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Ad sales slump but Yahoo promises an Alibaba payday

CEO Marissa Mayer tells investors they'll share in half the proceeds from Alibaba's blockbuster IPO. Yahoo also plans on holding on to a larger stake in the Chinese e-commerce firm than previously reported.

Richard Nieva/CNET

Nearing her two-year anniversary as CEO, Marissa Mayer handed more ammunition to her critics as Yahoo's net earnings fell 19 percent to $270 million in the second quarter ended June 30.

Yahoo also disappointed on the top line with $1.04 billion in revenue, excluding the cost the company pays to drive traffic to its properties. Earnings per share were 37 cents. Consensus analyst expectations pegged revenue at $1.08 billion and earnings per share at 38 cents.

Despite the miss, investors initially sent Yahoo shares up after hours when the company announced it would return to shareholders at least half of the proceeds from the upcoming initial public offering of Chinese e-commerce giant Alibaba. Yahoo currently owns a 22.6 percent stake in the company and analysts believe that might translate into a $10 billion windfall.

"We would like to take this opportunity to let our investors know that we are committed to return at least half of the after-tax IPO proceeds to shareholders, in line with our overarching commitment to maximizing shareholder value through prudent capital allocation," wrote Yahoo CFO Ken Goldman, in a prepared statement released with Yahoo's earnings.

The company also said that it will retain a larger stake in Alibaba than was previously reported, selling only 140 million shares in the IPO, instead of 208 million.

Yahoo shares closed at $35.61, down 9 cents, on Tuesday. After the initial after-hours pop, shares fell about 2 percent in response to a lackluster outlook from management. For the current quarter, Yahoo now expects revenue excluding traffic costs to range between $1.02 billion and $1.06 billion.

During Mayer's tenure, the company's stock has doubled, spiking to more than $41 in January. But much of the investor excitement is due to Yahoo's stake in Alibaba. Now the countdown has begun and as Alibaba readies its market debut -- which could be the largest in history -- Mayer will have to present her case for Yahoo without relying on what some critics say has become a convenient crutch. Today's earnings release perhaps offered a peek at coming attractions.

"Our top priority is revenue growth and by that measure, we are not satisfied with our Q2 results," Mayer said in the statement. "While several areas showed strength, their growth was offset by declines."

During a subsequent conference call with analysts, Mayer acknowledged the magnitude of the remaining challenge reversing the ongoing slump in display advertising. She said that "a transformation of this size will take several years," adding that "it will take a little longer than we originally forecasted."

But investors have already shifted attention from the Alibaba news to the uncertain state of Yahoo's core advertising content business. The company reported $394 million in display advertising, an important financial metric for the company, dropping 7 percent from the year before. The figure is a disappointment compared to last quarter's results. In May, the company reversed the downward trend in display advertising when it said revenue increased 2 percent -- a small but significant gain since the ads account for 40 percent of the company's total sales.

Mayer has invested heavily in Yahoo's product and content lineup. The company has always dabbled in the media business, but under Mayer, Yahoo has made a more aggressive push into the entertainment scrum. Most recently, the company said it would revive "Community," a popular ex-NBC sitcom with a cult-like following. In April, it announced two 30-minute original series, including one helmed by Paul Feig, director of the film "Bridesmaids" and creator of the TV show "Freaks and Geeks."

In addition to those TV offerings, Yahoo announced in April a partnership with live-events promoter LiveNation. Under the deal, Yahoo will stream one concert per day for the next several years, with sponsorships from Kellogg and other companies. The new music channel, which launched on Tuesday, will include performances by Dave Matthews Band and John Legend.

Yahoo has also added well-known personalities to its roster, including Katie Couric, who conducts video interviews with high-profile guests like Michael Bloomberg and actor Bryan Cranston. To make sure the company has the technical ability to deliver its new content offerings to viewers, Yahoo last week announced it's buying RayV, an Israeli company that specializes in large-scale video streaming.

Mayer has also worked to overhaul Yahoo's mobile efforts. Early into her tenure in October 2012, she promoted Adam Cahan, who had been with the company since 2011, to head a newly created mobile team. The company has since refreshed most of its mobile properties, including Yahoo Mail, Weather, and Finance, and introduced a new product called Yahoo News Digest.

"We will know we've been successful when we return the company to growth," Cahan told CNET in June. "Generally speaking, that's the mandate."