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For Yahoo!, Earnings Means More of the Same

Updated from 1:48 p.m. to include information about Alibaba quarter in the fifth paragraph.

NEW YORK (TheStreet) -- For Yahoo! (YHOO - Get Report) investors, second-quarter earnings may wind up being like a broken record: the core business is stable, but not growing much, if at all, and it's all about Alibaba. The company reports earnings Tuesday after the market close.

On Yahoo!'s first-quarter earnings call, CEO Marissa Mayer noted the company introduced several new products, including Yahoo! Gemini, "the first unified ad marketplace for mobile search and native advertising," as well as Yahoo! Ad Manager Plus buying platform. "The opportunity here is to leverage our powerful combination of ad technology, optimization expertise, rich data and targeting for advertisers to connect with target audiences on the Yahoo! network and elsewhere in our publisher network," Mayer said on the call.

Despite the recent product launches, Yahoo!'s core business has remained relatively flat for years, only just starting to see modest growth. First-quarter display revenue excluding traffic acquisition costs was $409 million, a 2% increase year over year. The number of ads increased 7% year-over-year, but the price per ad continued to trend lower, falling 5% over the same time frame.

Search revenue jumped 9% year-over-year, rising to $444 million ex-TAC, as paid clicks increased approximately 6% compared to the first quarter of 2013, and price-per-click increased approximately 8% during the same timeframe.

Yahoo!'s Alibaba Cash Could Trigger a Buying Binge in Tech

Has Marissa Mayer Done Enough?

For the second quarter, analysts surveyed by Thomson Reuters expect Yahoo! to earn 38 cents a share on $1.084 billion in sales, up just 1.3% year over year and flat sequentially. Traditionally, investors have looked to Yahoo! as a proxy for Alibaba's results, but the Chinese-based company recently filed an updated F-1 filing, detailing first quarter numbers. Alibaba had Y5.54 billion in net income on Y12.03 billion in revenue in its first quarter.

Mayer was encouraged by the slight uptick in the first quarter, noting that display revenue growth, albeit modest, is at "a point of stable to modest growth."  Competitors like Google (GOOG) and Facebook (FB) are seeing much stronger advertising revenue, but a return to that kind of hyper-growth will take "multiple years" for Yahoo!, according to Mayer.

The hyper growth can't come fast enough for Yahoo!, as Mayer reshapes the company. Research firm eMarketer now projects that while Yahoo! ad revenue will rise 2.7% in 2014, the company's share of the overall online advertising market will continue to shrink, accounting for just 2.52% of the market. "At the same time, Microsoft will grow its net worldwide ad revenues by more than 20% this year to reach $3.56 billion, eMarketer estimates, accounting for 2.54% of the market -- just enough to just surpass Yahoo," eMarketer said in a press release this morning.

Yahoo! now has over 430 million mobile users, as Mayer has noted in the past, but it's going to take time for that to turn into additional revenue, noted Bank of America Merrill Lynch analyst Justin Post. "For the core business, the biggest risk remains the usage transition to mobile so street will be looking at user trends, search query trends and display ad pricing trends," Post wrote in a research note, previewing Yahoo!'s earnings. "We expect net display revenue to be up 2% y/y, and are optimistic that Yahoo could see modest upside given Tumblr monetization."

As a result, Mayer stated on the first-quarter call there will continue to be acquisitions, as Yahoo! looks to turn around the core business. There will be some "strategic acquisitions," and some tuck-in acquisitions, as Yahoo! has done in the past.

Cantor Fitzgerald analyst Youssef Squali, who rates Yahoo! a "buy" with a $42 price target, expects "another muted quarter" from Sunnyvale, Calif.-based Yahoo!. "While 2013 was a year of right-sizing, investments and acquisitions, 2014 should be the year of monetization and renewed top-line growth," Squali wrote in the note. "The outcome of the highly anticipated Alibaba IPO in August, the tax treatment of the proceeds (discussed below) and use of the new cash are likely to drive the stock short-term, which is something we don't believe is appropriately reflected in the current valuation."

Topeka Capital Markets analyst Victor Anthony, who rates Yahoo! a "buy" with a $47 price target, is cautiously optimistic on the core business, but "a full turnaround is likely years out." As such, what the company does with its proceeds from the Alibaba initial public offering, expected to happen as soon as next month, are key.

Much of Yahoo!'s value rests on Alibaba and how well the market receives its IPO. Conservative calculations have pegged the company's worth at $150 billion, but Pivotal Research Group analyst Brian Wieser notes that for every $10 billion in upside, Yahoo! could be worth an extra $1.50 a share. "We note that every $10bn of incremental value on Alibaba's IPO valuation will equate to approximately $1.50 in value for Yahoo stock assuming the company pays full taxes on the transaction, and $23 in value is already included in our Yahoo price target based upon our $150bn valuation figure," Wieser wrote in an analyst note.

Yahoo! owns 22.6% or 24% of Alibaba depending on how the percentage of diluted stock is calculated.

Though there isn't much optimism expected from Yahoo! in the second-quarter, Piper Jaffray analyst Gene Munster notes that the back half of the year may offer investors hope. Starting with the third-quarter, this may be where Yahoo! starts to turn the tide on the core business. "We believe the bigger wildcard may be Q3 guidance as we note the company has pointed to an acceleration in growth in the back half of the year, thus it will be important to see if the company continues to feel comfortable with that thinking post Q2," the analyst said in a research note.

--Written by Chris Ciaccia in New York

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