By Deepa Seetharaman 

Yahoo Inc. on Monday posted a deep loss that underscores the challenges facing a potential acquirer of the shrinking internet business.

In what could be its last earnings report as an independent company, Yahoo on Monday said its revenue, minus commissions paid to partners for web traffic, fell 19% in the second quarter.

That is its sixth decline in the past seven periods and the steepest slump under Marissa Mayer, who was named chief executive almost four years ago to the day.

Yahoo's loss ballooned to $439 million as expenses surged 40%, largely because of a $395 million write-down of Tumblr. The blogging site, which Yahoo bought for about $1 billion in 2013, was supposed to be Ms. Mayer's signature acquisition, but the company has now written down $625 million of the value.

The earnings report comes on the same day as a third and potentially final round of bids are due, people familiar with the matter said. The monthslong process is expected to whittle a field of dozens of potential buyers down to a handful of serious contenders.

Yahoo aims to wrap up the auction by the end of this month, one of these people said. On an earnings call, Ms. Mayer said Yahoo was "deep into the process" of evaluating proposals and would update shareholders when prudent.

The remaining bidders, which are expected to include Verizon Communications Inc. and private-equity firm TPG, have expressed concerns about the flagging financial prospects of Yahoo, which continues to cede share of the online-ad market to Alphabet Inc. and Facebook Inc.

Ms. Mayer sought to put a positive spin on the second-quarter numbers. "Our businesses dramatically simplified and we continue to manage costs while efficiently running the company," she said on the call with analysts.

But sagging revenue and surging costs continue to threaten Ms. Mayer's attempt to turn around the iconic brand, and could hurt Yahoo's ability to fetch a high price for the core business.

Even excluding the Tumblr charge, costs would have risen about 9% despite Yahoo executives' pledge to rein in costs. Ms. Mayer said Monday that Yahoo was operating at the "lowest cost structure and smallest headcount" in a decade. Yahoo ended the quarter with 8,800 employees.

On Monday, Yahoo's shares fell 1% in after-hours trading to $37.59.

Overall during the quarter, revenue rose 5.2% to $1.31 billion, helped by a change in how the company reports revenue. Without that change, revenue would have declined 15% to $1.06 billion. Analysts had called for $1.08 billion.

The segment of Yahoo's business that Ms. Mayer touted would drive the company's growth has slowed dramatically, though it showed an uptick in the latest period. Revenue from "Mavens" -- a financial metric the company introduced last year to track mobile, video, native and social ads -- rose 26% to $504 million. That compares with 6.8% in the first quarter, 26% in last year's fourth quarter, 43% in the third period and 60% in the second quarter of 2015.

Yahoo said it ended the quarter with $7.67 billion in cash, up from $7.1 billion three months earlier.

Yahoo's core business is difficult to value because the majority of its roughly $36 billion market value is attributed to its valuable stakes in Alibaba Group Holding Ltd. and Yahoo Japan. Brian Wieser, analyst at Pivotal Research, estimates the core business is worth about $3.5 billion. BGC Partners analyst Colin Gillis estimated its value at $5.15 billion. Some earlier bids came in as low as $3 billion, people familiar with the process told The Wall Street Journal in May.

Yahoo's talks with possible asset buyers have dragged on for months partly because of uncertainty over "what's in the deal and what's not," according to one person familiar with the matter. Among the unresolved issues are Yahoo's patents and real estate.

Yahoo has set aside about 3,000 patents into a subsidiary called Excalibur and hired an investment bank, Black Stone IP, to separately auction it, though some bidders may want to buy it with the core operating business.

Adding to the complexity, Ms. Mayer addressed concerns about a search partnership with Mozilla that includes a provision allowing the maker of the Firefox web browser to walk away if it doesn't like Yahoo's buyer. In 2014, Yahoo agreed to pay Mozilla at least $375 million a year to make Yahoo the default search engine on Firefox.

She didn't comment on reports that Yahoo could be on the hook for $1 billion in payments to Mozilla, but said "should Mozilla choose not to [continue with Yahoo], our agreement does provide mitigations, which would reduce our exposure," Ms. Mayer said.

Ms. Mayer said the company is at the right size today. "We could revisit our strategy, and that might happen naturally during the strategic alternatives process, but within products and services we currently offer, we think this is approximately the right size overall for the company," she said during the call.

--Dana Cimilluca, Thomas Gryta and Joann S. Lublin contributed to this article.

Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com

 

(END) Dow Jones Newswires

July 18, 2016 19:26 ET (23:26 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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