Yahoo's Mixed Message

An optimistic announcement is meant to show the Internet portal doesn't need help from Google, News Corp., or AOL. Do shareholders buy it?
Yahoo CEO Jerry Yang Getty Images

Here's the message Yahoo! (YHOO) wanted to convey with its unscheduled update to investors: We're sticking by our growth forecasts despite the slowing economy, and that's all you need to know about why we're strong enough to keep rebuffing that pesky Microsoft takeover bid.

Here's the message many investors took away from the Mar. 18 declaration: All those serpentine maneuvers Yahoo has reportedly undertaken to keep Microsoft at bay—including talks with News Corp. (NWS), Google (GOOG), and AOL (AOL)—aren't panning out. So Yahoo is sticking to a strategy of growing the best it can on its own.

Reiterating the 2008 projections it gave in late January, just days before Microsoft's unsolicited bid, Yahoo said it expects to bring in between $4.32 billion and $4.8 billion in full-year profits on $7.2 billion to $8 billion in sales. Moreover, the company expects annual revenue to reach $8.8 billion by 2010. "Yahoo is positioned for accelerated financial growth—we have a powerful consumer brand, a huge global audience and a highly profitable operating model," Yahoo Chief Executive and co-founder Jerry Yang said during the presentation.

Remaining Low Amid Market Rally

Yahoo also strove to ease speculation the current quarter might produce an earnings disappointment that would send the one-time Web kingpin scurrying into Microsoft's protective embrace. First-quarter revenue is still expected to total between $1.68 billion and $1.84 billion. Should Yahoo miss Wall Street's expectations when it reports its first quarter results in April investors might start dumping its shares, fearful Microsoft will lower its bid.

Yahoo's update helped boost its shares by 7% amid a broad market rally spurred by the Federal Reserve's latest cut in lending rates. But despite the gain the stock remained nearly $2 dollars below the roughly $29.50 a share that Microsoft's cash-and-stock bid is now worth—a sign investors don't have much confidence Microsoft will sweeten its offer.

The reaction among industry analysts was mixed. In a note to investors, BMO Capital Markets analyst Leland Westerfield wrote Yahoo had shown its goals were even "more optimistic" than analysts previously thought. "Yahoo is presenting its case to remain independent of Microsoft, or at minimum, support why the buyout offer from Microsoft is insufficient in the Yahoo board's estimation," wrote Westerfield.

Online Ad Revenues Feeling the Pain

Yet Yahoo's bullish forecast, including a promise to double its operating cash flow to $3.7 billion by 2010, sounded hollow to some. "To say they are being aggressive is an understatement," said UBS analyst Benjamin Schachter. "This is a company that hasn't executed for a couple years, why should we believe that they will be able to grow the top line while keeping costs down?"

The ambitious projections may be even harder to meet given the increasingly grim economic outlook. Separately on Mar. 18, research firm eMarketer reduced its 2008 estimate for U.S. online ad revenues to $25.8 billion, down from an earlier forecast of $27.5 billion. Though the floundering economy would harm ad-supported sites less than other media—thanks to a shift in marketing dollars from traditional media to the Web—it will still slow the market's growth, said David Hallerman, a senior eMarketer analyst.

Share Prices Have Slipped

Analysts and investors have been burned before by buying too heavily into Yahoo's growth hype. A year ago many took management's assurances that a new search-advertising system, Panama, was performing better than expected as an indication profits would beat expectations. Instead, Yahoo failed to show a significant boost from higher ad-clicks after the system's debut and reported an 11% drop in profits during the first quarter of 2007 (, 4/18/08).

Microsoft did not return calls seeking comment. The software maker has thus far refused to raise its bid despite Yahoo's assertion the offer "significantly undervalued" the company. Instead, Microsoft threatened to nominate a slate of directors to Yahoo's board who would favor the deal (, 3/6/08). The offer, initially worth $44.6 billion, now values Yahoo at $42.4 billion because Microsoft's share price has slipped since the bid was launched.

Though the companies have reportedly been talking in recent days, there's been no sign that Microsoft is willing to open its purse any wider.

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