Yahoo Stays on the Hook

Did Tuesday's closing bell toll for Yahoo? In what many were calling the most important earnings report in the company's history, Yahoo managed to best Wall Street's expectations and may have secured a strong enough position to prolong its takeover battle with Microsoft.

A Yahoo! sign in Times Square, NY.

(Chris Hondros/Getty Images)

It fell far short of ending the war. A good-but-not-great quarter will very likely produce some extra pressure to get Microsoft to raise its $43 billion offer, but an air of inevitability continues to hang over the deal.

After the market's close, Yahoo announced earnings of 11 cents a share on revenue excluding commissions paid to advertising partners of $1.35 billion, up 14 percent from a year ago. That was ahead of forecasts of nine cents a share and close to early reports published by the New York Post ("Microsoft and Markets Await Yahoo! Earnings") predicting a beat but not a blowout. Yahoo's top line also got a boost from Chinese operations, which added $401 million in the quarter through its stake in Alibaba.com, an E-commerce site that went public last year.

On the post-earnings call, cofounder and Chief Executive Jerry Yang lauded his firm's performance under pressure and said Microsoft's bid "substantially undervalues Yahoo and our one-of-a-kind global franchise." He left the door to a deal open, saying Yahoo will "continue to be open to any and all alternatives, including a sale to Microsoft."

Leaving the option open is a good idea, since Yahoo's new guidance did little to sweeten the pot. Full-year 2008 revenue forecasts were unchanged at $7.2 billion to $8 billion. It did up the high end of its operating cash flow forecasts for the year by $50 million to $1.775 to $2.025 billion.

That sort of growth would be fine given a weaker economy, but with Microsoft knocking, the resolve of shareholders could waver. Microsoft has threatened a proxy contest designed to oust Yahoo's board if its offer isn't accepted by Saturday. Yahoo maintains some defenses, however, and could still put any deal off until July.

On the call, Yahoo execs said they're closing the gap with Google on search advertising and touted their lead in display ads as the biggest opportunity for the company. Yet Yahoo remains a distant No. 2 in the market behind Google, and execs said that while they're still trying to close the gap, their tentative outsourcing deal with Google in search advertising may mean "there may be more than one way to achieve that goal." Still, Yahoo President Sue Decker said it would be "premature to speculate" on what a deal might look like. As for Panama, Yahoo's own search ad system, the company predicted heftier growth internationally.

For Microsoft's part, CEO Steve Ballmer was plenty ready to speculate on Yahoo's fortunes and the price he's willing to pay. Before the release, he downplayed the impact of Yahoo's results on Microsoft's $31-a-share bid, telling Reuters, "I wish Yahoo all the success with its results, but it doesn't affect the value of Yahoo to Microsoft."

Yahoo has spent $14 million on parrying Microsoft's bid so far. That number will rise. As for customers holding back business, during the earnings call Q&A Yang blamed the economy for any slower revenue, rather than customers reconsidering giving Yahoo their business because of Microsoft's looming bid.

Analysts predict that a raised Microsoft bid could be between $32 and $35 a share.

The next volley will probably come from Microsoft's side, possibly in its quarterly report scheduled for Thursday.

Interested in how Tuesday's action went down? Here are links to TechCrunch and Silicon Alley Insider live blogging of the earnings release and call:

• TechCrunch's Michael Arrington.
• SIA's Henry Blodget.