Has Marissa Mayer Done Enough?

Updated from 10:51 a.m. to include additional analyst thoughts in the ninth paragraph.

NEW YORK (TheStreet) -- First-quarter earnings at Yahoo! (YHOO) didn't exactly blow the barn doors off, but for CEO Marissa Mayer and CFO Ken Goldman (my new favorite person by the way), they were good enough. For Wall Street, that's what matters, especially as Alibaba gets ready to go public later this year.

Yahoo! reported first-quarter earnings that beat Wall Street expectations, earning 38 cents a share on $1.087 billion in revenue excluding traffic acquisition costs (TAC). It looks as if core Yahoo!, search and display advertising, is turning around a bit, as CEO Marissa Mayer noted this was the best first-quarter revenue ex-TAC since 2010.

Display revenue ex-TAC was $409 million, a 2% increase year-over-year, as the number of ads increased 7% year over year. However, like most in the Internet industry (read: Google (GOOG)), the price per ad continued to trend lower, falling 5% over the same time frame. Search continues to be a strong driver for Yahoo!, as revenue excluding TAC rose 9% over the first quarter of 2013 to $444 million.

Analysts surveyed by Thomson Reuters expected Yahoo! to earn 37 cents a share on $1.08 billion in revenue for the first quarter.

For now, it looks as if the core business is slowly but surely turning around, despite most of the attention being paid to Chinese Internet giant Alibaba, which Yahoo! owns a 24% stake in, and for good reason. For the quarter, Alibaba earned $1.36 billion in net income on revenue of $3.058 billion, a year-over-year rise of 110% and 66%, respectively. Alibaba is expected to go public later this year, and could file its F-1 as soon as next week.

Piper Jaffray analyst Gene Munster noted that user metrics are starting to turn around for Yahoo!, but there's still plenty of work to do. "Net display revenue was about 2% ahead of
Street expectations and grew 2% y/y, but we note this would include Tumblr," Munster wrote in a research report. "Thus excluding Tumblr and looking at a more organic number, display revenue may have been more flattish y/y. With the emergence of RTB platforms, we believe that core portal players like Yahoo! are becoming increasingly less favorable given high relative costs for guaranteed buys. We believe that Yahoo! has opportunity in premium video and mobile, but note that they still have work to do to create a platform as relevant as a YouTube or Hulu in terms of advertisers' minds." Munster rates Yahoo! "neutral" with a $37 price target.

Much of the complaint has been made that Yahoo! has been stagnant, and that it's just all about Alibaba, and to a lesser extent, Yahoo! Japan, (which performed horribly this quarter). Yet, it looks as if the turnaround is starting to happen, albeit at a snail's pace.

"Our modest success this quarter is an important start," Mayer said on the call. "I should also note that the number of ads sold in Q1 grew, reinforcing a year long trend and increasing to 7% year-over-year. Part of this growth of course has been driven by our mobile business. It's a key area of investment for us and we're seeing nice returns on those investments in terms of users, traffic and revenue. Mobile is the future of our business."

To be fair, Mayer has said in the past that turning around the core business is going to take a few years, and she's laying the groundwork for it now. Topeka Capital Markets analyst Victory Anthony, who rates shares "buy" with a $49 price target, reiterated this sentiment from Mayer and her team. "Management stressed that their efforts to drive growth at Yahoo! are seeing early, but modest success and it will take multiple years to get the growth they desire," Anthony wrote in the note.


Yahoo! now has over 430 million mobile monthly active users (MAUs), up 30% year-over-year, so it's clear the company's strategy of updating and consistently refreshing its apps is paying off. On the call, Mayer noted the Yahoo App is #1 in Apple's (AAPL) App store and #2 on Google (GOOG) Play.

Cantor Fitzgerland analyst Youssef Squali, who rates Yahoo! shares "buy" with a price target to $42 (up from $40), noted Mayer and Goldman (he of the slick purple tie and shirt) appear to be refocusing the core on growing revenues again. "After making significant progress in addressing people, products and traffic, management seems to now be making progress towards growing revenues again," Squali wrote in the note.

Yahoo!'s four key areas of business are mobile, social, video and native, with mobile seemingly getting the most attention, judging by acquisitions and how much time Mayer continues to speak about it. "When you look at the success of our mobile products, it really follows the trajectory of the virtuous cycle we've talked about over the past earnings calls," Mayer said. "We've hired incredible people; the mobile team has grown more than 130% year-over-year. Great people have built incredible products, accelerating our ability to release, iterate, and execute."

Acquisitions such as Summly and Alike power Yahoo! News Digest. Rockmelt, Snip.it and Tumblr are helping build Yahoo!'s digital magazines platforms. "The Xobni team utilized their technology and our user's data to bring smarter contacts to Yahoo! Mail," Mayer said. "The teams from Distill and Bread played a key role in building our new comprehensive advertiser offering, Yahoo! Ad Manager Plus and OnTheAir developed the popular Loops feature on the Sports App. And finally PlayerScale worked to launch the Yahoo! Games network."

Mayer has not been shy about acquiring companies in the past, and it looks like the acquisitions are starting to pay off. This quarter, Yahoo! spent another $22 million to acquire 7 companies, so integration of these teams and engineers will continue to be important to Yahoo!'s future, as the core business gets more attention, following the eventual Alibaba IPO.

All of that aside, there are still major challenges for Yahoo!'s core business, as it competes with the likes of Google, Facebook (FB), Twitter (TWTR), and others for Internet advertising spend. "We believe significant challenges remain for Yahoo's core assets, and we expect the company to continue to devote significant resources toward promoting programmatic execution, international growth (U.S. was a bright spot, this quarter), and the expansion of video assets (where the company now trails AOL)," Wells Fargo analyst Peter Stabler wrote in an analyst report, upgrading shares to "outperform."

There will always be questions about Yahoo!'s core business, and whether it can return to above-industry trend growth, and allow the Sunnyvale, Calif.-based company to be thought of as more than a holding company for Alibaba and Yahoo! Japan. Mayer addressed some of this on the call, noting, "As more of our business moves to mobile, social, native and video, we think some of the terrific growth trends we are seeing, 60% last year and 98% in this first quarter in terms of year-over-year growth is likely to continue to occur. And so we've been overall investing in those key areas, driving up our mobile traffic and our mobile revenue, driving up our social presence with the acquisition and the growth and investment we are making in Tumblr and also working on our native and video offerings, because we really think that this offers great opportunities for users and for advertisers in the future. And we think that our Q1 results are indicative of some of the early signs of growth that we can see are fostering these businesses."

For now, Mayer has done enough to keep the bears off her back, while core Yahoo! returns to growth, and Alibaba continues to remain the crown jewel. It's up to Mayer and the rest of the team to keep this momentum going, otherwise, it reverts to being more of the same in Sunnyvale.

--Written by Chris Ciaccia in New York

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