U.S. Markets open in 6 hrs 19 mins

Yahoo Q2 profits miss estimates; Sales narrowly beat

Yahoo CEO Marissa Mayer speaks before the session "In Tech We Trust" in the Swiss mountain resort of Davos January 22, 2015. REUTERS/Ruben Sprich

Yahoo (YHOO) posted mixed second-quarter results after the bell on Tuesday as rising sales were countered by growing traffic acquisition costs.

The parent of Yahoo Finance revealed adjusted profits of 16 cents a share, missing estimates by two cents. Meanwhile, sales, excluding traffic acquisition costs, of $1.04 billion narrowly topped views of $1.03 billion. For the current quarter, Yahoo said it expects ex-TAC revenue of $1 billion to $1.04 billion, slightly shy of expectations of $1.07 billion.

Revenue, as reported for the second quarter, came in at $1.24 billion, marking a roughly 15% increase from the same period in 2014. Still the company's cost of revenue soared to $200 million from $44 million, over the same period.

Digging into the results, mobile revenue, which CEO Marissa Mayer has highlighted as a key growth opportunity for Yahoo, increased to $252 million in the second quarter from $163 million in the same three months in 2014. Mobile accounted for 22% of traffic-driven revenue, a sharp increase from 16% the year prior.

Gross search revenue jumped 15% year-over-year to $920 million, helped by a November 2014 deal that made Yahoo the default search engine on Mozilla's popular Firefox browser. However, on the flip-side, the traffic acquisition costs paid to search partners spiked to $106 million from under $1 million in Q2 2014. 

Meanwhile, gross display revenue climbed 15% to half-a-billion dollars, which was also associated with a sharp increase in traffic acquisition costs. 

Mayer noted on a call with analysts that Yahoo has made significant progress with native video ads. As an example, she referenced video ads that encourage users to download an advertiser's app. Mayer said users who proceed to download the app use it 40% more often, and 20% longer during each session, on average.

The Yahoo chief also said the firm is working on "innovative" ad pacts to support a recently-announced deal to become the first company to stream a regular season NFL football game online for free.

Sunnyvale, Calif.-based Yahoo's shares were recently off by 2.1% in volatile after-hours action, extending a drop of about 21% for 2015.

Yahoo didn't provide many details about its planned spinoff of a roughly 15% interest in Alibaba (BABA) in its earnings release or call. However, it said late last week that work to offload the stake as a tax-free spinoff continues apace, and is expected to be completed by the fourth quarter.

"We believe there are strong and legitimate business reasons for the separation," CFO Ken Goldman said on the call. The comment comes as Yahoo looks to garner a favorable private letter ruling from the IRS on the tax-free nature of the move.

Goldman also said that Yahoo's board and management team have continued to meet with advisers as discussions continue over how to maximize shareholder value with regard to the firm's holdings in Yahoo Japan.