Yahoo earnings play second fiddle to Alibaba payout -- again

Chief executive Marissa Mayer delivers better-than-expected sales. But admits Alibaba gains are "top of mind" for investors.

Richard Nieva Former senior reporter
Richard Nieva was a senior reporter for CNET News, focusing on Google and Yahoo. He previously worked for PandoDaily and Fortune Magazine, and his writing has appeared in The New York Times, on CNNMoney.com and on CJR.org.
Richard Nieva
4 min read

Yahoo shareholders will look for answers about its spinoff of Alibaba shares. Yahoo

Yahoo's investors may not be all that interested in Yahoo today -- even though the Internet search and media giant announced its most recent quarterly earnings on Tuesday.

Instead, shareholders have another company on their minds: Aabaco Holdings.

That's the name of the company CEO Marissa Mayer is trying to set up to hold Yahoo's 15 percent stake in Alibaba, the Chinese e-commerce giant that went public last year. The move is mostly a technical one: spinning off the stake -- currently valued at more than $30 billion -- means Yahoo may be able to avoid the billions of dollars in taxes it would have to pay if Mayer simply sold the shares and returned the cash to Yahoo investors.

Yahoo last week officially filed for the spinoff with the US Securities and Exchange Commission.

"I know it is top of mind for our investors," said Mayer near the beginning of a conference call with analysts, referring to the spinoff. Aside from that, neither she nor CFO Ken Goldman would give anymore detail about the progress of the transaction.

The handling of the Alibaba spinoff "will outweigh any impact on shares from the fundamentals of the core business in the near-term," wrote Macquerie Research analyst Ben Schachter, in a note to clients last week.

As for Yahoo's main business, the Sunnyvale, California, company today reported sales that beat analysts estimates. Though, Yahoo has upped spending significantly to attract eyeballs to its sites. The company paid traffic acquisition costs of $200 million in the second quarter, compared to only $44 million the year before.

In the three months ended June 30, sales, minus those acquisition costs, were $1.04 billion. Profit, excluding costs such as adjustments for stock-based compensation, was 16 cents a share. Analysts were expecting $1.03 billion in sales and profit of 18 cents a share.

Investors largely shrugged off the news, with shares down 1.84 percent in after hours trading to $38.99.

Since she took over as CEO three years ago, Mayer, a former Google executive, has tried to turn around the troubled Internet search service and media site. To do that, she's sought to remake Yahoo as a mobile-first company in recognition of that fact that more people are looking at websites on their smartphones and tablets instead of on desktop computers. Under Mayer's tenure, the company has refreshed all of its mobile properties, from Yahoo Mail to Sports to Weather, and she's spent more than $2 billion on more than 50 acquisitions to bring in new talent and tech. Mayer has also made big bets in media -- including inking a deal last month to live stream an NFL game for the very first time -- in her bid to make Yahoo a relevant online destination again.

She's had mixed results. In April, eight of the top 10 smartphone apps in the United States were owned by either Google or Facebook. Yahoo's apps didn't crack the top 15, according to ComScore.

Even so, all of Mayer's efforts seem secondary to the Alibaba stake, which will be distributed among shareholders after the expected spinoff. That investment was made by Yahoo co-founder Jerry Yang a decade ago. The company's shares in Alibaba have kept Yahoo's stock afloat (the shares are up more than 150 percent since she took over in July 2012) even as sales have dipped.

Yahoo lives off its revenue through ads, and that's been a trouble spot. Yahoo's share of the global digital ad market fell to 2.38 percent last year, down from 2.86 in 2013, according to eMarketer. To battle that loss in business, Mayer has shifted the focus away from traditional display, or banner ads. (Though, display revenue -- minus traffic acquisition costs -- actually rebounded to $406 million in the second quarter, up 3 percent from the year before.)

Instead, Mayer has tried to zero in on ads derived from mobile, video, native (or less cordoned-off Internet ads) and social -- which the company groups as the acronym "mavens." That revenue climbed 60 percent from the year before to $399 million.

In mobile advertising in the US, Yahoo is eclipsed by Google and Facebook, which are expected to take around 35 percent and 17 percent respectively this year. Yahoo held 3.3 percent of the share last year, but that's expected to jog up to 3.7 percent this year, according to eMarketer.

But that modest gain may not matter to investors as Yahoo prepares its spinoff, which is expected in the fourth quarter. There's still one more obstacle in the way for investors to get their payday: rule changes proposed by the Internal Revenue Service may put the spinoff in jeopardy.

In its July SEC filing, Yahoo warned the spinoff is "conditioned" on an IRS ruling. It's not clear when the IRS will make its call.

Goldman declined to elaborate, but did point to the progress the company had already made in the process. "While much work does lie ahead, this filing represents a key milestone."