Yahoo Forecasts Sales Meeting Estimates as Alibaba Gains

Yahoo! Inc. Chief Executive Officer Marissa Mayer was bailed out again by Alibaba Group Holding Ltd.

Alibaba, the Chinese e-commerce company that is planning to file for a U.S. initial public offering, posted a 66 percent sales surge for the last three months of 2013 and its fifth straight quarterly profit gain. That sent shares of Yahoo, which owns about 24 percent of Alibaba, soaring as much as 10 percent in extended trading after the company reported first-quarter earnings.

Yahoo itself had first-quarter sales, excluding revenue passed onto partner sites, of $1.09 billion, up from $1.07 billion a year earlier, the company said in a statement today. That compared with analysts’ average estimate of $1.08 billion, according to data compiled by Bloomberg, and was the first sales gain since late 2012. The company projected second-quarter revenue of $1.06 billion to $1.1 billion, in line with analysts’ average estimate of $1.08 billion.

Mayer, almost two years into her tenure, has revamped services and added content to attract users and the advertisers that follow them. That has helped the Sunnyvale, California-based company restore some growth to its core business, as investors have also bought into the stock to get a piece of Alibaba’s results.

Alibaba’s Strength

“The Alibaba numbers were very, very strong,” said Brian Wieser, an analyst at Pivotal Research Group, who has the equivalent of a hold rating on the stock. “It’s certainly a very strong positive for Alibaba -- and for Yahoo.”

Yahoo shares rose to as high as $37.70 in extended trading, after increasing 2.3 percent to close at $34.21 in New York. The stock is down 15 percent so far this year.

For the first quarter, net income was $311.6 million, down from $390.3 million a year earlier, partly due to restructuring charges. Profit, minus items such as stock-based compensation, was 38 cents a share, while analysts had projected 37 cents a share.

Sales increased in the first quarter as both of Yahoo’s major advertising services expanded, the company said. Display revenue, which includes graphical ads on the home page, rose 2 percent, while search-based marketing sales jumped 9 percent. The company also continues to pour money into the business.

Total operating expenses rose 16 percent to $1.1 billion during the quarter.

Moving Forward

“We believe we have moved from our core business being in decline to a point of stable to modest growth,” Mayer said on a conference call. “Our modest success this quarter is an important start.”

Mayer may soon no longer be able to rely on Alibaba to attract investors to Yahoo, as the e-commerce company prepares to file to go public in the U.S. Yahoo has long benefited from its stake in Alibaba, which goes back to a 2005 deal when the Web portal acquired a piece of the Chinese company for $1 billion.

Yahoo is set to sell about 40 percent of its stake in Alibaba at the time of the company’s IPO and then can unload more shares in the future.

Optimism around Alibaba’s valuation helped spur an upgrade of Yahoo’s stock today by Ben Schachter, an analyst at Macquarie Securities USA Inc. The Chinese company could be valued at $160 billion to $180 billion at its IPO, he wrote in a note in which he raised Yahoo’s rating to the equivalent of a buy from a neutral after the shares pulled back recently.

Core Inconsistency

“This is clearly a trading call not, in any way, a positive call on Yahoo’s core fundamentals,” Schachter wrote, putting the company’s price target at $40.

Mayer, after redesigning the company’s services, is adding more professional content to woo users. That’s included hiring high-profile journalists and executives. Earlier this month, the company said it would add a leading name in cosmetics, Bobbi Brown, to be its editor-in-chief of beauty coverage. Katie Couric recently joined to bolster Yahoo’s video efforts and former New York Times columnist David Pogue came aboard to lead technology coverage.

Premium Content

More professional content could be on the way. Yahoo is considering adding high-quality, longer-form video shows that would have multiple episodes, according to people with knowledge of the matter. That would come after striking deals to show other premium content, such as past episodes of “Saturday Night Live,” and backing some shorter-form programs, including Tom Hanks’s animated series “Electric City.”

Mayer said during the call that there would be a bigger focus on premium content for it video services. The spending should be in line with past years’ expenditures, she said.

In addition to video, another key area of focus for the company is mobile. Yahoo said today that it gets about 430 million users from mobile devices, making up more than half its audience.

The efforts come as the company improves its tools for advertising on its services. That includes a feature to help clients better target audiences and an advertising exchange that gives advertisers more tools to manage promotions.

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