Yahoo Growth Plan Draws New Scrutiny As Sales Disappoint

Investor's Business Daily

Yahoo (YHOO) handily beat Wall Street's Q1 earnings estimates but shares fell sharply in after-hours trading Tuesday as flat revenue and tepid guidance fell short of analyst views.

The results emphasized lingering doubt about whether CEO Marissa Mayer's focus on mobile-product redesigns will jump-start top-line growth at the stagnant Internet giant.

"You would have liked to see some regenerated revenue growth for the quarter, at least a little bit," said Wedge Partners analyst Martin Pyykkonen.

Bottom Line: Top Line Flat

Sales excluding what Yahoo pays other websites to carry ads were even at $1.074 billion, shy of the expected $1.099 billion.

"Getting the company going at the rate we would like will take several years," Mayer said on a conference call with analysts.

Yahoo adjusted Q1 EPS was 38 cents, up 40% from a revised 27 cents a year ago. But that excluded stock-based compensation for the first time.

The company said 35 cents was the comparable figure vs. Wall Street forecasts for 24 cents.

"A nice bottom-line beat," said analyst Pyykkonen.

Non-GAAP display revenue fell 11%, while non-GAAP search revenue climbed 6% on 16% more paid clicks.

Yahoo sees Q2 revenue at $1.06 billion to $1.09 billion, said CFO Ken Goldman. That's lighter than the $1.1 billion analysts have been modelling, according to Thomson Reuters.

Yahoo shares fell 4% in late trading. They declined 18 cents to 23.79 during Tuesday's regular session.

Yahoo shares have jumped more than 50% in the nine months since Mayer took over, so clearly investors are at least in part enthusiastic about her plans, say observers. She has pushed through redesigns for Yahoo's heavily trafficked home page and new app releases for Yahoo Mail on Apple (AAPL) and Google (GOOG) mobile operating systems.

Mayer says those redesigns are paying off, with users up 50% quarter-over-quarter. Those users are spending more time with the apps and opening the apps more often, she says.

"Overall, it's very early," Mayer said. "While it will take time to see the benefit of this realignment on our numbers, we're encouraged.

Alibaba's Riches

But analysts aren't so sure.

Before Tuesday's Q1 results, several analysts said that the bulk of Yahoo's share-price gains could reflect its holdings in China's Alibaba Group. Yahoo sold about half its stake in Alibaba, and its remaining 20% was estimated to be worth about $8.1 billion. But that was when Alibaba's valuation was seen to be $40 billion. The e-commerce giant has since been valued as high as $65 billion, noted JPMorgan analyst Doug Anmuth.

Investor confidence is pushing Yahoo shares to highs they have not seen since mid-2008, but Mayer's mobile redesigns might not be the catalyst, wrote Cowen & Co. analyst John Blackledge.

"Our view is that Yahoo is lagging on the mobile side of the business," said Blackledge, who rates the stock as neutral, or hold.

Yahoo's mobile use is "still very small," wrote Anmuth. Recent upgrades for Mail and its Flickr photo-sharing app are "a good start," but Yahoo "needs a larger overall mobile strategy that encompasses all of its products in a wider scale than it currently operates," the analyst wrote.

Google (GOOG) reports Q1 earnings after Thursday's close. Its shares fell a fraction late Tuesday.

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