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Yahoo Results Top Estimates on Search-Ad Gains, Cost Cuts

Yahoo! Inc. (YHOO) rose to the highest price in a year after new Chief Executive Officer Marissa Mayer outlined her turnaround strategy for the biggest U.S. Web portal, emphasizing mobile technology and personalized services.

Mayer aims to grow as fast as competitors in online search, display advertising, mobile applications, and products such as e-mail, she said yesterday on her first call with analysts since being named CEO in July. Yahoo earlier reported third-quarter profit and sales that topped analysts’ estimates.

The company’s fifth CEO in four years plans to reverse three straight annual sales declines by recharging growth in existing businesses. Mayer plans to focus on small acquisitions of less than $100 million rather than large deals, and expects to move workers around within Yahoo instead of cutting large groups of employees, she said.

“Marissa Mayer has taken baby steps to improve operations at Yahoo,” said Kevin Stadtler, president of Stadtler Capital Management in Fort Worth, Texas, who manages $6.5 million in assets, including Yahoo. “Large acquisitions are not necessary to resume top-line growth.”

Yahoo climbed 5.7 percent to $16.67 in New York, the highest closing price since Oct. 24, 2011. The stock has gained 3.3 percent this year.

Expenses Drop

Third-quarter profit, excluding some items, was 35 cents a share, the Sunnyvale, California-based company said in a statement yesterday. Sales, excluding revenue passed to partner sites, increased 2 percent to $1.09 billion. Analysts on average had estimated profit of 26 cents on revenue of $1.08 billion, according to data compiled by Bloomberg.

Profit got a boost as expenses fell after the company eliminated jobs, and sales of advertisements alongside search results increased at a faster pace than display-type ads.

“We’ve been through a couple rounds of cost-cutting, so this is a product of that,” said Brett Harriss, an analyst at Gabelli & Co. who recommends buying Yahoo shares. “It’s nice that they didn’t disappoint for once.”

Mayer sees the company focusing on sites and technologies that are “daily habits” for consumers, such as checking e-mail and stock tickers, she said on the conference call.

“Our vision and direction for Yahoo is to make the world’s daily habits inspiring and entertaining,” Mayer said. “We’ll become a growth company by inspiring and delighting our users.”

The CEO plans to invest in hiring engineers with expertise in mobile applications, boosting the company’s technology for buying and serving ads, and building services that are more personalized for individual users.

Profit Gains

Net income attributable to Yahoo rose to $3.16 billion, or $2.64 a share, from $293.3 million, or 23 cents, a year earlier. Income in the 2012 period included a net gain of $2.8 billion related to the sale of a stake in Alibaba Group Holding Ltd.

Product development costs declined 5.2 percent to $217.3 million in the period, while sales and marketing expenses decreased 7.3 percent to $269.3 million.

The sales increase was driven by gains in search-related ads, which climbed 11 percent to $414.1 million, minus sales passed to partner sites. Display advertising on that basis was little changed at $451.6 million.

In a departure from past practice, Yahoo didn’t provide an outlook for sales and operating income. Google, Mayer’s former employer, also doesn’t issue earnings forecasts.

‘Comfortable’ Acquisitions

Mayer, who said she has been involved in the acquisition of about 20 small companies in her career, sees Yahoo buying young startups that help improve its products, she said on the call.

“The size and scale that is comfortable for a great integration, a great product coming out of it, is something that is much more in the size and scale of double-digit millions and low hundreds of millions” of dollars, she said.

Yahoo obtained a $750 million credit line that expires in 364 days, the company said yesterday in a regulatory filing. The credit line, arranged by Citigroup Inc. (C) and HSBC Holdings Plc, is for general purposes and may be increased by as much as $250 million.

Mayer has kicked off her Yahoo comeback strategy by hiring several senior deputies. Earlier this month she named Henrique de Castro, previously Google’s vice president of global partner business solutions, as operating chief. Last month, she hired Ken Goldman away from network-security provider Fortinet Inc. (FTNT) to replace Tim Morse as chief financial officer. In August, Mayer added former American Eagle Outfitters Inc. (AEO) executive Kathy Savitt to lead marketing efforts.

Search Gains

The online advertising market in the U.S. is projected to grow 17 percent to $37.3 billion this year, according to researcher EMarketer Inc.

Yahoo’s share of display ads, including banners, will be 9.3 percent this year in the U.S., down from 11 percent last year, EMarketer estimates. Facebook’s portion of the market will be little changed at 14 percent, while Google’s stake will rise about 2 percentage points to 15 percent.

“Even though they’re losing share, search volumes are still growing,” said Colin Gillis, an analyst at BGC Partners in New York. “There’s no rapid deceleration that’s happening in the business. With some basic blocking and tackling they should be able to get the stock up.”

Mayer has taken steps to curtail operations outside the U.S. She completed Yahoo’s sale of half its stake in Chinese partner Alibaba in September, and last week said Yahoo will shut its South Korea business.

Yahoo said it will return $3 billion in proceeds from the Alibaba transaction to investors, after using $646 million for buybacks in recent months. The company plans to repurchase shares in the open market in the near term, CFO Goldman said on the call with analysts.

To contact the reporter on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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