By spinning off its stake in Alibaba Group Holding Ltd., Yahoo! Inc. will remove a key reason for investors to hold the stock -- increasing pressure on Chief Executive Officer Marissa Mayer to revive growth from other assets.
While shareholders cheered Yahoo’s tax-free plan to distribute its $40 billion holding in the Chinese e-commerce company as a separate public firm, the Sunnyvale, California- based Web portal issued a revenue forecast that fell short of estimates, underscoring the challenge Mayer faces in reviving sales, which have been stagnant for five years. The company’s current market capitalization of $45.4 billion is less than the combined value of the stake in Alibaba and Yahoo’s $8 billion holding in Yahoo Japan Corp.
By exiting the Alibaba stake, Mayer will no longer have the cover provided by owning part of China’s biggest online marketplace. While Mayer has made acquisitions, restructured the company and taken steps to boost the appeal of Yahoo’s products, she’ll now have to start delivering tangible results after more than two years as CEO.
“Now the core business is in focus,” said Sameet Sinha, an analyst at B. Riley & Co. “She was distracted with all this deal-making. So you did that, good job. Let’s move on.”
Mayer will need to extract more revenue from new businesses, including mobile and video, while making sure that Yahoo benefits from demand for search services, Sinha and other analysts have said.
For the fourth quarter, Yahoo reported sales, excluding revenue shared with partner websites, fell 1.8 percent to $1.18 billion, matching analysts’ average estimate. Profit, excluding items such as stock-based compensation, was 30 cents a share, topping the projection for 29 cents, according to data compiled by Bloomberg.
For the first quarter, Yahoo forecast sales of $1.02 billion to $1.06 billion, short of the $1.1 billion projection.
Mayer said Yahoo’s main business of selling advertising to Web users is recovering, with display-ad sales on track to climb this year.
The CEO has been investing in products, partnerships and ad services to expand Yahoo’s reach and restore growth, including on mobile devices where users increasingly access digital content. Mobile revenue for the fourth quarter was $253.8 million, Yahoo said. Mobile is part of what Mayer called mavens, or newly emerging businesses at Yahoo that also include video and social.
“The core of Yahoo’s business is returning to health and stability,” Mayer said on the call.
Yahoo shares rose 4.5 percent to $50.16 at 8:50 a.m. in New York before the markets opened. The stock rose 25 percent in 2014, while the Standard & Poor’s 500 Index gained 11 percent.
Display revenue, minus sales passed on to partners, declined 5 percent in the quarter to $464 million, hurt by sales at Yahoo’s traditional desktop business. In an interview, Mayer said she’s confident the display business can return to revenue growth.
“We spent the last two and a half years building a foundation for growth,” Mayer said. “There will be some steps forward and steps backwards. We will have some ups and downs, as any company in transition and transformation does.”
The search business showed better results with $464 million in revenue, little changed from a year earlier. The service’s prospects improved in November after Yahoo struck a deal to replace Google Inc. as the default search engine on Firefox browsers in the U.S. Mayer also said she’s open to new deals, including with Apple Inc.
Yahoo’s core search technology comes from Microsoft Corp. under an agreement that’s up for review this year. Mayer said on the call the companies are engaging in discussions about a number of different avenues, without giving details.
“You’ll probably have another couple of quarters before people really start getting snarky again about where the core business is going,” Sinha said.
Mayer decided on the spinoff after Starboard Value LP and other investors pushed her to return cash to shareholders, find ways to cut taxes and avoid major acquisitions.
The spinoff, which will include a “legacy, ancillary Yahoo business,” will be completed in the fourth quarter, after the expiration of Yahoo’s one-year lockup agreement on the Alibaba shares, Yahoo said in the statement. Yahoo didn’t specify what the business -- which has $50 million in earnings before interest, taxes, depreciation and amortization -- will be and said the spinoff would be subject to regulatory approval.
“For better or worse, the resolution of the Alibaba stake returns investor attention to operations,” said Paul Sweeney, a Bloomberg Intelligence analyst. “This quarter’s results show there is much more work for Marissa and her team to do.”
Yahoo will be a fraction of its size following the spinoff. With the company currently trading at a discount to the value of its Asian assets, investors aren’t giving Yahoo credit for its about $7 billion of net cash and get to own the core U.S. business for free. The Internet advertising and search business that would be left after the disposal of its Asian assets should be valued at about $5 billion to $8 billion, according to analysts’ estimates compiled by Bloomberg.
For his part, Chief Financial Officer Ken Goldman said management doesn’t mind the remaining business getting more attention from investors with the spinoff.
“We actually welcome the focus on the core business,” Goldman said in an interview. “We came to the company with the expressed purpose of returning it back to its iconic state.”
Strategic buyers are expected to shed assets in 2015. For more, see our story on spinning off non-core assets.