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Yahoo pushes back against activist as sales gain

Yahoo! Inc. Chief Executive Officer Marissa Mayer delivered a message yesterday to activist shareholder Starboard Value LP: I've got this.

Mayer began a defense of her leadership yesterday with a third-quarter earnings report that included sales that topped analysts' estimates. She followed up with a conference call where she talked up her stewardship of the company, ticking off a list of points to show that her turnaround effort is making progress. Mayer argued she has a clear acquisition strategy for growth and said she is focused on maximizing value for shareholders.

The comments show how Mayer is going on the offense after facing pressure from Starboard -- even though she didn't once mention the activist fund in her remarks. Last month, Starboard questioned Mayer's management and called for a breakup of the Sunnyvale, California-based company, in order to unlock more shareholder value. Starboard also asked that Yahoo cease from dealmaking and cut costs.

"Today was really a good opportunity for us to show the progress we've made," she said in an interview with Bloomberg News yesterday. "We were able to reap the fruits of some of what we've been sowing over the past few years."

Starboard didn't respond to a request for comment.

For Mayer, Starboard is another challenge in her Yahoo tenure that began in July 2012. Yahoo's online-advertising business continues to be a laggard behind rivals including Google Inc. and Facebook Inc. Mayer fired her chief operating officer earlier this year. She has faced questions about her commitment to clients after being late for a dinner with advertisers in June, something she apologized for after the event.

In the interview yesterday, Mayer said she hasn't met with Starboard and that she is aligned with them on certain topics, such as tax efficiency and capital allocation.

"We will meet with them and engage with them," she said. "We take all of our investor input seriously."

The CEO made her case for Yahoo's progress after the company yesterday reported third-quarter revenue, excluding sales shared with partner websites, was $1.09 billion. That was up 1.5 percent from a year earlier and exceeded analysts' average estimate of $1.05 billion, according to data compiled by Bloomberg.

For the current quarter, Yahoo forecast revenue of $1.14 billion to $1.18 billion, compared with analysts' average estimate of $1.17 billion.

Trajectory Change?

"To have 1 percent growth be better than expected says something about Yahoo at the moment," said Ben Schachter, an analyst at Macquarie Securities USA Inc. "It's good to see the right trajectory, but it doesn't change the story dramatically."

Yahoo shares added 3.6 percent to the equivalent of $41.61 in German trading at 9:13 a.m. in Frankfurt, after rising as much as 4.8 percent in extended U.S. trading. The stock closed at $40.18 in New York and is down less than 1 percent this year, compared with a 5 percent gain in the Standard & Poor's 500 Index.

Third-quarter profit, excluding items such as stock-based compensation, was 52 cents a share. Analysts had projected 30 cents a share. Net income attributable to Yahoo was $6.77 billion, up from $296.7 million a year earlier.

The company got a one-time boost of more than $9 billion before taxes last month from a sale of part of a stake it owns in Chinese e-commerce company Alibaba Group Holding Ltd., which still makes up more than half of Yahoo's valuation. Yahoo said today it's paying about $3.3 billion of taxes related to the share sale. The Web portal retains a stake of about 15 percent in Alibaba.

Yahoo also accelerated share repurchases over the quarter with an unidentified financial institution, the company said today. The transaction was completed Oct. 17, resulting in 23.5 million shares repurchased for $933 million, Yahoo said in today's statement.

The company ended the quarter with $12 billion in cash, compared with $5 billion as of Dec. 31.

Mayer also addressed taxes, a key point of concern for investors who want to see Yahoo's remaining stake in Alibaba monetized more efficiently. The Web portal has hired tax experts and is looking at some "promising" options to help lower the tax hit when the rest of the Alibaba stake is sold, she said. The company plans to give an update by the next earnings call on what those efforts have accomplished.

"Many have pointed out the value accretion that would occur if this final tranche were to be taxed upon sale at a lower rate than previous sales," Mayer said during the call. "We are acutely of aware of this."

Cost Cuts

Yahoo has made recent moves to be more efficient, with the closing of an office in Amman, Jordan, which is eliminating about 80 jobs. The company is also trimming about 400 positions at its Bangalore, India, office. During the call, Mayer said she has shuttered eight offices in total as she looks to drive savings that can be reinvested into the business.

Beyond taxes, the company's Alibaba stake and trimming costs, Mayer continues to need to prove herself. Yahoo's main online advertising business -- display ads -- generated $447 million in revenue in the third quarter, down 5 percent from a year earlier.

Mobile revenue made progress, though whether the sales will come quickly enough to offset declines in other areas remains unclear. Mayer said mobile revenue was more than $200 million in the third quarter and estimated gross revenue in mobile will exceed $1.2 billion this year.

"It wasn't a train wreck, but there was nothing in the core business that made me say, 'Wow, look at this,'" said Colin Gillis, an analyst at BGC Partners LP in New York.

Making Investments

Mayer is boosting spending in some areas, such as startup investments. Earlier this year, the Web portal agreed to acquire analytics startup Flurry Inc. for more than $300 million. Yahoo is also close to investing in mobile-messaging startup Snapchat Inc., a person with knowledge of the situation has said.

Mayer said the investments have helped boost user growth at Yahoo. The company's total user base, including blogging platform Tumblr, has expanded to more than 1 billion and mobile users are at about 550 million, she said. Tumblr, which Yahoo bought for about $1 billion last year, should make about $100 million in revenue next year, she added.

Mayer has also gone after more premium content. In June, Yahoo said it had signed a deal for the sixth season of "Community," which stars Joel McHale and had formerly run on NBC. The Web portal is also slated to carry two comedies featuring 30-minute episodes.

In the interview yesterday, Mayer said she realizes "that one quarter doesn't a year or a transformation make." Still, she said she was encouraged by some of Yahoo's results and added that "there's interesting signs of positive trends."

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