Yahoo falls on cautious forecast, Alibaba slowdown

SAN FRANCISCO — Yahoo shares fell on Tuesday after it gave a cautious outlook and released data showing a slowdown in growth at Alibaba Group, the Chinese e-commerce giant part-owned by the U.S. Internet company.

Yahoo CEO Marissa Mayer said she plans to focus more on the advertising side of the company's business in 2014; however, analysts remained doubtful it can get revenue growth going again in the face of big industry changes.

"If they can keep revenue level, that will be a success," said Karsten Weide, an analyst at research firm IDC who used to work at Yahoo. "Even that will be a challenge."

Yahoo forecast adjusted earnings, before interest, tax, depreciation and amortization, or EBITDA, of $290 million to $330 million for the first quarter of 2014. That implies a "significant" drop in EBITDA profit margins, to about 29% from 37% in the same period a year earlier, says Sameet Sinha, an analyst at B. Riley.

Yahoo also disclosed that Alibaba made an operating profit of $786 million on revenue of $1.78 billion during the quarter ending in September 2013. Alibaba revenue grew 51% from the year-earlier period. While strong, that was down from growth of about 61% in the previous quarter and 70% in the quarter before that.

Alibaba's performance is closely watched by Wall Street because Yahoo owns 24% of the company.Yahoo shares fell 3.1% to $37.03 in after-hours trading following the results.

Yahoo has been struggling with falling revenue from its main display advertising business as rivals including Google, Facebook and Twitter generate content and serve ads in new ways that are more attractive to advertisers on the Web. Yahoo's share of U.S. digital ad revenue fell from 11.5% in 2009 to 5.8% last year, according to eMarketer data.

Yahoo CFO Ken Goldman said the company was not giving a full-year forecast for 2014, partly because it has yet to see an inflection point in revenue trends.

Expenses will stay at roughly the same level throughout 2014, so lower revenue in the first quarter will mean thinner profit margins in that period. If revenue climbs later in 2014, margins will improve, Goldman added during a conference call with analysts.

Yahoo recently ousted COO Henrique de Castro after disappointing advertising results, sending him packing with millions of dollars in severance and other compensation.

"We really lacked a fit here," Mayer said during the conference call, while adding that the decision to remove de Castro was "regrettable."

De Castro will not be replaced, and Mayer said she plans to get more directly involved in advertising and sales.

But even with more attention from Mayer, Yahoo will struggle to revive its display ad business, says Weide.

Yahoo is making a big push in mobile and has created a lot of new content, but it will find it tough to distribute this to lots of users because the company's apps are not pre-installed on many smartphones and tablets, he said.

The other problem is that advertising agencies prefer to buy online ads through real-time bidding platforms, which automate the process. Unlike AOL, Yahoo has not embraced this approach and is still focusing on selling premium ad inventory through more traditional methods, such as a large sales force, Weide said.

"They don't really understand how much of a revolution is coming in display advertising sales," he added.

Yahoo has many employees and managers working in advertising sales, and it would be highly disruptive to suddenly switch to a more automated approach, Weide said.

"It's difficult to phase out an old business model and bring in a new one while the old one is paying the bills still," he said.