Yahoo Inc. Earnings Fall Following Big Investments in Search, Product Development

By Markets Fool.com

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Creator Paul Feig's Other Space is one of several originals Yahoo is fundingCredit: Yahoo via Tumblr.

Shares of Yahoo! stock had fallen 1.44% as of 4:29 p.m. ET Tuesday evening, as investors jeered first-quarter results that came short of expectations.Here's a closer look at the final totals versus Wall Street's projections:

YHOO Revenue YOY Growth EPS YOY Growth
Consensus estimate $1,054.21 million (3%) $0.18 (52.6%)
Q1 actuals $1,043 million (4%) $0.15 (60.5%)
DIFFERENCE ($11.21 million) (1%) ($0.03) (7.9%)

Sources: S&P Capital IQand Yahoo press release.

Commenting on the results, CEO Marissa Mayer said in a press release:

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We anticipated that we would grow GAAP revenue ahead of revenue ex-TAC and EBITDA, and that's precisely what we saw this quarter. For the next phase of the transformation, we will focus on accelerating our GAAP revenue growth while managing our margins and costs.

What went right:Mayer is correct to point to top-line gains. Gross revenue was up 8.2% before TAC, or traffic acquisition costs. Mobile (up 61.5%) and in-house search (up 19.5%) helped produce the gain. We may see even more of this sort of growth in future quarters now that Yahoo! has reached an amended, non-exclusive accord with Microsoft to pursue search deals on any platform. Expect Mayer to go where the money is.

What went wrong:Growth didn't come cheap. TAC soared 298.9% as search became more expensive. Specifically, search-related TAC jumped over a hundredfold -- from $686,000 to just over $100 million. Development costs for new and existing apps also surged, rising 21.8%and taking a bite out of profits. Separately, cash flow from operations, or CFFO, suffered a $3.28 billion hit from taxes due on the sale ofAlibaba stock. Without it, CFFO was on track to more than double.

What's next:Yahoo! chose not to provide a second-quarter outlook in its press release. Analysts tracked by S&P Capital IQ have the company generating $1,039.5 million in revenue and $0.20 a share in adjusted profit, versus $1,040.37 million and $0.37 a share in last year's Q2. Longer term, analysts have Yahoo! earnings declining an average of 0.31%annuallyover the next three to five years.

And in terms of the overall business? Investors should be watching for signs that Mayer is making good on her promise to reverse the equation and grow revenue faster than TAC. If she proves up to the task, cash and profits will flow like a wild mountain river, flush after the thaw.

The article Yahoo Inc. Earnings Fall Following Big Investments in Search, Product Development originally appeared on Fool.com.

Tim Beyers isn't much of a yodeler but he is a member of theMotley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim'sweb homeandportfolio holdingsor connect with him onGoogle+,Tumblr, or Twitter, where he goes by@milehighfool.The Motley Fool recommends Yahoo. The Motley Fool owns shares of Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.