Why Yahoo’s revenue continues to decline

Weakness in Yahoo’s display ad business caused revenue decline in 2Q quarter

Yahoo (YHOO) announced its 2Q14 earnings on Tuesday this week, which was below analysts’ expectations. Yahoo’s display advertising revenues declined by 7%, while its search advertising revenues increased by 6%. Within its display ad business, the ad inventory grew by 24%, while the ad pricing declined by 24%. The pricing decline was surprising and Yahoo blamed it on two issues.

The first issue was the delay in execution of its Yahoo Ad Manager Plus product, which it considers as an important driver of its display ad business growth. The second issue was the lower-than-expected contribution from premium ads which resulted in an unfavorable mix. On the positive side, the success of Digital Magazines helped Yahoo grow its display ad inventory. Yahoo’s search advertising business is doing better. However, its share in the U.S. core search market declined in the last three months, according to Comscore.

Yahoo’s position in digital advertising business worsens

According to a report from eMarketer and as the previous chart shows, Google (GOOGL) and Facebook (FB) leads the digital ad revenue market. However, the bad news for Yahoo is that Microsoft (MSFT) could overtake it in the market this year. IAC (or IACI), AOL (or AOL), and Twitter (TWTR) are some of the smaller players in this market, which could give Yahoo more competition to in the future.

Yahoo’s focus has now shifted to mobile 

The mobile advertising market is expected to grow at a faster rate than the overall digital advertising market. Although Yahoo has managed to grow its mobile monthly active users from 200 million in 2Q12 to 450 million in 2Q14, it hasn’t monetized its mobile ad business as well as it would have liked. However, Yahoo is optimistic that its new products Aviate and Gemini will help it grow its mobile display and mobile search business in future.

Yahoo also lags behind in video ad market

According to eMarketer, the U.S. video digital ad spending will grow by 41% this year and will continue to grow at a healthy rate in future. However, Yahoo’s position in this market is small and faces stiff competition from YouTube. Although Yahoo is trying to grow its video ad business by introducing a few original series, it will need to offer more content to become an important player in this market.

Yahoo’s stake in Alibaba the only good news for investors

Alibaba plans to go public in the U.S. soon. The company has valued itself at $130 billion, but some analysts’ believe that its valuation could be higher after the initial public offering (or IPO). Yahoo currently holds a 23% stake in Alibaba. Initially, Yahoo was required to sell 40% of its Alibaba’s stake at the IPO. However, it’s now required to sell only 27% of its Alibaba stake. This is good news for Yahoo’s investors because it allows Yahoo to hold on to Alibaba’s shares for longer. This will help the shares’ value grow as Alibaba’s business grows. Yahoo plans to return at least half of the after-tax proceeds from the IPO to shareholders, which is also good news for investors.