Earnings Reports

Yahoo Fails to Soothe Investors' Fears About the Company's Future

Senior writer
3 min read
This story originally appeared on Fortune Magazine

Yahoo is a giant technology company, with annual revenues of about $4.5 billion, but no matter how well it does in the core aspects of its business—mobile, search, advertising, etc.—all investors seem to care about are the parts of its business that it doesn’t control. At the top of that list is the company’s 15% holding in Chinese Internet firm Alibaba, and the crucial question of whether Yahoo will be allowed to spin that off without a huge tax bill.

This is a key factor both for the company and for its investors, because the Alibaba stake—which Yahoo acquired in 2005 for about $1 billion—is now worth an estimated $30 billion at current market prices. That means it accounts for more than 80% of Yahoo’s total market value of $37 billion.

The company announced last week that it has filed plans with the SEC to create a new holding company called Aabaco, and intends to spin its Alibaba shares off into that entity. But first, it needs a ruling from the Internal Revenue Service as to whether it will have to pay taxes on the spinoff.

When Yahoo sold some of its shares back to Alibaba in 2012, it had to swallow a tax bill of $2 billion, and estimates are that the bill for the rest of its stake could be as high as $12 billion.

Unfortunately, the company provided little or no guidance on its earnings call Tuesday about whether it is likely to get a favorable decision or not. Yahoo CEO Marissa Mayer said the company was “making progress” with its application, and chief financial officer Ken Goldman said he believed there was a “strong and compelling” argument for the spinoff, but the ultimate decision remains a mystery.

The rest of Yahoo’s business, meanwhile—the part it theoretically does control—had a mixed quarter. Mayer made much of the fact that adjusted revenue (which excludes traffic-acquisition costs) grew by 15%, the largest increase in almost nine years. But while that squeaked past Wall Street analysts’ estimates of $1.03 billion for the quarter, the company’s earnings did not: Adjusted profit came in at 16 cents a share, sharply lower than the 18 cents analysts were expecting.

The culprit was the same as it was in the previous quarter, namely traffic-acquisition costs—the deals that Yahoo and other search companies cut with browser companies and software providers to drive traffic to their search engines. A rise in TAC pushed the company to a net loss of $22 million or 2 cents a share, compared with a profit in the same quarter last year of $270 million or 26 cents a share. And Mayer said that the outlook for the rest of the year is also weak, and that higher costs will put revenue “under pressure.”

On the bright side, Mayer said that Yahoo’s revenue from mobile reached $252 million, an increase of 54% year-over-year, and mobile accounted for 22% of the company’s ad-supported revenue in the most recent quarter. Investors, however, seemed preoccupied with the rise in costs and earnings miss: Yahoo’s stock fell in after-hours trading and is now down 20% since the beginning of the year.

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