Yahoo is making more money under CEO Marissa Mayer, despite unexpected drop in revenue

SAN FRANCISCO – Yahoo is making more money under CEO Marissa Mayer, even as the Internet company struggles to sell more of the ads that bring in most of its revenue.

The latest signs of earnings progress came Tuesday with the release of Yahoo’s first-quarter earnings report.

The numbers also show further signs of decay in Yahoo’s sales of display ads. On the plus side, Yahoo’s ad revenue tied to search results rose.

Investors seemed more worried about the downturn in Yahoo’s display advertising than the surge in the company’s earnings. Yahoo’s stock sank more than 3 per cent after the results came out.

The negative reaction suggests that some investors may be losing their faith in Mayer, a respected executive who defected from Google Inc. to join Yahoo nine months ago.

Investors have been counting on Mayer to duplicate some of the success she enjoyed while helping to build Google Inc. into the Internet’s most powerful company. She was one of Google’s first employees and a top executive there for 13 years. Yahoo’s stock had been up by more than 50 per cent since Mayer’s arrival at Yahoo, thanks largely to the rising value of Yahoo’s 24 per cent stake in Chinese Internet company Alibaba Group.

Yahoo Inc. earned $390 million, or 35 cents per share, during the first three months of the year. That’s a 36 per cent increase from income of $286 million, or 23 cents per share, at the same time last year.

If not for expenses covering employee stock compensation and certain other costs, Yahoo said it would have earned 38 cents per share. That was well above the average estimate of 25 cents per share among analysts surveyed by FactSet.

In an unpleasant surprise, revenue fell 7 per cent from last year to $1.1 billion.

After subtracting ad commissions, Yahoo’s revenue stood at $1.07 billion, about $30 million below analyst projections.

The weak spot came in display advertising, which is used to be Yahoo’s strength. Excluding ad commissions, Yahoo’s first-quarter display advertising revenue fell 11 per cent from last year to $402 million.

BGC Financial analyst Colin Gillis said the reason Yahoo’s earnings beat expectations was not because of the company’s core business but because of investments such as the stake in Alibaba.

“They are making more money (as) an investment house,” Gillis said.

In extended trading after the release of results, Yahoo’s stock fell 79 cents, or 3.3 per cent, or 4.7 per cent, to $23. During the regular session earlier, it fell 19 cents, or 0.8 per cent, to $23.79.

Mayer has been trying to make Yahoo’s online services more engaging and easier to use in hopes that the improvements will encourage Web surfers to visit more frequently and stay for longer. That would help Yahoo sell more advertising to marketers who have been funneling more of their online budgets to Google and Facebook Inc. in recent years. Mayer also has been trying to recast Yahoo’s services so they are better suited for the growing audience consuming content on smartphones and tablet computers.

In a statement, Mayer said Yahoo “saw continued stability in our business, strengthened our team, and started the year with fast execution against our products and partnerships. We are moving quickly to roll out beautifully designed, more intuitive experiences for our users. I’m confident that the improvements we’re making to our products will set up the Company for long-term growth.”

Analysts seemed to back Mayer’s assessment.

“You have to remember that turnarounds take a long time and we are still in the early innings of that,” Gillis said.

Gartner analyst Andrew Frank noted that earnings were stronger than expected and “they didn’t miss revenue by a lot.” He called the results positive overall and said he didn’t see any warning signs in there.

As part of a makeover under Mayer, Yahoo has redesigned its home page, email service and Flickr photo-sharing service. The company, which is based in Sunnyvale, Calif., also has made a series of small acquisitions aimed primarily at attracting more engineers with expertise in mobile applications and social networking.

Those changes haven’t been enough to generate a large enough increase in Yahoo’s revenue to match the growth at the other major players in the Internet ad market. Google’s ad revenues have been climbing by about 20 per cent in recent quarters while Facebook’s has been surging by about 40 per cent. Google is scheduled to report its first-quarter results Thursday while Facebook plans to post its numbers on May 1.

Yahoo also has been lagging the growth in the overall ad market, a trend expected to continue at least through the rest of this year. In Yahoo’s main market, the U.S., the company’s ad revenue this year is expected to increase by about 3 per cent, according to the research firm eMarketer. That contrasts with an anticipated 25 per cent gain in overall spending on digital ads in the U.S. this year, eMarketer said.

AP Technology Writer Barbara Ortutay in New York contributed to this report.