Yahoo CEO Faces Key Earnings Call Amid Investor Pressure

Bloomberg News

's earnings call this week has turned into a must-win situation for Chief Executive Officer Marissa Mayer.

Mayer will unveil Yahoo's third-quarter results tomorrow, making her first extensive public comments since coming under pressure last month from activist investor Starboard Value LP. On the call, Mayer will say Yahoo is focused on the handling of taxes from a stake in Chinese e-commerce company , explain her acquisition strategy, and what she's doing with spending after job cuts this month, according to a person familiar with the matter, who asked not to be identified because the details aren't public.

Mayer's message is crucial to assuaging investor concerns about whether she can turn around Yahoo. The Sunnyvale, California-based Web portal is under intensifying scrutiny after last month selling part of a stake in Alibaba, which had driven up Yahoo's value. Since Alibaba went public, Yahoo's shares have fallen 8.6 percent. In addition, Yahoo's main online advertising business continues to struggle.

The call is 'critical,' said Scott Galloway, a professor of marketing at New York University's Stern School of Business.'Is she going to have the wind at her back or in her face?'

Sarah Meron, a spokeswoman for Yahoo, declined to comment on what will be discussed with investors.

Three Issues

Mayer will have to address three primary issues on the earnings call, said Sameet Sinha, an analyst with B. Riley & Co. Those include what the CEO intends to do with the money Yahoo reaped from Alibaba's initial public offering; how the company will treat its remaining stake in Alibaba; and what Yahoo will do to lower the tax impact of selling its shares in Alibaba.

As for Yahoo's underlying business, Mayer has so far been unable to rev up growth after two years of leading the Web portal. For the third quarter, sales minus revenue passed onto partner sites is projected to be $1.05 billion, down 3 percent from the year-ago period, to a Bloomberg survey of analysts. For the year, Yahoo is estimated to report a 2 percent sales decline, according to data compiled by Bloomberg.

'If she can demonstrate that she knows how to operate the core business, she has more credibility around all decisions related to Yahoo,' Galloway said.

Mayer has recently been focused on more efficiency with the online ad business. She is closing Yahoo's office in Amman, Jordan, eliminating about 80 jobs, and is trimming about 400 positions at the company's Bangalore, India, office.

Asian Assets

What Mayer does with the company's remaining stake in Alibaba -- as well as a separate investment in Yahoo Japan Corp. (4689) -- is also a point of contention. Yahoo sold about 140 million Alibaba shares in the Chinese company's IPO last month, retaining about a 15 percent stake.

Starboard CEO Jeffrey Smith wrote in an open letter to Mayer last month that Yahoo should break up by creating a holding company for the China and Yahoo Japan assets, and spinning off its core business operations. Merging the new Yahoo core operating unit with another company would reward shareholders, he said. A final step would be to sell Alibaba and Yahoo Japan back their shares, he added.

'Clearly Yahoo is deeply undervalued relative to the sum of its parts,' Smith wrote.

Tax Bite

Investors are also eager to hear how Yahoo will deal with the tax consequences from the sale of its Alibaba shares. While Yahoo reaped more than $9 billion by selling Alibaba stock in the IPO, the profit will be fully taxed, erasing billions in value.

Yahoo executives including Chief Financial Officer Ken Goldman have said they are looking into issues around taxes. Management should address the topic of saving money on taxes during the call, said Brian Wieser, an analyst with Pivotal Research Group.

In addition, Mayer could give more detail on how much of the money from Alibaba's IPO will be returned to shareholders, Sinha said. Yahoo earlier this year said at least half will be returned to shareholders. Yet investors want to know what will happen with the rest of the proceeds and if Mayer may use the cash toward more acquisitions.

Yahoo has done more than two dozen since Mayer became CEO in July 2012. Earlier this year, the Web portal agreed to acquire startup Flurry Inc., an analytics provider, for more than $300 million. Last year, Mayer made her biggest deal with the purchase of blogging service Tumblr for about $1 billion. Investors including Starboard have decried Mayer's dealmaking, saying the acquisitions have so far yielded few results.

If Yahoo returns closer to 75 percent of the Alibaba profit to shareholders, that would leave less for a big acquisition, Sinha said.

Now it's up to Mayer to weigh in. On the day Starboard sent its letter to her last month, she said the company is focusing on various 'capital allocation initiatives' and that she maintains an 'open dialogue' with investors.

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Dave McCombs

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