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

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:

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.

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