Yahoo's Q1 report highlights gains from ads, Alibaba

Yahoo is prospering from its lucrative investments in Asia while the Internet company's listless advertising sales are picking up, if ever so slightly, under CEO Marissa Mayer.

The positive signs in the Yahoo's first-quarter report overshadowed a 20 percent decline in the company's earnings during the opening three months of the year.

Yahoo's stock gained $2.19, or 6.4 percent, to $36.40 in Tuesday's extended trading. Even if the shares rally similarly in Wednesday's regular trading, the stock will remain below its 52-week high of $41.72 reached in early January.

The results released Tuesday highlight the contrasting performances of Yahoo's investment portfolio and the company's main business of running ad-supported online services.

Yahoo Inc. is making most of its money from its holdings in two Asian Internet companies - China's Alibaba Group and Yahoo Japan.

Meanwhile, the Sunnyvale, Calif. company has been struggling to sell more ads, even as marketers divert more of their budgets to the Internet. Most of those digital dollars, though, have been flowing toward Google Inc., the Internet's search leader, and Facebook Inc., the online social networking leader.

Yahoo's share of the worldwide market for digital advertising is expected to shrink to 2.5 percent this year, down from 3.4 percent in 2012, while Google's share climbs to 33 percent and Facebook's share rises to 8 percent, according to the research firm eMarketer.

A 24 percent stake in Alibaba has turned into Yahoo's crown jewel as the Chinese company prepares to go public on the New York Stock Exchange later this year. Since selling Yahoo its stake for $1 billion in 2005, Alibaba has built a massive e-commerce network that caters to businesses and consumers in the world's most populous country.

Yahoo's report provided that latest tantalizing peek at how rapidly Alibaba has been growing. The numbers covered Alibaba's fourth quarter from last year because there is a three-month lag before Yahoo books its portion of Alibaba's income.

Alibaba's fourth-quarter earnings more than doubled from the previous year to $1.35 billion while its revenue surged 66 percent to $3.06 billion.

The stellar performance reinforced hopes that Alibaba's market value could range somewhere between $150 billion and $200 billion when it goes public. By comparison, Facebook started off with a market value of $104 billion in its highly anticipated Wall Street debut in 2012.

Yahoo is now in line for a huge windfall when it sells its Alibaba stake, providing money to expand its reach through acquisitions and buy back more of its stock. Yahoo has already spent $6 billion buying back its stock since the beginning of 2012.

The anticipated gain from the Alibaba investment is the main reason Yahoo's stock has more than doubled since Yahoo hired Mayer from Google in July 2012 to revive its ad sales.

Macquarie Securities analyst Benjamin Schachter estimates Yahoo's stakes in Alibaba and Yahoo Japan are worth nearly $29 per share. He values the rest of Yahoo's business at just $11 to $12 per share.

Mayer still hasn't been able to snap Yahoo out of an advertising funk that began six years ago, although some segments showed modest improvements in the first quarter. In a particularly heartening sign, Yahoo's display ad revenue crept up by 2 percent from the same time last year, after subtracting commissions from ad partners. That was the first uptick in Yahoo's first-quarter display ad revenue in three years.

"We believe we are moving from our core business being in decline to modest or stable growth," Mayer said in a video conference call.

Yahoo earned $312 million, or 29 cents per share, during the first three months of this year. That compared to $390 million, or 35 cents per share, at the same time last year.

If not for special items, Yahoo said it would have earned 38 cents per share. That was a penny above the average estimate among analysts surveyed by FactSet.

Revenue dipped 1 percent from last year to $1.13 billion.

After subtracting ad commission, Yahoo's revenue totaled $1.09 billion - about $20 million higher than analyst projections.