment, we are returning focus and funding to Yahoo! Small Business, Shopping, Autos and Travel to grow these profitable businesses. While obviously unfavorable on the revenue line in the short term, collectively, these initiatives better serve our long- term growth, profitability, and strategic focus.
In total, the fees listing and leads business declined in second quarter by 19% from prior year to roughly $245 million. Given the unfavorable prior year comparisons associated with this transition period, we expect second half performance to stay in the range of a 15% to 20% decline versus 2009.
So that's our revenue performance this quarter. Now let's move down the income statement and discuss cost structure.
For the quarter, total expenses, including both cost of revenue and operating expenses, were $1.426 billion. Excluding TAC of $473 million, our expenses were $953 million, down 10% versus prior year. Noteworthy highlights include the following. As we've commented in the past, we're committed to ensuring that our expense plans are consistent with our revenue environment. In order to preserve profitability this quarter, the business did a nice job across all functions to proactively moderate spending. As a result, expenses landed $27 million favorable to the midpoint of our guidance range despite incurring $10 million of restructuring cost.
Operating reimbursements from Microsoft landed at the high end of expectations, thereby contributing to the overall cost favorability. As a reminder, these reimbursements related to running our page search and algo platforms. Ultimately, as we transition in each geography, these reimbursements will begin to step down and be replaced with permanent reductions to Yahoo!'s cost structure.
In addition to the ongoing operating reimbursement, Microsoft is also responsible for up to $150 million of Yahoo!'s transition costs. This quarter $18 million was incurred against this declining balance. These transition costs were equivalent to transition reimbursements. So the impact to our P&L was neutral this quarter as expected. Since receiving regulatory clearance, Yahoo! has been reimbursed roughly $85 million of transition cost, so $65 million remains on the $150 million commitment.
Including the income statement discussion, as previously noted, operating income landed at $175 million. Below operating income, our equity investment line grew by 51% year-over-year. Yahoo! Japan's results were the primary driver with both revenue and operating income growing by 9% in the March ending quarter. Recall that we recognized our proportional share of Yahoo! Japan's results one quarter in arrears. Finally, the Yahoo! Inc. effective tax rate was 36% for the quarter, toward the low end of our 35% to 40% guidance.
Before moving to the third quarter outlook, let's take a moment to review a few key balance sheet metrics. Cash and marketable debt securities ended the quarter at roughly $3.8 billion. During the quarter, we repurchased roughly 32 million shares for $496 million. Year-to-date, including July, we've repurchased 63 million shares for $973 million, an average price of $15.40 per share. Our 2006 share repurchase authorization has now been fully utilized. On June 24, Yahoo!'s Board of Directors approved a new $3 billion authorization.
As I have said in the past, it remains our goal to use repurchases to offset dilution from our equity programs, but we will continue to be opportunistic as well. Our cash flow from operating activities was roughly $347 million for second quarter and $491 million for first half.
As of June 30th, our receivable balance with Microsoft related to search alliance was approximately $75 million. CapEx was $190 million for the quarter, an increase of roughly $78 million from first quarter. The additional spending is primarily related to build-outs of our more efficient datacenter and grid infrastructure.
Finally, as of June 30th, the pre-tax value of our 35% stake in Yahoo! Japan and our 29% indirect stake in Alibaba.com was just over $11 billion or approximately $8 per share. These figures are based on based on public market quotes and do not include estimates of the value of Alibaba Group's privately held businesses.
Now let's look at our outlook for third quarter. Revenue was expected to be in the range of $1.570 billion to $1.650 billion. This outlook assumes roughly $15 million of adverse impact resulting from foreign currencies compared to second quarter.
Traffic acquisition cost should remain roughly 29% to 29.5% of revenue. Our total expenses less TAC are expected to be in the range of $945 million to $965 million including D&A and stock-based compensation of roughly $215 million.
We expect transition cost related to the search alliance to continue to be fully offset by transition reimbursement billings and for the search alliance operating cost benefits to be in the range of $75 million to $85 million.
Please note, however, that as we agreed upon transfer of employees to Microsoft occurs and we move on to Microsoft paid and algorithmic search platforms, reimbursements will begin to fall and the underlying expenses will be removed from our cost structure.
These revenue and cost ranges yield an outlook of $160 million to $200 million for operating income. The midpoint expectation of $180 million would be essentially double the operating income generated in third quarter 2009.
Including third quarter guidance, we're forecasting a range of roughly 35% to 40% for our effective tax rate, but would note that we're in dialog with IRS over a matter that could result in the low 20% range. We'll provide an update on this effort during our October call.
Before handing the call back to Carol, I'd like to update our expectation for full year total expenses less tax.
Given the second and third quarter efficiencies were generating versus our original spending plans, we're narrowing and lowering our full year range to $3.795 billion to $3.835 billion. The midpoint of $3.815 billion is down by roughly $70 million from what we shared with you in April. It also represents an 11% reduction compared to 2009.
Now, back to Carol.
Carol Bartz - CEO: Thanks, Tim. Recapping Tim's comments on the quarter, we're pleased that revenue grew, display growth is very strong, and search is stabilizing. We've got our arms around the listing leads and fees business, but there is a lot of transitioning happening in those lines and will be few quarters before we cycle through the changes and begin to see the results from our investments. Finally, and most important, we're making great progress on growing profits and margins.
Now, I'd like to talk a bit more about the ad market. First up, let's spend a little time on display. Overall, the continued growth in display reflects that the promise we're delivering to advertisers that only Yahoo! offers a science, art, and scale needed for great online campaigns is resonating.
Let me give you an example that most of you are familiar with, the login page ad, we previewed at Investor Day and rolled out in mid June. General Motors was the first to use the new format and the results were simply fantastic. Those ads for the Chevrolet Malibu, Traverse and Equinox saw an incredible level of engagement from users and we saw it across three specific areas.
First, users who saw the Malibu loin ad conducted seven times more searches for Chevrolet brand turns than those who didn't see the ad, seven times. That's a display of having a direct impact on search behavior.
Second, the day the Malibu ad ran, we had the biggest spike in searches for Chevy Malibu we've seen all year.
Third, on the day the ad ran, Malibu make model and trim page views on Yahoo! Autos nearly doubled.
Equally as interesting, the day the ad ran for the other two models, similar Traverse page views on Yahoo! Autos were up 32% and notes for Equinox were up 50%.
That's what advertising is all about. The new login ad truly influenced consumer behavior to use our search or visit Yahoo! Autos for more information.
So these are great numbers and a big reason why the ads did so well is they just looked great. This kind of execution is a huge differentiator for us. We're using artful and interesting presentation to drive engagement with the brand and its product.
We have a huge digital canvas that were letting advertisers paint on and it's something no one else can do on the Web. Those ads, of course, are for big national campaigns but we're also focused on growing the local ad market. That's why we've established relationship with local publishers to help address their challenge of bringing more local advertising dollars online.
Last week we announced the partnership with Gannett and their 81 local publishing organizations and 7 broadcast divisions. Gannett will now sell Yahoo! ad inventory as part of their local advertising strategy, and in doing so, they're able to take advantage of the advanced display ad targeting and ordering capabilities of our ad platform. In addition to ad revenue, there's also a nice side benefit of the partnership. We plan to feature select Gannett content across the Yahoo! network.
As for search, we remain focused on growing our search business with an emphasis on search revenue, query growth and share. As Tim mentioned, due to mix, overall search RPS was down, but we feel good that RPS was up 4% in the U.S. and year-over-year trajectory is definitely improving. We're also getting traction in improving our search growth, and at the latest June numbers for comScore show, we're gaining share. While some of the gains were organic, others were due to changes in our sites, so they would be counted correctly by comScore. I know some have been confused to even criticize this approach.
What's not well understood is comScore results historically counted the same kind of activities differently on leading search engines, therefore, resulting in inaccurate competitive comparison. The new contextual search experiences we've introduced, like slideshows for example, are not a matter of retagging something in our network and calling it search. These experiences are generated automatically using our search backend technology and counted as a search based on users action and intent.
The result is that people love them. It's become another way for us to deliver personalization and relevance users through search. Meanwhile we're looking for gains to be driven more by organic growth later this year when results of additional efforts to drive more search volume are expected to take effect.
While we are in search, let's touch on the search alliance with Microsoft. Their transition is progressing well. We've already hit several significant milestones that I'd like to share with you. This past quarter we transitioned more than 125 employees to Microsoft. We started a regular cadence of communication to our advertisers and publishers in the U.S. and Canada to help them prepare for the transition. We trained nearly 600 sales and account management of Yahoo!'s and continue to work through the feature and system enhancements for future releases across algo and paid search.
I know that the timing of the transition is a question on top of everybody's mind. The algo transition is progressing very well. In fact, we recently began internal testing on Yahoo! Search where Microsoft will power up to 25% of our algo search results in the U.S. and a smaller percentage of paid search results.
Speaking of paid, we're testing, training and working with Microsoft to get adCenter ready to serve our advertisers. We feel good about our progress, but I want to continue to emphasize that because the holiday season is so important to our advertisers, we will not give the go ahead for the U.S. and Canada unless we're confident of a smooth transition with quality.
Finally, I'd like to recap a few more events from the quarter before I take your questions. In case you are hiding under the rock for the past two months, the World Cup has held the globe's attention and Yahoo! has been right in the middle of it. When it comes to online coverage of the World Cup, our site was hugely successful, thanks mostly to our efforts to bring the event to users in new and innovative ways.
In addition to a special soccer channel on our network, we unveiled new shortcuts in search and launched a new Yahoo! Toolbar featuring World Cup coverage. That toolbar had more than 250,000 downloads and very high engagement. Scores and news modules received more than 50% of total clicks on the toolbar, and initial engagement showed four times more click intensity and eight times more searches per user when compared with our normal toolbar.
We also had the largest global launch of any fantasy product yet. Fans were able to play the World Cup game in 22 countries and 10 languages. This is due to the investments we made in the underlying fantasy platform, in line with what we did with the entertainment platforms that I talked about earlier.
Last but not least, we had heat on our hands with the Yahoo! Penalty Shootout. It was a simple social contest that we created. Users played more than 2 million times for more than 11.6 million minutes. It was a great way to enhance user engagement.
In the background of all of our content and advertising efforts, we're also hard at work driving innovation around our products and technology. Late last month, we hosted our 3rd Annual Hadoop Summit, attracting more than 1,000 developers. In case you haven't heard of it, Hadoop is an open source technology we pioneered. It's also one of the most advanced software technologies in the world for crunching huge amounts of data, and it's essential in processing the vast pools of data we capture in our cloud to deliver everything from display ads to content.
Hadoop is a core technology that's behind every click on Yahoo!. But it's not just us. Twitter, Facebook, Amazon and the rest of those 1,000 developers I just mentioned also rely on Hadoop. Our approach to Hadoop's development has earned us a lot of admirers. Not just for the huge amount of technology expertise needed to build it, but also for making it open source. Technology plays an essential part in what we do. Hadoop and the great talent we've recently added demonstrate how we're elevating science, technology, and innovation even more within the Company.
So that was the quarter. Before we take your questions, I just want to reiterate what we talked about today. Our metrics around margins and operating income continue to grow, as we told you they would. We're pleased by the performance of display overall in the engagement numbers that we're seeing with our new ads formats. We made carefully orchestrated move to deepen our focus on content and the social, mobile, video, and local levers we used to deliver it.
We remain laser focused on the Microsoft search alliance and transitions, plus our own efforts to improve search RPS and volume growth are trending in the right direction. From the World Cup to our Hadoop technology, we're focused on creating industry-leading products, technologies and experiences for our users, developers, advertisers, and publishers.
With that let's take your question.
Operator: Youssef Squali, Jefferies & Co.
Youssef Squali - Jefferies & Co: Two very quick questions. One, Tim, you talked about or both of you talked about the weakness you saw in the back half of June. Do you have any clarity as to what happened and when you say, it's back level – it's back to earlier levels, i.e., has improved in the first part of July, are we back to that high-teens type of growth rate and how sustainable is that now going forward for the third quarter?
Carol Bartz - CEO: I'll take that first, Youssef. We really believe our customers are doing very wise expense management. Most of our big display advertisers are multinational companies. They have FX issues like everybody else does, and marketing is one of those areas that is easy to dial on and off. The interesting thing – of course, so we've been watching very carefully. In the first weeks in July, it's like it never happened. It's just back to the same run rate we've had, which really has us believing that's what it was. Also, we got to be able to look at the exchange, and it was definitely not a Yahoo! anomaly. It looks like this was something that was going on in the marketing display and which is why – normally, we wouldn't give you the sort of intra-quarter information, but we thought we had a mirror of what happened in the last three weeks in June with what happened in the first three weeks of July.
Operator: Brian Pitz, UBS.
Brian Pitz - UBS: Could you discuss why your page view growth declined 4% year-over-year despite the World Cup? I know last quarter we saw slowdown to 0%. Second question is related, are you still looking at transitioning the page search platform to Microsoft in the fourth quarter?.
Carol Bartz - CEO: Let's first talk about the page search, it's like I said in my comments, Brian. It's very, very important that our advertisers are ready that adCenter is ready and we're not going to pull the trigger, yes or no, until we're sure of it. We're feeling very positive about algo. I told you 25% of our searches are being run through the system now, but we only have a small test pit right now in paid, obviously increasing those as every week goes by, but paid is where we make our money. So we will be careful after when we transition that. We're still shooting as we told you before for the October timeframe.
Tim Morse - CFO: In terms of page views, I guess I'd make of couple of contractual comments. There are obviously traditional measure of engagement on static websites, but the Internet is evolved through video streams, mobile experiences, and rich Web experiences, where engagement doesn't generate page views. So what we're trying to do is move to more of holistic view. Page views will always still be valuable because they closely correlate with the way displays ads are sold, but improvements in ad effectiveness and ad platform technology, for instance, are enabling us to grow revenue rapidly without increasing page views. That being said, we are diving into the minus 4% we're seeing. There is more analysis we had on this. It is honestly a little bit of surprise to see it at that level. We need to break it, for instance, between our mail messenger and community properties, and home page, and the media properties, for instance, because we look for very different dynamics there. As a proxy, I could talk a little bit about the comScore minutes for homepage and for that matter most of our other media properties having actually a pretty nice performance. Homepage was up in comScore minutes 10% year-over-year. So, a lot of the initiatives that Carol talked about during the call around social, mobile, local, video and certainly our content strategy, all are certainly driven to increase that engagement, whether it's a page view number that, again, we have to get a little bit smarter on, having just seen this one published, or more likely minutes going forward, that's where our investments are in creating that engagement, and we do think we're starting to see things pay off. A last note on engagement is, quarter-over-quarter if you look at the minutes, again, split off the communications' properties, you will see the rest of the Yahoo! properties grow about 10% quarter-over-quarter. So we do think that we're starting to see traction for our investments. Next question please.
Operator: Mark Mahaney, Citi.
Mark Mahaney - Citi: Any thoughts on why wouldn't have seen a similar disruption in search revenue in the back half of June that you saw on display? Then mobile revenues almost certainly not material for you, but if you look forward and you think about when it could be material, would you hazard a guess. Is it that volume is becoming material, but the monetization that's what really needs to gap up or is it also the volume as well?
Carol Bartz - CEO: Search was actually sluggish for us. It was basically sluggish for us the whole quarter. We didn't see any material change like we did in display, Mark, those last three weeks. I think the advertisers are more likely to manage their budget with the big brand ads. So that would be my reasoning for why search didn't slow down. As far as mobile revenue, we're seeing a lot more creativity in the mobile revenue, but it's a very small percentage, but very, very important because our customers are all experimenting. We used to have to have force our sale people to put it on the specs so that they think about mobile, and now that's not necessary at all. They are all thinking about mobile and it's very fast growing. It's still small.
Operator: Imran Khan, JPMorgan.
Imran Khan - JPMorgan: Two questions. I think, Carol, you mentioned that you tested very smaller percentage of paid search on Microsoft platform. Can you give us some sense what kind of revenue per search pickup you are saying? Is it in line with your expectation, below, above? Secondly, just to go back to your commentary about the weakness among large advertisers, is it any specific categories you saw weakness or is it more of a broad weakness among multiple categories?
Carol Bartz - CEO: On the RPS, the buckets actually are still small, but I will tell you we're pleased with it. So that gives you a hint that so far things look on track. But it's too small and too early. We started to algo testing, bucket testing before paid. It's too early to comment on search, but there is nothing alarming at this point. As far as your point on who the advertisers was a slowdown, it actually was no specific category. It was just some of our large guys, a little CBG, a little travel, a little telecom, but it was definitely the big customers.
Operator: Jason Helfstein, Oppenheimer and Company.
Jason Helfstein - Oppenheimer and Company: Tim, your results in revised full year expense guidance suggest tighter control over expenses. Can you give us a bit more detail over where these savings are coming from and if perhaps we could see some margin ahead of the Microsoft close, which would probably be a bit more aggressive than what you talked about at the Analyst Day?
Tim Morse - CFO: We're really seeing it across the board. It's fundamentally a different way we're managing here. I talked a lot of about it at Investor Day, but we're taking a very multiyear view and we really have this concept of self-funding that we're driving throughout the organization. When you combine those two things, the multiyear view and a self-funding discipline, then what you end up getting is people not making decisions for these three-month periods, but making them for the longer term and having to actually make tradeoffs into side-on priorities, and we're getting much better at this now. So we're generating an awful lot of opportunity within existing cost structures and finding more cost effective ways to invest in the business like we talked about Investor Day. More cost effective ways to do that as you become more creative and are forced to do it. As far as the margins go, having 10% for the first half excluding that $43 million of nonrecurring favorability in the first quarter related to the search alliance, 10% is pretty good, 11% for the second quarter, pretty good, again when we were between 5% and 6% at this time last year. So we're making an awful lot of progress. Again, we remain committed to being 15 to 20 by 2012 and 18 to 24 rolling that growth forward one more year to 2013. So, I feel good about the progress we're making and I can tell you the whole company is really, really contributing to it.
Carol Bartz - CEO: Jason, I would say that, Microsoft is a wash, because they – if we have a cost, they reimburse us, so that's a wash. Our top job here is to grow the top line and so we're not trying to squeeze every cost that we're trying to be efficient and effective, but where we can through acquisitions, or through marketing, or through more technologists, we're going to spend to grow the top line. So the expense numbers that Tim guided you to are, we're not trying to get lower than that. That's our guidance and that's how we're planning on running the business.
Operator: Jeetil Patel, Deutsche Bank Securities.
Jeetil Patel - Deutsche Bank Securities: Two questions. Can you talk a bit about pricing in the display ad business? Are you still able to command premium CPMs when you allocate more inventory from the remnant or under-monetized areas such login page into the business. I guess, are you still able to command the same pricing? Second, what rates you have growth or decline, what are you pacing at in June versus April, May maybe just gives us a sense of how strong April and May were as may be a proxy?
Tim Morse - CFO: I would say on pricing, we have a very unique value proposition and are really, you know this idea of Science, Art and Scale really is how we're running the Company. We're seeing a lot of leverage off of those aspects of our business. So, yes, we see that premiums are good for us. They match our value proposition. Our login page as we talked about at Investor Day, definitely a very premium buy. I just echo something that Carol covered in her script, which is, we talk about the integration of the whole Yahoo! network, and to see how that login page, that mail login page influenced behaviors on Yahoo! Autos and in Yahoo! Search, is just a terrific example of that. A terrific example of how not only do we get premiums, but with pricing up, better targeting of audience buying, we have a terrific opportunity to rope all of this together to maintain our momentum, our growth momentum.
Carol Bartz - CEO: Actually, to put it simply, our guaranteed pricing was up, and a lot. We're getting a lot of quality through that guaranteed. If you look at the mix between guaranteed and non-guaranteed, Class 1 are guaranteed up a lot, non-guaranteed, not up so much because people are valuing that inventory because we're starting to train them to think about buying an audience, not just buying a site. We are just doing a lot better targeting. Targeting is still, at the end of the day, targeting is the issue. Because if you could target every individual specifically, we've got so much inventory, it's absolutely crazy. It's really about how we find each unique person, give them a unique content, a unique experience and a unique ad. If we can do 600 million of those day-in and day-out, we got a hell of a business here. So, it really is about targeting.
Tim Morse - CFO: Then with respect to your question on kind of the inter-quarter dynamics, I really don't want to get into it kind of month-by-month, but as Carol indicated, we did feel really good. We felt really good about the total quarter, let's make no mistake about it. But really, the slowdown we saw was that later part of June. So things were tracking pretty much right in line through April and May, but I really don't want to get into it by month-by-month comparisons.
Operator: James Mitchell, Goldman Sachs.
James Mitchell - Goldman Sachs: I apologize for harping on the same topic, ad nauseam. But give me your display revenue shift from June to July, and display price increases you made during the second quarter and the launch, the login page display advertising late in second quarter. I might have expected display revenues to be up a little bit sequentially in the third quarter, whereas you seem to be guiding overall revenue to be flat sequentially. Is there something happening elsewhere in the business that might offset sequential improvement in display or should I just attribute it to conservatism?
Tim Morse - CFO: We just addressed the question, I am sure I'm going to get quite a bit is the guidance conservative. I'd say look our guidance always represents our best estimates of the range of outcomes that we think are likely. That said, there are three things that I'd call out is what happened at the end part of the quarter, mostly in the second half of June unquestionably has influenced our thinking for third quarter. 3Q is always a tougher quarter to call because it always seems to come downs at September, and when you see things in the second quarter, like in absence of spot buying in those last couple of weeks, it should make you incrementally more cautious. I would note, though, the third thing that I said this in my script, but there is about $15 million of unfavorable foreign currency impact 3Q versus 2Q. So, if you go from our 16.01 in second quarter, just for easy math, just on same FX basis, that's 15.85 right away. So same basis 15.85 up to a midpoint of 16.10, we do see growth there.
Carol Bartz - CEO: James, what I would also tell you is it is no secret to anybody that consumer confidence is really weird right now. It was getting stronger and stronger in the spring, and then you see what happened in May and June, and of course, our advertisers see that. To add to the points Tim made, whether it's FX or Q3 or whatever, we think this is appropriate guidance.
Operator: Sameet Sinha, JMP Securities.
Sameet Sinha - JMP Securities: Carol, you spoke about audience buying. Could you speak about how Yahoo! is positioned in that Science, Art and Scale spectrum and how far you are in the process, if you can talk about your experience, what effective CPM increases have you seen because of this behavioral targeting? Secondly, Tim, could we assume that since your CapEx has gone up and your OpEx guidance for the full year has come down and you spoke about datacenter transition that is what I'm seeing some of your expenses are moving from OpEx to CapEx?
Carol Bartz - CEO: Let me first talk about audience buying. What Yahoo! has is so special – we always talk about scale, and I think you guys understand that, but with that scale we have breadth and depth. So, for instance, it was very obvious always to target – find a male on Yahoo! Sports, but when we started actually doing the targeting across properties and selling across properties, we found young males on the gossip sites, we found young males on the women sites, we found them all over the place. Once we started targeting an audience and not just assuming things, but using our technology in finer and finer ways – and it still is I think pretty growth targeting, but it's still much more than young male or young female, but where they live income levels, so on and so on, we get really great results, and therefore, higher CPM. We're just at the beginning of this, Sameet. This is a real area of advantage for the company. And since you mentioned, Science, Art and Scale, I think one of the most interesting things happening in the industry right now is that not only our people advertisers looking at Internet marketing, but they are finally understanding that it can be very unique and very interesting. Let's face it, those first ads in those first years are just goofy, you know, the little banner ads and couple of words. But when you think about interactivity and the beauty of like the login pages, when you think of pulling people into experience, I don't know how many of you saw a day we actually did our own takeover of the login page, we had a 3D site. There's so many things you can do now and advertisers are catching – they are catching that fever, if you will. That Malibu ad was just beautiful and people responded to it, and that's just the beginning of what's going to happen.
Tim Morse - CFO: Sumeet I would say on the OpEx to CapEx question, the short answer is, no, they are really very independent things and you'll be able to see because we break out depreciation, amortization, stock-based comp away from the more traditional core spending dollars. I'll say two things. First, on the CapEx side, the bump was expected. We are just spending to support our infrastructure efficiency plans. I talked a lot about this at Investor Day. We're spending on our cloud infrastructure so that we can reduce our data platforms, our ad systems, our development in Q&A infrastructure massively down by two-thirds, reduce those items as we invest in the cloud. Secondly, on the datacenter side, we're completely transforming our datacenter footprint, and that's going to result in 35% lower cost in a few years. So, that's the kind of stuff we are spending on, yet we're going to stay within the $600 million to $700 million range I gave for CapEx at the beginning of the year. I came out last quarter and I said, look, I think we're going to be at the low end of the range. I still think we are. All this spending is very much in plan. But it's not a substitute or a flip-flop with OpEx. They are pretty parallel but different paths.
Operator: Ross Sandler, RBC Capital Markets.
Ross Sandler - RBC Capital Markets: Two questions. First on search, you mentioned overall query is up 7%. Can you tell us what your internal data showed for query growth for users who actually like enter a keyword, or stated another way, what was query growth excluding the Trending Now and the slideshow queries? Second, in addition to Microsoft, you also recently outsourced Personals, HotJobs, Real Estate through various partnerships. Can you talk about the cost savings from those areas? Carol, you just mentioned a few broad areas where you are reinvesting. Can you give us a little more color on how much is going into the advertising program versus some of the other initiatives?
Carol Bartz - CEO: That was about five questions. How much we're investing? Just like we said at Analyst Day, we're investing in making sure we have modern platforms. The whole reason we could rollout fantasy football or soccer into 22 international sites is because we have, frankly, global platform. The reason we're going to be able to rollout all these new entertainment sites in Q3 is we have a global platform, so we're going to continue to invest in that as we said at the conference, very important. So it's the engineering side of the business and it's a sell-side of the business. You either make it or sell it.
Tim Morse - CFO: Ross, the thing I'd say on search queries is, those are the queries that I referenced on these calls. Those core bidded searches are what I talk about. I am not talking about everything core and contextual there, I am talking about the stuff that's really at the core of Web search. So 7% year-over-year was our growth, much lower in the U.S. certainly than it was internationally. Then I think you asked the question about the fees listings and lease businesses. I talked about that in the script, didn't breakout profitability, and probably we'll stick with that not going to. But there are about two things really. Yes, these are profitable businesses, but they can be more profitable and they will contribute to our operating margin expansion plans, but it's also about growth. It's not about stunting these businesses. We are reinvesting in them. We are partnering with partners that we think will enable us to growth and enable us to focus on the things that we do well. Not to dissimilar from the Microsoft search alliance. If we can partner on the backend with best-in-class sites, focus on the front-end experiences, and integrating them into – especially the rest of our display and search businesses. Again, like the mail login page demonstrated, we think that those pieces are really beginning to come into play here or fall into play.
Carol Bartz - CEO: When you talk about Shopping, Travel, Autos, those are heavy intense sites and so they are inherently profitable. A lot of them were just old, and their backends hadn't been updated. We didn't have the right partners, and so, as Tim said, we're really in a transition to look at the ones that give us the best ROI that take the lowest investment and I think we found that. We have the three segments Tim talked about. So, we're reinvesting in the small business and the Shopping, and Autos, and Travel, because frankly they are very profitable.
Tim Morse - CFO: Thank you very much, everyone. We appreciate your time today.
Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.