Yahoo's big surprise is fast mobile growth

SAN FRANCISCO - Gains from Yahoo's mobile advertising business and its stake in Alibaba are helping to offset continued declines in desktop display ads, but the company's core profitability is pressured by investments that have yet to pay off.

That's the broad take-away from Yahoo's YHOO third-quarter earnings conference call and webcast late Tuesday.

Yahoo CEO Marissa Mayer and Chief Financial Officer Ken Goldman played up the positives since Mayer took over in mid-2012.

Yet they also acknowledged the concerns some investors and Wall Street analysts have about the company's future now that the Alibaba IPO BABA has come and gone.

Here's a quick look:

Mobile

The company's mobile ad revenue in the quarter was $200 million, or 17% of its total sales of $1.15 billion.

Previously, the company's mobile efforts were so lackluster that Yahoo didn't even break out those sales.

What's more, the figure is growing fast, as Mayer forecast that it may top $1.2 billion for all of 2014.

'We're adding a lot of innovation on the mobile side,' Goldman said.

The Yahoo Finance app on an Apple iPhone.(Photo: Laura Mandaro/USATODAY)

The company is already benefiting from its acquisition during the third quarter of Flurry, a mobile-ad technology provider.

'The expertise they bring is just tremendous,' Mayer said, pointing to mobile app advertising as a new area of development for Yahoo.

Yet it still has a long way to go.

'Mobile advertising is not yet optimized,' Mayer said, adding that the company needs 'better targeting' of ads.

By comparison, Facebook FB said mobile ads comprised 62% of its total ad revenue for the quarter ended in June.

Analysts estimate that Google GOOG, which also doesn't break out mobile ad revenue, gets between 20% and 30% of its sales from ads served on smartphones and tablets.

ALIBABA PROCEEDS

During its second-quarter conference call in July, Yahoo CFO Goldman had raised the hopes of some investors by saying that the company might get favorable U.S. tax treatment on its Alibaba proceeds.

Yahoo even sold its IPO shares in the Chinese Internet-commerce giant through a Hong Kong-based subsidiary in hopes that might lower its ultimate tax bill.

Yet Goldman revealed late Tuesday that that won't be the case.

'It doesn't matter where the cash is domiciled,' Goldman said in response to a question on the matter.

The company is on the hook for a $3.3 billion tax bill on its $9.4 billion Alibaba IPO gain, an amount it plans to pay 'closer to March 2015,' rather than in the current fiscal year ending in December.

That move will boost net income this year but be a drag on it next year.

SEARCH VS. DISPLAY ADS

While revenue from the company's search business has grown for 11 straight quarters and its mobile display ad business 'has grown significantly' during her tenure, Mayer said the company's desktop display ads are hurting the company's top and bottom line.

'PC display (advertising) is the biggest drag on our business,' she said.

The company will continue to make investments to boost growth, both executives said.

That likely means investors won't see any improvement to the profitability of Yahoo's core business.

The company's cash flow minus stock compensation expenses fell 8% from a year earlier to $306 million, even while revenue was flat.

Income from operations, meanwhile, plummeted by 55% to $42 million, as Yahoo's operating profit margin (minus traffic-acquisition costs) was more than cut in half.

The metric fell to 4% of revenue from 9% a year earlier.

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