By Douglas MacMillan
Two years into Marissa Mayer's tenure at Yahoo Inc., advertisers
are still sitting on the sidelines.
Yahoo on Tuesday reported that its total revenue, minus
commissions paid to partners for Web traffic, fell 3% in the second
quarter, its fourth decline in the past five periods and below the
company's estimates. Of particular concern, revenue from display
ads, excluding the traffic costs, dropped 6.9% to $394 million.
"A transformation of this size will take several years," Ms.
Mayer told analysts. "It will take a little longer than we
originally forecasted."
That sentiment differs from Ms. Mayer's comments just three
months ago, when she said the first quarter was "evidence we are on
the right course." Those results--Yahoo's first revenue growth in
more than a year--now appear to be a blip as Ms. Mayer struggles to
persuade advertisers to shift their budgets from Google Inc. and
Facebook Inc., which command the bulk of the online and mobile ad
markets.
Yahoo's shares fell 2.3% in after-hours trading to $34.78. Its
market capitalization is about $35 billion.
The troubling progress report comes as Ms. Mayer needs
advertisers most. Pressure on the chief executive is increasing as
Alibaba Group Holding Ltd., the Chinese e-commerce company in which
Yahoo owns a 23% stake, prepares to hold an initial public offering
that will shift investor focus from that asset to Yahoo's stagnant
core business.
Alibaba will give investors something to cheer about for the
time being. Alibaba and Yahoo agreed to reduce the number of shares
that Yahoo is required to sell at the IPO to 140 million shares
from 208 million shares. That will give Yahoo less cash from the
IPO but will allow it to hold on to shares that could increase in
value as Alibaba grows. Yahoo will unload about 27% of its stake in
Alibaba, rather than a previously planned 40%.
Alibaba's expected IPO valuation is a moving target. The
e-commerce company last week valued itself at $130 billion ahead of
the offering, but some Wall Street analysts valued the company at
as much as $230 billion.
Yahoo's chief financial officer, Ken Goldman, said he expected
the sale of Yahoo's Alibaba shares to be fully taxed and would
return at least half of the proceeds to shareholders, though he
didn't specify how.
B. Riley & Co. analyst Sameet Sinha estimated Yahoo's total
stake in Alibaba is valued at about $38 billion. Assuming it pays a
capital-gains tax of 35%, Yahoo would make about $6.7 billion in
IPO proceeds, Mr. Sinha said. That would give shareholders more
than $3 billion in the form of share buybacks or dividends.
Regardless of the Alibaba outcome, Yahoo must find a way to turn
around its advertising business before investors lose patience.
The average price for Yahoo ads declined 24% in the second
quarter--compared with a 5% drop three months earlier. The drop was
a sign that Yahoo's new ad offerings, such as "in-stream" ads that
appear in the center of sites such as Yahoo News and Yahoo Finance,
aren't attracting much demand from advertisers.
Ms. Mayer also said demand has dropped off for one particular
type of ad, the FPAD, a small, square-like advertisement on its
home page, which she plans to reconfigure and reprice.
More generally, advertisers are moving away from higher-priced,
graphical banner ads that have been Yahoo's specialty. In their
place, they are spending more on cheaper ads targeted to individual
visitors, an area where Facebook and Google have excelled.
Ms. Mayer's reorganization of the company's executive ranks
haven't stopped the bleeding. The company's ad sales still declined
in the wake of Ms. Mayer's firing of Henrique de Castro, her former
operations chief and top liaison to the ad industry.
"It's remarkable how bad" ad revenue in the quarter was, said
Brian Wieser, an analyst at Pivotal Research. "Such are the
problems when there is no head of ad sales."
That job has been taken up by Ms. Mayer herself, who says she
has recently gone on a listening tour meeting with more than 500
ad-industry executives representing more than 50 top brands. But
she is still seen by some in such circles as a technologist out of
touch with Madison Avenue. In one highly publicized incident, she
arrived nearly two hours late for a meeting with top ad-agency
executives in Cannes, France.
Yahoo has announced a bevy of new ad offerings--such as native
ads, digital magazines and Web video shows--but marketers say Yahoo
still lacks the popular appeal with consumers. "They all feel like
'could-be's' for brands, not big money bets," said Greg March, the
CEO of ad agency Ikon3.
Yahoo reported second-quarter profit of $272.6 million, down
from $335 million a year earlier.
Mike Shields contributed to this article.
Write to Douglas MacMillan at douglas.macmillan@wsj.com
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