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Yahoo! Shrinks Less Than Expected As Strategic Deliberations Continue

By Dan Caplinger - Apr 19, 2016 at 6:00PM

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The company still has investors waiting for details on a possible sale.

Image: Yahoo!

For years, Yahoo! (NASDAQ: YHOO) has been in the uncomfortable position of playing second fiddle to other tech giants. In search, the company has lagged behind the industry leader, and Yahoo!'s big stake in Chinese e-commerce company Alibaba has created challenges in evaluating the success and establishing the value of Yahoo!'s core business. Coming into Tuesday's first-quarter financial report, investors were prepared for Yahoo! to continue to watch sales and profits fall, but the company's results were actually better than many had feared. Nevertheless, what wasn't obvious was Yahoo!'s path forward, and that's what many investors want to see more than anything else. Let's look more closely at the latest from Yahoo! and what you should anticipate going forward.

Slowing declines for Yahoo!
Yahoo!'s first-quarter results didn't look pretty, but they didn't represent a worst-case scenario for investors. GAAP revenue fell more than 11% to $1.09 billion, just topping the $1.08 billion consensus forecast among investors. Net earnings swung to a loss of $99 million on a GAAP basis, but after adjusting for certain extraordinary items, adjusted earnings of $0.08 per share came in a penny above what investors had expected to see.

A closer look at Yahoo!'s numbers shows some important trends. The disparity between what Yahoo! refers to as its "Mavens" and its other businesses was even more evident this quarter. Mavens revenue, which includes mobile, video, native advertising, and social media, rose 7% to $390 million. Non-Mavens revenue fell more than 13% to $644 million. Similarly, when you break out revenue sources between mobile and desktop, the same differences arose, with mobile growing at a better than 10% clip even as desktop-related revenue fell at double-digit percentage rates. Mobile revenue rose to be a full quarter of traffic-driven revenue at Yahoo! during the quarter.

In addition, Yahoo! continues to struggle to contain costs. Overall, costs of revenue climbed by nearly a quarter despite falling revenue, and payments to search partners represented more than half of that, rising 44% compared to what the company paid in the first quarter of 2015.

Yahoo! CEO Marissa Mayer trumpeted the positives of the company's performance. "I'm pleased that we delivered Q1 results in line with our expectations," Mayer said, and "our 2016 plan is off to a solid start." The CEO also mentioned that it made "substantial progress toward potential strategic alternatives" for the company, but details were largely absent despite the high priority that Yahoo! has given to completing the process.

What's next for Yahoo!'s business?
All that Yahoo! said about strategic alternatives is that it has formed a committee of independent directors, which has worked with leadership and outside advisors to find partners willing to work with the company. Some investors found it disappointing that Yahoo! couldn't release more details, but with the plan having been announced just three months ago, it's unrealistic to expect more progress at this early point.

Yet Yahoo!'s guidance for the second quarter raised some concerns as well. The company said that it expected to bring in about $810 million to $850 million in revenue after taking out the costs that the company pays in order to acquire traffic. That's down a sixth from year-ago levels, and it's $10 million to $50 million short of what investors had expected prior to the report.

Even with those concerns, Yahoo! shares moved modestly higher in response to the news, climbing a bit more than 1.5% in after-hours trading following the announcement. Nevertheless, with so many people waiting on the company to accelerate its internal assessment and find more profitable business opportunities, Yahoo! can't afford to wait much longer before coming up with a viable strategic plan for its future. Otherwise, activist investors will lose patience with the current management and demand more aggressive change on its own timetable.

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