Yahoo Will Get to Hold Onto More of Alibaba

Updated July 15, 6:22 p.m. ET

Yahoo will get to hold on to more of its most valuable asset, the high-flying Chinese e-commerce company Alibaba.

Alibaba, which is prepping for a huge public offering in the U.S., has agreed to let Yahoo keep 68 million more shares than originally planned when the company goes public, Yahoo disclosed in its quarterly earnings report Tuesday.

Yahoo was previously required to sell 208 million shares, or about 40 percent, of its current stake in Alibaba during its IPO. Now the Internet giant will only have to sell 140 million shares. Alibaba’s IPO could give the Chinese company a valuation of as much as $150 billion, according to some estimates, making it a valuable asset for Yahoo.

Yahoo currently has about a 24 percent stake in Alibaba. “We are very strong believers in Alibaba over time,” Yahoo Chief Financial Officer Ken Goldman said in a conference call with investors. The company also announced that it would return at least half of the after-tax proceeds it makes from Alibaba’s IPO directly to shareholders.

Not everyone is convinced that Yahoo’s dependence on Alibaba is a good thing. “They’re suggesting that the capital is much better suited in an investment in Alibaba Group than what they can actually do with the cash,” says Rick Summer, an equity analyst at Morningstar. “It’s an admission that Yahoo doesn’t have enough opportunities to invest in and they don’t have confidence to return the cash to shareholders.”

Beyond Alibaba, Yahoo’s earnings report was mostly disappointing. The company posted revenue excluding traffic acquisition costs of $1.04 billion in the second quarter, a 3% drop from the same period last year and well below analysts’ estimates. Earnings per share were 37 cents, below analyst estimates of 38 cents. Operating income plunged from $137 million in 2013 to $38 million in 2014. Revenue from display advertising excluding traffic acquisition cost was $394 million, off seven percent from the same period last year. Search revenue, though, was a bright spot, increasing from $403 million last year to $428 million this year.

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

During the conference call, Mayer touted user growth as proof that Yahoo still has considerable room to grow its revenue. The company’s sites now have 450 million monthly users on mobile, and its video site, Yahoo Screen, increased views 67% year-over-year. Upcoming content initiatives aimed at further goosing growth include a series of daily concert broadcasts for a year and the exclusive airing of a sixth season of the cancelled NBC sitcom Community.

Yahoo shares sunk a bit more than two percent following the company’s conference call with investors.