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Yahoo, searching for a new angle, takes a wrong turn with sales

The Internet media and search company still hasn't gotten its advertising business on track. All the while, CEO Marissa Mayer looks to be getting more serious about Yahoo's future in search. Will it help?

There are signs that Yahoo may be looking to get back into search. Richard Nieva/CNET

Yahoo may be trying to become again the search giant it once was.

The company has rewritten its pact with its longtime partner Microsoft, which manages search technology for Yahoo. Since the deal was inked in 2009, users typing a query into Yahoo's search bar have gotten information via Microsoft.

But that could change.

Yahoo released new details about the agreement in a government filing on Monday. The new stipulations give Yahoo more flexibility in what results the search engine returns, and also gives each of the companies the option of ending the deal at any moment during or after October 2015. The deal was originally set for 10 years from when it was signed.

The filing hit a day before Yahoo announced financial results for the first quarter, signaling to investors that Yahoo is making plans for its future in search.

As it prepares, its current business is still sputtering. For the quarter ended March 31, sales, excluding the cost Yahoo pays to partners to drive traffic to its sites, were $1.04 billion and profit, minus some costs, was 15 cents a share. Analysts had estimated $1.06 billion in revenue and earnings of 18 cents per share.

The slumping numbers highlight Yahoo's plight as it tries to turn around a shrinking advertising business. Investing in search could help to bolster that business.

"We do believe deeply in search," Marissa Mayer, Yahoo's chief executive, said during a call discussing financial results. "It's deep in Yahoo's DNA."

For Mayer, the stakes are high. When she stepped in as CEO in July 2012, the company was already in turnaround mode. (The search deal with Microsoft was put in place by then-Yahoo CEO Carol Bartz.)

Mayer, a former Google executive, was immediately under pressure to reverse Yahoo's flagging revenue. Her results so far are being questioned. Yahoo's share of the digital ad market dropped to 5 percent in 2014 from 5.8 percent the year before, according to eMarketer. Facebook's and Twitter's shares, by comparison, each went up.

For most of Mayer's tenure, the company had relied on a now $40 billion stake in the Chinese e-commerce giant Alibaba to mask its shortcomings. That changed last quarter when Mayer spun off the Alibaba stake to avoid a multibillion-dollar tax bill -- a move that pleased investors after Yahoo reported a lackluster quarter for sales. (Mayer also said Tuesday that the company was also looking at how to make the most money from another Asian asset, Yahoo Japan, and that Yahoo would announce a plan on a future conference call.)

The takeaway: Mayer now needs to prove Yahoo's ads and products business is worthwhile, without hiding behind Alibaba.

One of Mayer's battlefronts is search. Google is still the world's most dominant search engine, but Yahoo in recent months has improved its position. In November, Yahoo announced a five-year search deal with Mozilla, maker of the popular Firefox Web browser, to become the default search engine for the browser in the United States.

Mayer said her efforts will specifically be trained on mobile devices. She points to a number of search products that take into account a user's personal information -- like things from emails or search history. Those include Google Now and digital assistants like Apple's Siri and Microsoft's Cortana. Last year, Yahoo bought a similar startup called Aviate, which takes over the home screen of a phone powered by Google's Android software. The service automatically surfaces information on your phone based on things like where you are or what time of day it is.

"People respond to great search," Mayer said. "But what great search means is changing."

A 'more modern' Yahoo

Mayer has been trying to fight Yahoo's flat revenue by investing in new areas.

Her first move was to catch the company up on mobile devices like smartphones and tablets -- where ad dollars are increasingly going. The company said it made $1.2 billion from mobile ad sales in 2014, the first time it has disclosed that annual figure. On Tuesday, Yahoo said it made $234 million from mobile revenue in the quarter, up from $145 million the year before.

For most of Yahoo's existence, the company has been dependent on display, or banner, advertisements. But sales in that area continue to fall flat. Yahoo said revenue, minus the costs the company pays to partners, dropped 7 percent from the year before to $381 million.

But as users shift to mobile devices, that kind of advertising has been in decline, and Yahoo has invested more in other forms of digital advertising. That includes video ads and so-called "native" ads, which look and feel more like editorial content instead of being cordoned off. Yahoo last year bought the video ad-tech company Brightroll to beef up its efforts.

The company said the combined revenue from mobile, video ads, native ads, and ads from the Yahoo-owned blogging site Tumblr -- which the company refers to as the acronym "mavens" -- totaled $363 million. That's up from $230 million the year before.

Mayer acknowledged the failings of some of Yahoo's traditional businesses, but said the "mavens" revenue would make up for those shortcomings.

"It counteracts declines in legacy businesses as we reinvent new, more modern Yahoo," Mayer said.