Yahoo reveals third quarter earnings drop, reduced ad prices

The Internet company's third-quarter numbers released Tuesday are the latest to underscore the challenges facing CEO Marissa Mayer even as Yahoo's stock continues to soar under her leadership. The shares have more than doubled since Yahoo lured Mayer away from rival Google Inc. 15 months ago, largely because investors prize Yahoo's 24 percent stake in Chinese Internet star Alibaba Group Holding.

Alibaba is already making far more money than Yahoo while growing at a rapid pace that bodes well for the future. Yahoo is leaning on Alibaba and another investment in Yahoo Japan for most of its income, a trend highlighted again in the latest quarter.

Yahoo Inc., meanwhile, is still struggling to revive its revenue growth even though marketers are spending more on online ads. Most of that money, though, is flowing to search leader Google and social networking front-runner Facebook Inc. Both of those companies have built addictive services and networks that have proven to be more effective marketing vehicles.

After subtracting the commissions paid to its partners, Yahoo's ad revenue during the three months ending in September dipped by 2 percent from the same time last year.

"It was a pretty dismal quarter," said BGC Financial analyst Colin Gillis. "They are very fortunate to have Alibaba."

A change in the way Yahoo will eventually have to sell its Alibaba holdings seemed to please investors. Under a new arrangement announced Tuesday, Yahoo will now be required to sell 208 million of its Alibaba shares in an IPO widely expected to occur next year. That's down from 261.5 million under a deal reached 17 months ago. The revised terms will be a boon for Yahoo if Alibaba's stock soars above its IPO price, as often happens with promising technology stocks.

Yahoo's stock gained 26 cents to $33.64 in extended trading after Tuesday's news came out.

Mayer, 38, is pleading for patience to get Yahoo's own business in better shape, saying it may take another year or two before Yahoo's sales are growing at the same rate as the overall market. In the first half of this year, Internet ad spending climbed 18 percent from the same period in 2012.

In an online video presentation Tuesday, Mayer sought to shift the focus to signs that Web surfers are relishing the changes she has been making to Yahoo's products. Her revisions are an attempt to bring in more people on mobile devices and persuade them to stick around for longer periods of time. She said the number of digital pages on Yahoo's services is now back to the levels of two years ago and predicted ad spending will eventually rebound, too.

"I am more encouraged than ever in Yahoo's potential for growth in both the near and long-term," Mayer said. "It will take some time for increased engagement to translate into revenue but I'm confident we are on the right track."

Mayer's optimism couldn't mask the third-quarter declines in both of Yahoo's advertising categories: The Sunnyvale, Calif. company sold fewer display ads at lower prices in the quarter, and the amount of money marketers paid for the text ads next to Yahoo's search results declined even as those ads drew more clicks.

Yahoo earned $297 million, or 28 cents per share, in the three months ending in September. That's a 91 percent drop from nearly $3.2 billion, or $2.64 per share, during the same period a year ago.

It wasn't an apples-to-apples comparison because last year's profit was lifted by a $2.8 billion windfall from Yahoo's sale of nearly half its Alibaba stake.

If not for certain items unrelated to its ongoing business, Yahoo said it would have earned $358 million, or 34 cents per share. That per-share figure was a penny above the average estimate among analysts surveyed by FactSet.

Revenue fell 5 percent from last year to $1.1 billion.

After subtracting ad commissions, Yahoo's revenue stood at $1.08 million to match analyst projections.

The company expects its revenue, minus commissions, to range from $1.18 billion to $1.22 billion in the current quarter ending in December. Analysts had been anticipating revenue of $1.25 billion.