Earnings Preview: Did momentum build in Yahoo 1Q?

SAN FRANCISCO (AP) -- Yahoo's first-quarter earnings report will show whether investors' faith in CEO Marissa Mayer's ability to turn around the Internet company is justified.

WHAT TO LOOK FOR: The results, due out Tuesday afternoon, are being released as Yahoo's stock price hovers around $25, its highest level since then July 2008. Shares are up about 55 percent since Mayer defected from Google Inc. last July to lead Yahoo. The rally is tied to Wall Street's confidence in Mayer, who spent 13 years helping to build Google into the Internet's most powerful company, as well as the rising value of Yahoo's 24 percent stake in China's Alibaba Group.

Yahoo's financial breakdown for the opening three months of the year will give Wall Street a better sense of whether Mayer's efforts to revive the company's revenue growth are gaining momentum. Analysts are only expecting a 2 percent rise in revenue from the same time last year, so it will likely be a major disappointment if Yahoo can't clear that low hurdle.

Mayer, 37, has been trying to make Yahoo's online services more engaging and easier to use in hopes that the improvements will encourage Web surfers to visit more frequently and stay for longer. That would help Yahoo sell more advertising to marketers who have been funneling more of their online budgets to Google and Facebook Inc. in recent years. Mayer also has been trying to recast Yahoo's services so they are better suited for the growing audience consuming content on smartphones and tablet computers.

The numbers also should highlight the ongoing importance of Alibaba Group, which has been contributing a significant portion of Yahoo's income during the past 18 months. Yahoo already reaped a $7.6 billion windfall from selling half its stake in Alibaba last year. The remaining holdings figure to be worth even more because Alibaba's market value keeps climbing as its Internet services attract more traffic and generate more revenue.

Based on recent disclosures contained in Yahoo's regulatory filings, J.P. Morgan analysts estimates Alibaba's market value is currently about $60 billion, up from an estimated $40 billion last September. That means Yahoo's remaining stake could be worth about $14 billion, before taxes. After factoring in the hefty tax bill that Yahoo would incur by selling the rest of its Alibaba stake, J.P. Morgan's Doug Anmuth estimates the Chinese company is currently worth at least $7.42 per share to Yahoo's stockholders.

Yahoo is expected to sell its remaining stake when Alibaba goes public. The initial public offering of stock is likely to occur this year or next.

Flush with cash from last year's Alibaba deal, Yahoo has become one of the biggest buyers of its own stock. That's another reason why the shares have been rising. The company, which is based in Sunnyvale, Calif., spent $2.2 billion buying back 126 million shares last year. Anmuth estimates Yahoo spent another $1 billion buying back stock during the first quarter.

But at some point, Mayer will have to prove her formula will produce revenue growth somewhere closer to the rates of its peers. Yahoo's revenue, minus ad commissions, rose 2 percent last year, ending three straight years of declines. But Google's revenue minus ad commissions rose 21 percent, while Facebook's total revenue climbed 37 percent.

As part of its makeover under Mayer, Yahoo has redesigned its home page, email service and Flickr photo-sharing service. The company also has made a series of small acquisitions aimed primarily at bringing more engineers with expertise in mobile applications and social networking.

The earnings conference call will also give analysts an opportunity to ask Mayer about the state of Yahoo's employee morale since she decided to end previous arrangements that allowed an unspecified number of people to work from home. In a memo sent in late February, Yahoo announced all workers would have to start coming into the office every day beginning in June.

WHY IT MATTERS: Even while the company's revenue was sagging, Yahoo's website remained one of the most popular destinations on the Internet. If Mayer's plans are successful, it should spur more competition that could produce more innovation and options for both consumers and advertisers.

WHAT'S EXPECTED: Analysts polled by FactSet project adjusted earnings of 25 cents per share on revenue of $1.1 billion, after subtracting Yahoo's ad commissions.

LAST YEAR'S QUARTER: Yahoo earned $286 million, or 23 cents per share, on revenue of $1.08 billion.