Overall: Revenue is re-accelerating, and more importantly,
search-monetization is improving (Revenue per Search increased 20%).
Traffic growth was also solid (Earlier in the quarter, some Comscore
data suggested that Yahoo's user-growth had peaked). Margins declined,
which is a concern, but costs are easier to control than revenue, and
we expect management will focus on efficiency later in Q4 or in early
2008. Bottom line: Company finally headed in right direction again.
Revenue ex-TAC at high end of guidance range.
In light of display weakness through quarter and chaos at Yahoo, this
is good news. Overall revenue up 12% year over year, an acceleration from Q1 (7%) and Q2 (8%). U.S. revenue growth accelerating, as a result of search monetization improvements and, surprisingly, display growth.
The search news, especially, is very encouraging. Search revenue on US
"owned and operated" sites accelerated to better than 30% year over
year, driven primarily by improved click-through rates (due to the new
search algorithm). Even display accelerated, with U.S. display up 20%
(from low teens in Q2). US revenue up 13% Y/Y vs. 5% in Q2. On the
negative side, International revenue decelerated to 9% from 15%. This
is puzzling, especially in light of favorable currency trends.
Management blamed the cleansing of crappy affiliates and says
international search algorithm improvements should kick-in in Q4.
Owned and Operated sites (Yahoo sites) revenue continue to accelerate, which is also good news:
Up 24% in Q3, vs. 18% in Q2 and 14% in Q1. This segment contributes
more profit than the "Affiliates" so growth here important. The
Affliate network will contribute less than 10% of the company's revenue
ex-TAC in Q4.
Guidance for Q4 essentially unchanged.
Range has been reduced on both ends. Given slight top-line
out-performance this quarter, combined with the acquisitions of Blue
Lithium and Right Media, the Q4 guidance seems light, which will
trouble some people. CFO Jorgenson also suggested some Q3 revenue
gains were one-time (but then later reversed self and said "seasonal
strength.") We suspect the company issued intentionally conservative
Operating margin declined again (bad), especially in the U.S.
U.S. op margin declined from 35% last year to 28% this year.
Management is "not happy" about the margins, but blamed some of it on
accelerated hiring in Q3. It's time for some strategic cost
cutting (read: layoffs). International operating margin rose a point
Free cash flow up modestly year over year (9%),
but was goosed by decline in CAPEX to $150 million vs. about $250
million last year. This growth is relatively weak, especially in light
of the revenue growth. On positive side, company is well-positioned
for strong FCF growth in 2008.
Off-Balance Sheet assets (Alibaba, Yahoo Japan, Gmarket) valued at $9.2 billion end of quarter, or $6.50 a share.
Apologies for the light posting of late. Have been spending most of my time on Silicon Alley Insider. Should be back to more frequency here soon, but please feel free to check out SAI (www.alleyinsider.com). Thanks. Henry