Photo courtesy: Ethan Miller—Getty Images
By Tom Huddleston Jr.
July 15, 2014

Yahoo’s second-quarter results show the fourth drop in revenue in the past five quarters, but the company’s shares briefly spiked in after-hours trading on the news that Yahoo will hold onto a larger chunk of its stake in Chinese e-commerce giant Alibaba than previously thought.

The search giant’s revenue, minus traffic costs, came in at $1.04 billion in the quarter ending June 30 – down 3% from the same period a year earlier and slightly below analysts’ prediction of $1.09 billion, according to data compiled by Bloomberg. Yahoo (YHOO) itself had predicted its revenue, without traffic costs, would be between $1.12 billion and $1.16 billion this past quarter. Excluding certain costs, the company’s adjusted profit climbed slightly to 37 cents per share from 35 cents.

“Our top priority is revenue growth and by that measure, we are not satisfied with our Q2 results,” Yahoo CEO Marissa Mayer said in a statement. “While several areas showed strength, their growth was offset by declines.”

Despite Mayer’s earlier promises to step up Yahoo’s advertising game this year, the company’s digital ad revenue fell 7% in the second quarter to $394 million, minus traffic costs, down from $423 million during the same period last year. Search ads continued to fare better. Excluding traffic costs, revenue from search ads increased 6% to $428 million from $403 million in Q2 2013.

Mayer said digital “remains an area of investment and transition,” and added that Yahoo “need[s] to work faster to ameliorate the negative trends.”

Despite the lackluster results, Yahoo shares rose slightly in after-hours trading before heading downward once again. Any investor excitement likely came as a result of two pieces of news about the upcoming initial public offering of Alibaba, in which Yahoo holds a 24% stake. Yahoo said in its earnings release that the company plans to return at least half of the post-tax proceeds from the Alibaba IPO to Yahoo shareholders.

Meanwhile, Yahoo also announced an agreement with Alibaba to reduce the number of shares the U.S. company must sell as part of the pending IPO from 208 million to 140 million. Yahoo’s Alibaba stake is currently its most attractive asset, as the Chinese company recently valued itself at about $130 billion, which would make Yahoo’s holdings worth potentially more than $30 billion. The more of that asset Yahoo can hold onto, the more attractive it is to its own investors.

Still, those investors had been hoping for an improvement in Yahoo’s advertising revenues. The company is looking to become a regular draw for digital customers after building up its video library with Yahoo Screen and launching a year-long concert partnership with Live Nation and a handful of planned original television series. In a conference call to discuss the company’s earnings report, Mayer talked up those new Yahoo content offerings, as well as the company’s recent deals to secure the rights to Saturday Night Live and the recently revived, former NBC sitcom Community.

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