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These are the three things to look out for in Yahoo’s Q3 earnings

Yahoo reports its earnings this afternoon, US time. Marissa Mayer has now been in charge of the online company for five quarters, and if her turnaround is to be seen as successful, progress in the following areas will be needed.  The turnaround is still in its embryonic stages—RBC Capital Markets believes it  will take three to four years to execute.  But optimism about Mayer’s ability to restore the company to its former glory and expectations of a windfall from the impending IPO of Alibaba, in which Yahoo owns a 23% stake have lifted Yahoo shares to their highest levels since 2006.  While this is a vote of confidence in the new regime, it also means there is increased pressure on management to deliver.

1. Signs that it’s working on its products

Last quarter, Yahoo shed light on the surprisingly good performance of many products which have been revamped and overhauled since Mayer arrived. Daily active users (DAU) for its its mail and weather apps rose sharply, and there was a threefold increase in uploads to Flickr, its photo-sharing service. It will take time for these improvements to translate into profits, but they represent the “first concrete step in the turnaround process,” RBC says. Mayer’s strategy is to reinvigorate the Yahoo brand by designing engaging products. If she gets that right, monetization can follow—or so the thinking goes.

2. Better numbers for search and display advertising

Last quarter, paid clicks increased by 21% compared to a year earlier, driven by redesigns to Yahoo’s search ads and its user interface. But prices-per-click were down 8%, in part due to increased traffic in emerging markets, where rates are lower.  This translated into relatively weak growth of just 5% in search revenues. RBC expects these trends to continue, and is predicting search revenue growth of just 1%. Prices of display ads fell by 12%, driven largely by “programmatic buying,” an automated form of ad trading. RBC is tipping display revenue to fall by another 9%.

3. What’s going on with Tumblr ?

Yahoo’s $1.1 billion acquisition of blogging platform Tumblr in the summer was arguably the signature initiative of the Marissa Meyer era. It opens the door to a younger demographic and increased traffic.  But RBC points out that Yahoo needs to strike a delicate balance between making money on Tumblr through more advertising, and alienating its devoted users.

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