Are Yahoo's Earnings Good Enough?

Its first-quarter profit and revenue numbers beat Wall Street's estimates, but they may not be sufficient to prompt Microsoft to boost its offer

Yahoo's (YHOO) first-quarter results reinforce the company's view that Microsoft's $31-a-share takeover offer isn't high enough. Microsoft (MSFT) may beg to differ.

Revenue, excluding the amount paid to advertising partners, rose to $1.35 billion, Yahoo said on Apr. 22. That beat forecasts of $1.32 billion. Yahoo management and directors have said Microsoft's cash-and-stock offer "significantly" undervalues their company. Yahoo needed to meet or beat growth forecasts to justify that view.

"The quarter's results underscore the fact that our strategy and investments are beginning to pay off," CEO and co-founder Jerry Yang said on a conference call with analysts. "Our board and management are committed to choosing a path to maximize stockholder value and will not enter into any transaction that does not recognize the full value of this company."

Threatening to Go to Stockholders

How good were the results? First-quarter profit of $542 million was fueled largely by proceeds from the initial public offering of, the Chinese e-commerce site majority-owned by Yahoo. Excluding the $401 million noncash gain from the IPO, profit was 11¢ a share, better than the 9¢ Wall Street was expecting. But it may not have been enough to get Microsoft to hike its bid, made public Feb. 1.

Microsoft has resisted increasing its offer and has threatened to take the proposal straight to shareholders if Yahoo doesn't agree to its terms by Apr. 26. Microsoft CEO Steven Ballmer suggested even before Yahoo's first-quarter results were released that Microsoft may not be moved by the company's quarterly performance. "I wish Yahoo all the success with its results, but it doesn't affect the value of Yahoo to Microsoft," Ballmer said at the launch of Microsoft's Web portal for North Africa, according to Reuters.

There's little doubt Yahoo is valuable to Microsoft, which wants to make the acquisition to help it compete with Google (GOOG) in the lucrative market for online ads. But Ballmer & Co. may not have seen enough in the first-quarter results to compel them to increase the offer before nominating a slate of directors who would be more amenable to Microsoft's terms.

During an earnings call, Yang and President Sue Decker tried to persuade analysts that Yahoo has a plan for reversing the growth slump that made it vulnerable to a takeover offer in the first place. The executives said repeatedly that the first-quarter results showed they were on track to meet the aggressive financial goals outlined in the three-year plan Yahoo showed investors (, 3/18/08). Under that plan, Yahoo anticipates almost $9 billion in annual revenues by 2010.

Few Opinions Changed

For all the assurances, analysts were not convinced. "Yahoo has been struggling for several quarters, if not several years now," says Cantor Fitzgerald analyst Derek Brown, who has a $31 price target on the stock. "The likelihood that everything changes in one quarter does not seem likely." In extended trading, after the results were released, Yahoo stock slipped 15¢, or 0.53%, to 28.39.

To deliver on its goal, Yahoo will need to overhaul the online display advertising market, in particular, a change in the way many Web publishers buy and sell advertising. A cornerstone of Yahoo's plan is AMP!, the online advertising exchange it rolled out last month. AMP makes it easier for marketers to buy large amounts of targeted ad space across a variety of Web sites by creating a marketplace for Yahoo, smaller ad networks, and outside publishers to sell their inventory.

Yang has other plans for boosting growth, including an agreement to outsource some search-related advertising to Google. But all of these measures will take time that Yahoo doesn't have. Even after a decent first quarter, analysts remain confident Microsoft will prevail. The only question: At what price?

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