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Originally published July 16, 2013 at 4:49 PM | Page modified July 16, 2013 at 6:29 PM

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Yahoo still struggling to attract ad revenue

On Tuesday, Yahoo reported that revenue from both display and search advertising dropped in the second quarter, highlighting the challenge that CEO Marissa Mayer faces as she continues to remake the company.

The New York Times

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During her first year as chief executive of Yahoo, Marissa Mayer made big strides in changing the company’s culture. But her ability to reverse Yahoo’s declining revenue remains to be seen.

On Tuesday, Yahoo reported that revenue from both display and search advertising dropped in the second quarter, highlighting the challenge that Mayer faces as she continues to remake the company.

Despite the slow ad sales, Yahoo reported that net income in the last quarter rose 46 percent from the same period of 2012, to $331 million, or 30 cents per share, primarily on the growth in its investment holdings. Revenue over the same period fell 7 percent, to $1.14 billion, falling slightly short of Wall Street expectations and underscoring the company’s trouble reviving growth in its core advertising business.

“I am encouraged by Yahoo’s performance,” Mayer, who has said she expects any turnaround to be a multiyear effort, said in a statement. “Our business saw continued stability, and we launched more products than ever before, introducing a significant new product almost every week.”

Since arriving from Google last summer, Mayer has stemmed Yahoo’s losses in market share for search queries, and she has tried to improve employee morale by offering new smartphones and free cafeteria food. She also helped start a national debate about flexibility and efficiency in the workplace, by ending the company’s work- from-home policy. But perhaps more important, Mayer has shown that she can move quickly and decisively in executing her plan to improve the company’s fortunes.

So far, though, her moves have done little to revitalize the company’s sagging core business in digital display advertising. The number of display ads sold has declined every quarter for the last seven quarters. Display revenue in the second quarter decreased 12 percent over the previous year.

In recent quarters, these losses have been buffered by the rising value of Yahoo’s holdings in Asia, including a 24 percent stake in the fast-growing Chinese e-commerce giant Alibaba, which is expected to make an initial public offering in the next year. Most of the stock price’s 75 percent growth under Mayer has been driven by these holdings. Shares in the company fell about 1 percent in after-hours trading.

Mayer has asked investors for patience on turning around the ad business. She has said the company would focus first on developing its people, then its products. Already, the company has redesigned Flickr, the popular photo service, revamped its home page and released mobile apps for popular services like mail and weather. She said the refreshed products were meant to build “delightful” and “entertaining” experiences into the daily habits of their users.

Mark Mahaney, an analyst at RBC Capital Markets, said the flurry of moves gave him some hope.

“We are still believers in a potential turnaround story,” he said. “Although there has been little quantifiable evidence of an improvement to date, the increased velocity of product innovation and acquisitions at Yahoo make us optimistic.”

In addition to spending more time on recruiting (and lengthening the time it takes to hire a new employee to 22 days, from eight days, according to a report from Glassdoor.com, a site that collects company reviews from employees), Mayer has brought in engineering talent for social, mobile, gaming and video products through a string of 17 acquisitions.

The recent $1.1 billion acquisition of the popular microblogging site Tumblr has been the most prominent purchase, delivering both a younger and more socially connected audience to Yahoo. But it has also generated skepticism as to whether Tumblr’s popularity can be turned into serious dollars.

“Billions of pages of lower-quality content and a user base that may push back against advertising may prove difficult to monetize,” said Colin Gillis, an analyst at BGC partners, who thinks the company’s shares may be ripe for a pullback, when combined with flattening revenues and potentially lower earnings from the company’s equity holdings.

Other Yahoo purchases, like Qwiki, a New York based startup that allows users to produce short videos on their phones, and Xobni, a Silicon Valley firm that helps people more easily search their mobile in-box, have brought Yahoo talent and technology in the mobile and video space — areas where Facebook and Google, the company’s rivals, have reported stronger advertising growth to date, and signal that Mayer is moving to compete in those areas.

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