During her first year as chief executive of Yahoo, Marissa Mayer made big strides in changing the company’s culture. But reversing Yahoo’s declining revenue is turning out to be a far stiffer challenge.
The difficulty was underscored Tuesday, when Yahoo reported that revenue from the company’s two primary moneymakers — display and search advertising — fell sharply in the second quarter.
Since arriving from Google last summer, Ms. Mayer has reversed a decline in Internet traffic, and she has tried to improve employee morale by offering new smartphones and free food in the cafeteria. She also helped start a national debate about flexibility and efficiency in the workplace by ending Yahoo’s work-from-home policy. But perhaps more important, Ms. Mayer, 38, has shown that she can move quickly and decisively in executing her plan to improve the company’s fortunes.
“We have made real progress over the last year,” said Ms. Mayer, in a live webcast, emphasizing several products Yahoo released in that period, including new mobile apps, and a redesign for the home page and search. “The people are here. The engine is now up and running.”
Despite the slow ad sales, Yahoo reported that net income in the quarter rose 46 percent from the same period of 2012, to $331 million, or 30 cents a share, primarily on the growth in its investment holdings. Revenue over the same period fell 7 percent, to $1.14 billion, falling slightly short of Wall Street expectations and underscoring the company’s trouble with reviving growth in its core advertising business.
Slowing revenue from advertisement is at the heart of Yahoo’s decline in revenue. And Ms. Mayer’s efforts have done little to revitalize Yahoo’s sagging core business in digital display advertising. The number of display ads sold has declined every quarter for the last two years. Display revenue in the second quarter, which ended June 30, decreased 12 percent from the period a year earlier. Revenue from search fell 9 percent.
“The reality is, they’re in the early stage of a difficult process,” said Colin Gillis, an analyst with BGC Partners. “We are still a ways away from seeing what this management team can do.”
In recent quarters, the revenue declines have been buffered by the rising value of Yahoo’s holdings in Asia, including a 24 percent stake in Alibaba, the fast-growing Chinese e-commerce company, which is expected to make an initial public offering in the next year. Most of the 75 percent growth in the stock price under Ms. Mayer has been driven by these holdings.
“Yahoo’s flat,” Mr. Gillis said. “Alibaba is a rocket ship.”
Yahoo’s shares fell about 0.4 percent in after-hours trading.
Ms. Mayer has asked investors for patience on turning around the advertising business. She has said the company will focus first on developing its people, then its products.
Already, Yahoo has redesigned Flickr, the popular photo service, revamped its home page and released mobile apps for popular services like mail and weather. She said the refreshed products were meant to build “delightful” and “entertaining” experiences into the daily habits of users.
Mark Mahaney, an analyst at RBC Capital Markets, said the flurry of activity gave him some hope.
“We are still believers in a potential turnaround story,” he said. “Although there has been little quantifiable evidence of an improvement to date, the increased velocity of product innovation and acquisitions at Yahoo make us optimistic.”
Employees also seem to be more optimistic. Yahoo, which is based in Sunnyvale, Calif., has had a notable decline in attrition, and 12 percent of new hires this year were returning Yahoo alumni. Of Ms. Mayer’s 17 acquisitions in the last year, most were to bring in more engineering talent for social, mobile, gaming and video products, she said.
The recent $1.1 billion acquisition of the popular microblogging site Tumblr has been the most prominent purchase, delivering a younger and more socially connected audience to Yahoo. But it has also generated skepticism as to whether Tumblr’s popularity can be turned into dollars. Other Yahoo purchases, like Qwiki, a New York based start-up that allows users to produce short videos on their phones, and Xobni, a Silicon Valley company that helps people more easily search mobile in-boxes, have brought Yahoo talent and technology in mobile and video — areas where Facebook and Google, the company’s rivals, have reported stronger advertising growth.
The deals also signal that Ms. Mayer is moving to compete in those areas. Yet in the earnings webcast she emphasized that investors would not see significant change in overall revenue from new and revitalized products until 2014.