Yahoo (YHOO) reported mixed second-quarter results Tuesday. Revenue, excluding traffic acquisition costs, fell 5%, while GAAP revenue dropped 23%, as softness in display revenue and turnover at the sales level impacted results toward the second half of the quarter. The attractiveness of competing sites like Facebook and Google (GOOG) is becoming increasingly more difficult for Yahoo to overcome, in our opinion. Income from operations, however, still advanced 9%, while net earnings per share jumped 18% from the prior-year period. Cash flow from operations fell 5% from the same period a year ago, while free cash flow shrunk 25% to $96 million during the quarter. We don’t expect a material about-face in Yahoo’s core U.S. operations, with the likes of Facebook and Google growing stronger, but we do think Yahoo could still unlock potential in its Asian assets (it owns 35% of Yahoo Japan and 25% of Alibaba.com). Though we don’t think Yahoo represents a compelling value play at this time, especially given its troubled top line, we can’t rule out its candidacy as a target. We’re neutral on its shares.
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