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Yahoo looks to channel Monty Hall with Q1 earnings

April 22, 2008 |  1:36 pm

UPDATE: Yahoo posted its earnings. Wall Street's reaction? Eh. Here's our story.

Wall Street will tune in to the Internet version of "Let's Make a Deal" today as Yahoo attempts to wrest a higher price from Microsoft. In the audience will be a cast of thousands: shareholders, employees, analysts and media, all ready for Yahoo to reveal its first-quarter financial results.

Analysts say the numbers, if good enough, represent Yahoo's best shot at gaining some leverage in negotiations with Microsoft ahead of its Saturday deadline to accept the software company's nearly $43-billion takeover offer.

Microsoft has vowed to launch a proxy fight and possibly lower its offer if Yahoo doesn't agree to a deal.

Yahoo has argued that it's worth more than the $31 a share in cash and stock that Microsoft offered (the stock portion has dropped with Microsoft's shares).

The Sunnyvale, Calif., Internet company has shown off rosy forecasts for its future prospects and has engaged in talks with Time Warner Inc.'s AOL unit and Rupert Murdoch's News Corp.

Yahoo shares rose 12 cents to $28.55 Monday. Microsoft gained 42 cents to $30.42.

Yahoo also has hinted that it's closing in on a deal to outsource some of its search business to rival Google, which posted better-than-expected first-quarter results last week.

Although Wall Street clearly believes that Google's market-buoying performance indicates that the online advertising sector has remained strong despite a weakening economy, it might not provide a good indication of how Yahoo has fared.

Google dominates search advertising, which gives advertisers more measurable returns and is generally thought to hold up better in an economic downturn. Far more uncertainty shrouds the display advertising market.

Yahoo has forecast first-quarter revenue of $1.28 billion to $1.38 billion. Wall Street expects...

 

... a profit of 9 cents a share, not including special items, on revenue of $1.32 billion, according to Thomson Financial.

"We expect that Yahoo pulled all the stops out," Sanford C. Bernstein analyst Jeffrey Lindsay said. "It's enormously in their interests, whether they get sold or stay independent, to have been cranking out the sales force to the maximum extent and driving the business hard. If they have done that, all the credit to them. Either way, they will have a better chance of improving Microsoft's bid or having a shot at staying independent."

UBS analyst Benjamin Schachter says the revenue forecast's wide range and Yahoo management's lackluster track record make it difficult to "give them the benefit of the doubt for much of an upside surprise." The stock is trading on expectations that Microsoft will buy Yahoo for $32 to $35 a share, he said.

That's because Yahoo's other options are "not very compelling in terms of value creation and will have challenges from both regulatory as well as a business operations perspective," said Sandeep Aggarwal, an analyst at Collins Stewart.

So Yahoo needs to make a deal.

Aggarwal says Yahoo has several things going for it, including its solid position in Internet advertising, stature as one of the largest Internet destinations around the globe, significant off-balance-sheet assets, recent acquisitions and partnerships that will generate incremental revenue.

But the company faces competition from Google and others, has slower growth than the overall online advertising market, has limited international traction and is suffering from a talent exodus. Plus, Aggarwal said, its business strategy is "not fully firmed up."

Without an offer from Microsoft, he said, Yahoo would be worth significantly less.

-- Jessica Guynn

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