Yahoo's Q2 earnings disappoint; Mayer admits 'we are not satisfied'

UPDATED: Yahoo also renegotiated the number of shares it needs to sell in connection to Alibaba's IPO to quite a few less than before.
Written by Rachel King, Contributor

With the Alibaba IPO around the corner, Yahoo's investment in the Chinese tech giant was a focus amid the search company's second quarter earnings announcement on Tuesday.

The Cupertino, Calif.-based business reported a net income of $270 million, or 26 cents per share (statement).

Non-GAAP earnings were 37 cents per share on a revenue of $1.04 billion, excluding traffic acquisition costs (TAC).

Wall Street was looking for earnings of 38 cents per share on a revenue of $1.08 billion.

CEO Marissa Mayer admitted defeat point blank in prepared remarks:

Our top priority is revenue growth and by that measure, we are not satisfied with our Q2 results. While several areas showed strength, their growth was offset by declines. Yahoo Search, for example, had a strong quarter, growing 6% year-over-year on a revenue ex-TAC basis and 19 percent year-over-year in search click-driven revenue. Our social, mobile, video and native areas also grew with significant momentum, collectively gaining nearly 90 percent year-over-year. However, display remains an area of investment and transition. In Q2, we saw display revenue decline, further highlighting the fact that we need to work faster to ameliorate the negative trends. I believe we can and will do better moving forward. Overall, I remain confident in Yahoo's future, our strategy, and our return to long-term growth.

Although search revenue was on the upswing, analysts were also eyeing returns for display, which didn't pan out as well.

Excluding TAC, display revenue for the quarter was $394 million, a seven percent drop year-over-year. The price-per-ad decreased roughly 24 percent annually, but the number of ads sold shot up by the same percentage.

As for Alibaba, Yahoo revealed that it worked out a revision to its share repurchase agreement. The new deal slashes the maximum number of shares Yahoo is required to sell in connection with Alibaba's IPO from 208 million shares to 140 million.

For the current quarter, analysts are expecting earnings of at least 40 cents per share on a revenue of $1.1 billion.

Yahoo is expected to provide its third quarter outlook during the live webcast of its quarterly shareholders call at 2PM PT/5PM ET.

UPDATE: Yahoo CFO Ken Goldman provided Q3 guidance during the call, which he admitted it "assumes that declines we saw in Q2 do not reverse in Q3." The outlook also depends upon Alibaba equity earnings following the IPO.

That said, Yahoo expects revenue to fall between $1.02 billion to $1.06 billion, excluding TAC.

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