Yahoo! Inc. (NASDAQ:YHOO) has reported rather disappointing first quarter earnings on Tuesday. Yahoo! Inc. (NASDAQ:YHOO) missed on the consensus estimate of $0.18 EPS by 3 cents and missed the expected revenues of $1.054 billion by $11.21 million. Despite these unsatisfactory results, the stock did not drop a lot of its value. UBS Managing director, Eric Sheridan talked on CNBC about Yahoo! Inc.’s earnings miss and shared his opinion on Marissa Mayer’s turnaround strategy for Yahoo.
Sheridan pointed out that there are really two stories behind the lackluster results by Yahoo!. He said that the traditional Yahoo! business of selling digital advertisements on PC’s has been declining over the last few quarters. He pointed out that the ad business has dropped nearly 10% YoY. He said that the ad business is slowly becoming smaller part of the overall portfolio every quarter.
Sheridan mentioned that Yahoo! and Mayer had placed huge bets on Alibaba stake, which is reaping benefits now, as that part of revenue grew by nearly 60% YoY. He feels that Yahoo! is currently undergoing a business transformation. He feels that Mayer should concentrate on making the good revenues as 50% of total revenues to showcase revenue growth. He feels that people are more interested in core Yahoo! business revenue growth. He thinks that Yahoo! will undergo this transformation over the next few quarters.
Yahoo! also indicated during the earnings call that they are looking out for suggestions on what to do with Yahoo! Japan Stake, which is worth about $9 billion.
“We have always believed that Yahoo! is a sum of the parts story, until you get into 2016. You are going to get the spin of the Alibaba stake in the fourth quarter. Investors are going to get that. We have long believed that Yahoo! Japan was the next asset to be monetized. Announcement from Marissa last night came about one or two quarters earlier that we thought we were going to get. [..] If they can monetize that in a tax efficient manner, nobody really has that in parts as well. So That’s another leg of the story,” Sheridan said.
Once Yahoo! spins out what is left of Alibaba and if they spin out Yahoo! Japan stake as well, then Mayer will be left with no option other than improving the core business. In addition, Mayer has also added up the company’s operating cost by $500 million. So will the transformation take place? Sheridan said that there are early signs that the transformation is taking place.
