Yahoo Q3 Earnings, Revenue Dip Amid M&A, Big Revamps

Investor's Business Daily

Yahoo on Tuesday continued to struggle in Q3 to achieve top-line growth, while earnings fell and guidance was lackluster. But shares edged higher late after the Internet company said it will maintain a bigger-than-expected stake in China's Alibaba.

Yahoo (YHOO) under an agreement with the Chinese e-commerce giant, had planned to sell half its stake, or 261.5 million shares, as part of Alibaba's planned U.S. IPO. That would have left Yahoo with 12%.

But Yahoo said Tuesday that it will sell only 208 million shares, leaving it with about 14.5%.

"We are extremely happy that we can maintain a larger portion in the company as they continue to grow their business," said Yahoo CFO Ken Goldman.

Earnings And Revenue FallYahoo's per-share Q3 profit excluding items fell 3% vs. a year earlier to 34 cents, but topped views of 33 cents. That followed six straight quarters of EPS growth ranging from 30%-58%.

Revenue excluding what Yahoo pays other websites to carry ads fell 1% to $1.081 billion from $1.089 billion. Wall Street expected $1.082 billion.

Yahoo expects Q4 revenue at $1.18 billion to $1.22 billion vs. views at $1.25 billion.

"I'm very pleased with our execution," said CEO Marissa Mayer, "especially as we've continued to invest in and strengthen our core business.

Since Mayer joined Yahoo in July 2012 from rival Google (GOOG), she has been busy making acquisitions and redesigning "core" products such as Yahoo News and Flickr.

The Sunnyvale, Calif.-based company last week launched a new version of Yahoo Mail and increased user data to 1 terabyte, more than Google offers. Yahoo made eight acquisitions in Q3.

Yahoo's operating costs fell 36% in the first nine months of 2013 vs. 2012, says Goldman.

"Operationally, 2013 remains a year of investments and acquisitions," said Cantor Fitzgerald analyst Youssef Squali, "setting the stage for what we believe will be a resumption of growth in 2014.

Yahoo shares have climbed 68% this year. They fell nearly 2% to 33.38 leading into Tuesday's report. They rose slightly in after-hours trading.

What's At Stake

Shareholder interest in part is being fueled by Yahoo's 24% stake in Alibaba, which is planning a U.S. IPO that could raise up to $15 billion. The IPO reportedly could value the Chinese giant at more than $100 billion.

Alibaba hasn't yet said when the offering will take place, BGC analyst Colin Gillis pointed out in a Monday research note.

"Investors who own shares of Yahoo as a proxy for Alibaba may find that they have to hold shares through at least three more Yahoo lackluster earnings results," wrote Gillis, who rates the stock with a hold.

Yahoo's global share of digital ad spending is now forecast at 2.97%, down from 3.37% in 2012, eMarketer Vice President Clark Fredricksen said. That's vs. Google's 32.84% and Facebook's (FB) 5.41%, both of which are seen rising from 2012.

Mayer in September said Yahoo monthly active users were at 800 million, up about 20% from 15 months prior, not including users on newly acquired Tumblr.com. Mobile active users jumped to 390 million in Q3, up 15% from Q2, Mayer said.

But analysts want to see stronger evidence of a revival.

"Signs of a fundamental turnaround at Yahoo would begin with a recovery in its user engagement levels," wrote RBC Capital Markets analyst Mark Mahaney, who rates the stock as outperform, or buy. "And so far, there isn't evidence of this."

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