Yahoo! Inc. (NASDAQ:YHOO ) reported results for the quarter ended September 30, 2011 after the market closed yesterday and for the first time in a long time actually beat the street numbers and reported better than expected results.

Revenue excluding traffic acquisition costs (“revenue ex-TAC”) was $1,072 million for the third quarter of 2011, a 5% decrease from the third quarter of 2010.

Income from operations decreased 6% to $177 million in the third quarter of 2011, compared to $189 million in the third quarter of 2010.

The year over year decreases were primarily due to the revenue share related to the Search Agreement with Microsoft.

GAAP revenue was $1,217 million for the third quarter of 2011, a 24% decrease from the third quarter of 2010, primarily due to the required change in revenue presentation related to the Search Agreement and the associated revenue share with Microsoft.

Net earnings per diluted share decreased 21 percent to $0.23 in the third quarter of 2011, compared to $0.29 in the third quarter of 2010.

 

Third Quarter 2011 Revenue Highlights

• Display revenue ex-TAC was $449 million, which was flat compared to $448 million for the third quarter of 2010.
• GAAP display revenue was $502 million, a decrease of 2 percent, compared to $514 million for the third quarter of 2010.
• Search revenue ex-TAC was $374 million, a 13 percent decrease compared to $428 million for the third quarter of 2010.
• GAAP search revenue was $467 million, a 44 percent decrease compared to $839 million for the third quarter of 2010.

Cash Flow and Cash Balance

• Cash flow from operating activities for the third quarter of 2011 was $356 million, a 3 percent increase compared to $346 million for the same period of 2010.
• Free cash flow was $247 million for the third quarter of 2011, a 1 percent decrease compared to $250 million for the same period of 2010.
• Cash, cash equivalents, and investments in marketable debt securities were $2,870 million at September 30, 2011 compared to $3,629 million at December 31, 2010, a decrease of $759 million. During the third quarter of 2011, Yahoo! repurchased 44 million shares for $593 million. During the nine months ended September 30, 2011, Yahoo! repurchased 82 million shares for $1,203 million.

 

Financials at a Glance

Quarterly Results (in millions, except percentages and per share amounts)
		Q3 2010		Q3 2011		Percent Change
Revenue ex-TAC		$1,124		$1,072		(5)%
GAAP revenue		$1,601		$1,217		(24)%
Income from operations		$189		$177		(6)%
Net earnings		$396		$293		(26)%
Net earnings per diluted share		$0.29		$0.23		(21)%

 

Yahoo!’s results for the third quarter of 2011 reflect $53 million in search operating cost reimbursements from Microsoft under the Search Agreement, which amount is equal to the search operating costs incurred by Yahoo! in the third quarter. Search operating cost reimbursements are expected to continue to decline as Yahoo! fully transitions all markets to Microsoft’s search platform and the underlying expenses are no longer incurred under our cost structure. Our business outlook for total expenses reflects these anticipated savings.

Yahoo!’s results for the third quarter of 2011 also reflect $4 million in transition cost reimbursements from Microsoft under the Search Agreement. During the third quarter Yahoo!’s cumulative transition costs exceeded the $150 million reimbursement cap specified in the Search Agreement. Transition costs in excess of the cap will not be subject to reimbursement.

Business Outlook

Revenue ex-TAC for the fourth quarter of 2011 is expected to be in the range of $1,125 million to $1,235 million. Based on the terms of the Search Agreement with Microsoft, Microsoft retains a revenue share of 12 percent of the net (after TAC) search revenue generated on Yahoo! Properties and Affiliate sites in transitioned markets. Yahoo! reports the net revenue it receives under the Search Agreement as revenue and no longer presents the associated TAC within cost of revenue. Accordingly, for transitioned markets Yahoo! reports GAAP revenue associated with the Search Agreement on a net (after TAC) basis rather than a gross basis. For markets that have not yet transitioned, revenue continues to be recorded on a gross basis, and TAC is recorded in cost of revenue. GAAP revenue for the fourth quarter of 2011 is expected to be in the range of $1,275 million to $1,395 million. Total expenses (cost of revenue plus total operating expenses) for the fourth quarter of 2011 is expected to be in the range of $1,075 million to $1,135 million. Total expenses less TAC for the fourth quarter of 2011 is expected to be in the range of $925 million to $975 million. Income from operations for the fourth quarter of 2011 is expected to be in the range of $200 million to $260 million.

Business outlook for revenue ex-TAC is being provided to reflect the underlying dynamics of the business during the Microsoft transition and to facilitate comparisons to prior periods.