Despite Major Deals, Yahoo Expects Another Flat Quarter

Yahoo’s second quarter was marked by a whirlwind pace of deals, starting with its $1.1 billion purchase of blogging service Tumblr in May. More recently, it snapped up video app Qwiki, contact management software firm Xobni Corp., and Bignoggins Productions -- an app for managing fantasy sports teams -- in a series of smaller acquisitions.
 
The buying spree reflects CEO Marissa Mayer’s efforts to rejuvenate the Web portal and restore revenue growth since taking the reins a year ago. Picking up new talent and technology through acquisition has been a big part of her strategy, with 17 deals notched so far during her tenure.
 
She has also pushed to revamp core Yahoo properties like the home page, Yahoo Mail and Flickr, while taking steps internally to boost morale and foster collaboration, from providing employees with free food a la Google to ending work-at-home arrangements, a more controversial move.
 
But so far, the changes engineered by Mayer haven’t helped revitalize growth. Revenue fell 7% from a year ago to $1.1 billion in the first quarter and analysts on average expect sales to be flat in the second quarter at $1.08 billion when Yahoo reports its latest results on Tuesday. In short, revenue stands the same as when Mayer took the job last July.
 
Analysts forecast adjusted earnings of 30 cents a share for the quarter, up 36% from 22 cents, in the year-earlier period.
 
The company’s display ad business, which accounts for 40% of sales, is projected to remain soft. JP Morgan analyst Doug Anmuth forecasts display revenue -- excluding payments to partner sites -- of $418 million, down 11.7% from a year ago, following an 11% decline in the prior quarter.
 
He attributes the slide to various factors, including the restructuring of Yahoo’s sales force, growing competition and the company reducing some ad inventory on the home page and in Yahoo Mail to improve the user experience. “De-monetization, however, could help engagement and ultimately increase pricing as remaining ads generate more interactions and click-throughs,” he wrote in a quarterly earnings preview.
 
Citing comScore figures, Anmuth suggested the home page redesign earlier this year had already led to higher engagement. Unique visitors on the desktop reached mid-teens growth during the first half of 2013 from a year ago, while minutes spent on the home page in the second quarter increased by 23%.
 
Yahoo is expected to see better results on the search side, with net revenue projected to rise 5% year-over-year to $405 million. The company disclosed in May that Microsoft will continue to pay it a guarantee to up for any revenue-per-search (RPS) shortfall stemming from the companies’ 2009 search deal. The guarantee, set to expire on March 31, was extended for another year.
 
While that may be reassuring, Yahoo continues to lose ground in the search market. Queries through Yahoo Search slipped 1% in June from a year ago, while its share of searches last month was 11.4% -- down from 11.9% in May, and 13% from a year earlier. “It is clear that Yahoo needs to make dramatic improvements if it is to stay relevant in search,” stated Macquarie Securities analyst Ben Schachter, in a recent research note.
 
Mayer said during the first-quarter conference call that she wants to see search to growing more rapidly and become “even more immersive” in the coming quarters to boost engagement. More broadly, she said she expects the kind of growth overall that she envisions to take several years to achieve while the company makes internal and external changes.
 
How patient Wall Street will be with her turnaround efforts remains to be seen. But the sense of renewed energy and promise Mayer has brought to Yahoo have helped push the company’s stock up 75% from a year ago to over $27 a share as of Friday.
 
How the Tumblr acquisition -- by far the largest deal under Mayer -- turns out could go a long way to defining her success in moving Yahoo forward. Analysts have taken a wait-and-see approach, noting the inherent risks in paying over $1 billion for a company with little revenue to date and an unproven ad business.
 
Adam Kasper, chief media officer at Havas Media, North America, said it’s still too early to judge the ad potential of Tumblr, but called the prospect of a robust ad product on the platform “intriguing.” While he wouldn’t say whether the agency had increased spending with Yahoo since Mayer took over, he said the company should benefit from “presenting a more consistent and innovative product offering to the marketplace.”
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