By Alexei Oreskovic
SAN FRANCISCO (Reuters) - Investors cheered Yahoo Inc's plans to keep a larger-than-expected stake in Chinese e-commerce giant Alibaba Group Holding Ltd, overlooking continuing softness in its core online advertising business.
Yahoo rose nearly 1 percent to $33.70 in after hours trading as it said it would sell fewer shares than originally agreed from its 24 percent stake when Alibaba goes public.
That means Yahoo will reap more gains if Alibaba's stock surges after the IPO, said Ben Schachter, an analyst with Macquarie Research.
"The idea is you don't want to have to sell at the IPO price, you want to sell later to potentially get the appreciation going up," he said.
Yahoo's core business of selling online display and search advertising remained soft in the third quarter under fierce competition from Facebook Inc and Google Inc .
Prices for Yahoo's display ads declined 7 percent year-over-year, while the number of display ads sold increased roughly 1 percent.
Revenue from search advertising, which accounts for 39 percent of the total, was up 3 percent year-over-year, excluding certain costs.
Yahoo Chief Executive Marissa Mayer pointed to improvements in user traffic to the company's various Web destinations and said the increasing usage would start to show up in Yahoo's revenue growth in the coming year.
She said that users of Yahoo's mobile products increased 15 percent from the previous quarter to 390 million, while traffic to a revamped version of Yahoo's sports website had doubled.
"We are in this to win and to win big," Mayer said during a post-earnings video conference that was streamed live on the company's website.
She said new "native" ad formats that Yahoo had begun experimenting with had encouraging results that could help Yahoo boost revenue on its mobile products, which she described as "under-monetized."
INVESTING FOR GROWTH
Yahoo said it earned $297 million in net income in the third quarter, or 28 cents a share, compared to $3.16 billion or $2.64 a share in the third quarter of 2012, when Yahoo's results included a $2.8 billion gain from the sale of a portion of its stake in Alibaba Group.
Excluding certain items, Yahoo said it earned 34 cents per share, a penny above the average analyst estimate.
Yahoo's stock price has more than doubled since Mayer took the reins in July 2012. But analysts say much of the gain is due to aggressive stock buybacks and Alibaba's expected IPO.
"They're very fortunate that people aren't putting that much emphasis on the core business, they're owning it as a proxy for Alibaba," said Colin Gillis, an analyst with BGC Partners.
Yahoo included Alibaba's second-quarter financial results in its quarterly earnings report on Tuesday.
Alibaba grew revenue 61 percent to $1.74 billion in the April to June period, while net income leapt 159 percent to $707 million. That pace of revenue growth is down from 71 percent in the first quarter, but still exceeded Gillis' forecast for about 54 percent.
Yahoo took down its own forecast for the full 2013 year, trimming the midpoint of its net revenue guidance from $4.5 billion to $4.425 billion. The company also said its adjusted operating income would be lower than it previously projected.
"They're clearly investing, putting more dollars to work here," said JMP Securities analyst Ronald Josey, adding that it was unclear when those investments would start to pay off.
Mayer, a former Google executive, has focused on revamping Yahoo's Web products since joining the company in July 2012.
But while Mayer has brought back some buzz to the Yahoo brand, analysts say the company's business remains challenged by an industry-wide shift to automated online advertising exchanges. These exchanges, which allow marketers to buy ads across a wide variety of websites, have pushed down the price of the premium display ads that Yahoo sells.
"The premium business is changing and getting smaller," said BGC Partner's Gillis. Until Yahoo adjusts its online ad sales business to the changes, "it's going to be painful," he said.
The Web portal reported $1.081 billion in net revenue, which excludes fees paid to third-party websites, in the three months ended September 30, compared with $1.089 billion in the year-ago period. The average analyst expectation was for net revenue of $1.082 billion, according to Thomson Reuters I/B/E/S.
(Editing by Andre Grenon and Stephen Coates)