By Dow Jones Business News,
July 15, 2014, 07:39:00 PM EDT
By Douglas MacMillan
Two years into Marissa Mayer's tenure at Yahoo Inc., advertisers are still sitting on the sidelines.
Yahoo on Tuesday reported that its total revenue, minus commissions paid to partners for Web traffic, fell 3% in
the second quarter, its fourth decline in the past five periods and below the company's estimates. Of particular
concern, revenue from display ads, excluding the traffic costs, dropped 6.9% to $394 million.
"A transformation of this size will take several years," Ms. Mayer told analysts. "It will take a little longer
than we originally forecasted."
That sentiment differs from Ms. Mayer's comments just three months ago, when she said the first quarter was "
evidence we are on the right course." Those results--Yahoo's first revenue growth in more than a year--now appear to be
a blip as Ms. Mayer struggles to persuade advertisers to shift their budgets from Google Inc. and Facebook Inc., which
command the bulk of the online and mobile ad markets.
Yahoo's shares fell 2.3% in after-hours trading to $34.78. Its market capitalization is about $35 billion.
The troubling progress report comes as Ms. Mayer needs advertisers most. Pressure on the chief executive is
increasing as Alibaba Group Holding Ltd., the Chinese e-commerce company in which Yahoo owns a 23% stake, prepares to
hold an initial public offering that will shift investor focus from that asset to Yahoo's stagnant core business.
Alibaba will give investors something to cheer about for the time being. Alibaba and Yahoo agreed to reduce the
number of shares that Yahoo is required to sell at the IPO to 140 million shares from 208 million shares. That will give
Yahoo less cash from the IPO but will allow it to hold on to shares that could increase in value as Alibaba grows. Yahoo
will unload about 27% of its stake in Alibaba, rather than a previously planned 40%.
Alibaba's expected IPO valuation is a moving target. The e-commerce company last week valued itself at $130 billion
ahead of the offering, but some Wall Street analysts valued the company at as much as $230 billion.
Yahoo's chief financial officer, Ken Goldman, said he expected the sale of Yahoo'sAlibaba shares to be fully taxed
and would return at least half of the proceeds to shareholders, though he didn't specify how.
B. Riley & Co. analyst Sameet Sinha estimated Yahoo's total stake in Alibaba is valued at about $38 billion.
Assuming it pays a capital-gains tax of 35%, Yahoo would make about $6.7 billion in IPO proceeds, Mr. Sinha said. That
would give shareholders more than $3 billion in the form of share buybacks or dividends.
Regardless of the Alibaba outcome, Yahoo must find a way to turn around its advertising business before investors
The average price for Yahoo ads declined 24% in the second quarter--compared with a 5% drop three months earlier.
The drop was a sign that Yahoo's new ad offerings, such as "in-stream" ads that appear in the center of sites such as
Yahoo News and Yahoo Finance, aren't attracting much demand from advertisers.
Ms. Mayer also said demand has dropped off for one particular type of ad, the FPAD, a small, square-like
advertisement on its home page, which she plans to reconfigure and reprice.
More generally, advertisers are moving away from higher-priced, graphical banner ads that have been Yahoo's
specialty. In their place, they are spending more on cheaper ads targeted to individual visitors, an area where Facebook
and Google have excelled.
Ms. Mayer's reorganization of the company's executive ranks haven't stopped the bleeding. The company's ad sales
still declined in the wake of Ms. Mayer's firing of Henrique de Castro, her former operations chief and top liaison to
the ad industry.
"It's remarkable how bad" ad revenue in the quarter was, said Brian Wieser, an analyst at Pivotal Research. "Such
are the problems when there is no head of ad sales."
That job has been taken up by Ms. Mayer herself, who says she has recently gone on a listening tour meeting with
more than 500 ad-industry executives representing more than 50 top brands. But she is still seen by some in such circles
as a technologist out of touch with Madison Avenue. In one highly publicized incident, she arrived nearly two hours late
for a meeting with top ad-agency executives in Cannes, France.
Yahoo has announced a bevy of new ad offerings--such as native ads, digital magazines and Web video shows--but
marketers say Yahoo still lacks the popular appeal with consumers. "They all feel like 'could-be's' for brands, not big
money bets," said Greg March, the CEO of ad agency Ikon3.
Yahoo reported second-quarter profit of $272.6 million, down from $335 million a year earlier.
Mike Shields contributed to this article.
Write to Douglas MacMillan at firstname.lastname@example.org
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