Yahoo earnings: Marissa Mayer’s strategy may be starting to pay off


Pedestrians pass the Yahoo Inc. pavilion on day two of the Mobile World Congress in Barcelona, Spain, on Tuesday, Feb. 25, 2014.. Photographer: Angel Navarette/Bloomberg

Yahoo showed small but encouraging signs of growth Tuesday, reporting better than expected first quarter results and offering hope that chief executive Marissa Mayer's turnaround strategy may be working.

The tech giant is now out of an era of decline, Mayer told investors during a live video conference. But, she admitted, Yahoo still had far to go before a turnaround was complete.

"Our modest success this quarter is an important start," Mayer said. Yahoo hired more than 300 engineers during the quarter, and the all-important number of regular mobile users has grown to 430 million -- a 30 percent bump from the same period last year.

Here are three key take-aways from the company's latest earnings report:

Yahoo is growing. For the first time in four quarters, Yahoo reported some of its key revenue figures are growing. Excluding the commission paid to its partners for Web traffic, Yahoo's revenue ticked up one percent compared to the same time last year. Revenue from display ads rose a modest but noticeable 2 percent from the previous year to $409 million. (Overall, revenue fell one percent during the same period.)

The firm also beat analyst expectations of muted earnings, reporting a profit of 38 cents per share on $1.09 billion revenue.

That's good news for Mayer, who has invested heavily in buying startups, pruning Yahoo's existing products and developing original products to offset its shrinking share of the search market. When Mayer took over Yahoo in 2012, she promised to focus the company's efforts to spur growth. Now she can show some nascent signs that her strategies have worked.

And that's what analysts are looking for from Yahoo this year. Youssef Squali, technology analyst for Cantor Fitzgerald, said in a note that 2014 is "expected to be the year when Yahoo shows improvement in monetization and hopefully a resumption of growth."

Yahoo earnings provide a glimpse into Alibaba. Yahoo owns a 24 percent stake in Alibaba, the Chinese e-commerce giant that is expected to file for an initial public offering that analysts say could raise at least $15 billion.

For several quarters now, Alibaba's growth has been off-setting stagnation in Yahoo's core business, and information about the Chinese firm has been nearly as important to investors as Yahoo's profits.

"Even though Yahoo's a big company, [the Alibaba IPO] will have a huge impact," said Larry Levine, a valuation expert and managing director for McGladrey LLP's financial advisory practice. "It's in Yahoo's best interest to provide more information relative to Alibaba, because it makes it easier to evaluate their own interest" in the company.

The forecast looks good for potential Alibaba investors. The firm reported $3.06 billion in revenue during the first quarter -- up 66 percent compared with the same period last year.

The strong results could boost Alibaba's valuation from $130 million to about $200 billion before its IPO, experts said. But Yahoo stock holders shouldn't get too excited, experts say.

Yahoo must sell approximately 10 percent of its Alibaba shares after the IPO, generating some cash. But shareholders won't necessary receive a windfall. "We expect that the cash proceeds to primarily be used to repurchase shares and to pursue acquisitions," Colin Gillis, senior technology analyst and director of research at BGC Financial, said in a note before the earnings report.

The road ahead is still tough. While the quarterly results are encouraging, Yahoo's still not in the clear. The company must shore up its core businesses and that won't be an easy job.

There are plenty of good signs: Demand for display ads rose 7 percent from the same period last year, for example. But the price for those ads continued to fall, dropping 5 percent from the same time last year.

According to the latest report from comScore, Yahoo search is also continuing to lose ground against Google and Microsoft's Bing -- something that analysts say isn't likely to change any time soon.

"We see that the declining position for Yahoo in search, and the erosion of its display ad pricing, are trends that are going to be difficult to reverse," Gillis said.

Hayley Tsukayama covers consumer technology for The Washington Post.
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