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Yahoo’s Forecast Trails Estimates as Google Takes Market Share

Yahoo! Inc.’s (YHOO) gains from its stake in China’s Alibaba Group Holding Ltd. aren’t enough to mask the slumping advertising business as Google Inc. (GOOG) and Facebook Inc. take market share.

Yahoo forecast fourth-quarter sales, excluding revenue passed to partner sites, of $1.18 billion to $1.22 billion in a presentation yesterday. Analysts on average had been expecting revenue of $1.25 billion, according to data compiled by Bloomberg.

Advertisers are flocking to Google and Facebook instead of Yahoo, thwarting Chief Executive Officer Marissa Mayer’s efforts to turn the Web portal around. The company is at least benefiting from its stake of about 24 percent in Alibaba, China’s largest e-commerce company, and said yesterday that it reduced the maximum number of shares it is required to sell in Alibaba’s initial public offering by 20 percent to 208 million.

Related: How Alibaba Could Underprice Amazon

“The overall story around the stock really continues to be Alibaba,” said Brian Nowak, an analyst with Susquehanna Financial Group, who has the equivalent of a hold rating and doesn’t own the shares. “The core business still faces some challenges that need to be addressed.”

Yahoo, based in Sunnyvale, California, rose 1.7 percent in extended trading to $33.94. The stock fell 1.8 percent at yesterday’s close in New York and has surged 68 percent this year after dropping in five of the previous seven years.

Photographer: David Paul Morris/Bloomberg

Yahoo! Inc. signage is displayed at the company's headquarters in Sunnyvale, California. Close

Yahoo! Inc. signage is displayed at the company's headquarters in Sunnyvale, California.

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Photographer: David Paul Morris/Bloomberg

Yahoo! Inc. signage is displayed at the company's headquarters in Sunnyvale, California.

Revenue fell 0.7 percent from a year earlier to $1.08 billion, in line with estimates. Net income dropped to $297 from $3.16 billion the prior year, when Yahoo had a $2.8 billion gain from the sale of Alibaba shares.

Mayer’s Challenges

Mayer, who took the helm of the largest U.S. Web portal in July 2012, is investing in product improvements to woo more users and marketers amid increased competition. Last month, Mayer said the company surpassed 800 million active monthly users, an increase of about 20 percent since she arrived at Yahoo from Google.

Since last year the company has released new versions of Flickr, as well as its news and sports sites. During the call with analysts, Mayer said mobile adoption is a key metric for the company as more users move to wireless devices. Yahoo’s mobile users climbed to more than 390 million from 340 million about three months earlier.

“Mobile is growing and it’s growing at a huge rate,” Mayer said. “There’s just so much of an opportunity to put great advertisements and great content in front of users.”

Increased Traffic

The investments in mobile and other products, including search, should lead to more traffic followed by more ad dollars, Mayer said.

The developments haven’t resulted in advertising market share gains. Yahoo’s share of the U.S. online ad market will probably drop to 7.7 percent this year from 8.6 percent in 2012, according to EMarketer Inc. Google’s control will climb to 41.1 percent from 40.9 percent, and Facebook’s share will jump to 7.1 percent from 5.9 percent, EMarketer predicts.

To infuse engineering talent and innovative products into Yahoo, Mayer has been on a buying spree, acquiring at least 19 companies. They include mobile-application makers Stamped Inc., Jybe Inc. and Summly Ltd.,the news-reading application created by teenager Nick D’Aloisio. Her biggest deal was blogging site Tumblr Inc., which Yahoo bought for $1.1 billion earlier this year.

Alibaba Profit

Alibaba is faring better. Its second-quarter profit more than doubled as customers flock to the online marketplace for everything from Fuji apples to Boeing 737s. Net income attributable to ordinary shareholders rose to $707 million in the three months ended in June from $273 million a year earlier, Yahoo said.

Yahoo recorded earnings in equity interests of $233 million in Alibaba and Yahoo Japan, up from $175 million a year ago.

Alibaba is considering going public next year after investment banks valued the company at as much as $120 billion, more than three times the size of Yahoo.

With the change to the Alibaba agreement, Yahoo said it gets more shares to sell at its “discretion” after the company goes public. The update amends a deal from May 2012.

“They can participate in the potential upside of Alibaba post IPO,” said Benjamin Schachter, an analyst at Macquarie Securities USA Inc. in New York, who has the equivalent of a hold rating on the stock. “Investors will cheer that.”

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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