Yahoo's holdings, not earnings, please investors
SAN FRANCISCO - Yahoo (YHOO) is still struggling to boost revenue nearly three years into CEO Marissa Mayer's tenure, magnifying concerns that the Internet company holds little value beyond its lucrative Asian investments.
The latest evidence of Yahoo's financial malaise emerged Tuesday with the release the company's first-quarter earnings report. Mayer and Yahoo Chief Financial Officer Ken Goldman eased investors' disappointment by pledging to cut costs, while indicating that the company may be willing to fulfill Wall Street's desire for a spin-off of its stake in Yahoo Japan.
Investors already had driven down the company's stock by 12 percent so far this year before Tuesday's numbers came out. The shares initially fell by an additional 2 percent in extended trading, but then rebounded after the cost-cutting pledge and the Yahoo Japan remarks. If that happens, it would mirror what Mayer has already started to do with an even more valuable stake in Alibaba Group (BABA), an e-commerce star in China.
Yahoo's stock rose 66 cents to $45.15 after Mayer's remarks in a webcast reviewing the financial results.
After accounting for ad commissions, Yahoo's first-quarter revenue fell 4 percent from the same time last year to $1.04 billion, extending a troubling trend that began before Mayer took over in July 2012. Yahoo's net revenue has declined from the previous year in seven of the past nine quarters. The only uptick reflected mere 1 percent increase in revenue.
Yahoo's overall first-quarter revenue, before ad commissions, didn't impress investors because they focus on the amount of money that the company retains after paying its partners for helping to draw online traffic to it ads.
Those expenses, known as "traffic acquisition costs," quadrupled from the same time last year, an indication that Yahoo is paying a steep price to show its advertising.
The Sunnyvale, California, company also poured substantially more money into developing new products, contributing to a steep drop in Yahoo's first-quarter earnings.
Although Yahoo's stock has nearly tripled under Mayer's leadership, most of the increase has been tied to Yahoo's 24 percent stake in Alibaba Group and 35 percent stake in Yahoo Japan -- not Yahoo's core business.
The planned Alibaba spin-off, due to be completed by year-end, is designed to avoid a big tax bill on the gains. A similar benefit could be achieved with a Yahoo Japan spin-off, to the delight of investors.
Yahoo's holdings in Alibaba Group and Yahoo Japan are currently worth about $41 billion, before factoring in potential taxes. Throw in the nearly $7 billion in cash and marketable securities that Yahoo held at the end of March, and the company's current market value of $42 billion implies investors think Yahoo's ongoing business is worth next to nothing.
Not surprisingly, Mayer doesn't agree with that assessment. "Overall, I am pleased with the progress we have made," she said on Tuesday's webcast.
Yet Mayer recently reshuffled Yahoo's top management. She also renegotiated the terms of Yahoo's five-year-old search partnership with Microsoft (MSFT) to give Yahoo a bigger cut of the companies' shared revenue, more control over the results on Yahoo's site and the option to sell more ads through other networks besides Microsoft's.