Yahoo faces crucial test with earnings report

Yahoo faces crucial test with earnings report
Anything less than meeting expectations could spur Microsoft takeover

By John Letzing, MarketWatch
Last update: 7:33 p.m. EDT April 18, 2008

SAN FRANCISCO (MarketWatch) -- Jerry Yang's moment of truth is at hand.
The chief executive and his trusted lieutenants at Yahoo Inc. (YHOO:
Yahoo! Inc

YHOO 28.43, +0.40, +1.4%) face a critical juncture Tuesday, when the embattled online giant issues what arguably will be the most closely watched quarterly report in the company's history.
Hit the numbers that Yang and the gang have promised Wall Street, and Yahoo just might buy a little time to retain its coveted independence. By contrast, coming up short could push the company Yang co-founded a big step toward being taken over by the reviled Microsoft Corp.
Yahoo's first-quarter report comes as the company faces an increasingly aggressive buyout bid by Microsoft, made more than two months ago and initially valued at $44.6 billion. Meantime, Yang has sought to present Yahoo as a thriving entity that could remain independent, or at the very least merit a higher offer. An outstanding earnings report could therefore go quite a ways to bolster his case.
MSFT 30.00, +0.78, +2.7%) , for its part, has added to the pressure by setting a deadline for Yahoo to either begin negotiating a deal a few days after its earnings release or face a hostile takeover. See related story.
Analysts covering the industry are betting that Yang will deliver. The average estimate on Wall Street is that Yahoo will earn 18 cents a share for the period that ended in March, and $1.3 billion in net revenue, according to a survey by FactSet Research. That compares with earnings of 10 cents a share and $1.18 billion in net revenue in the corresponding period a year earlier.
Last month, only two weeks before the end of the quarter, Yahoo was able to reaffirm earlier projections it shared with analysts for the period.
Another potentially positive sign was Thursday's earnings report from Yahoo's rival, Google Inc. (GOOG:
GOOG 539.41, +89.87, +20.0%) , providing at least some reassurance that the online-advertising market underpinning both companies is still seeing healthy demand.
"It seems like there's less likelihood of a surprise from Yahoo now," Sandeep Aggarwal, a Collins Stewart analyst, said in an interview after studying Google's report. See related story.

In addition, data released earlier this week by search-marketing firm SearchIgnite showed that Yahoo, traditionally on the losing end of such reports, actually managed to increase its share of the total pool of search-advertising revenue.
Yahoo's share of such ad spending grew to about 24% in March, according to the SearchIgnite data, while Google's share dipped to roughly 70%. Microsoft's share also fell to 5.4% in March, according to the data.
The stakes haven't been lost on the chief Yahoo and his advisers. Indeed, the company has been more solicitous than usual to Wall Street analysts leading up to its momentous earnings report Tuesday, according to one analyst familiar with the matter. But the tactics the analyst described portray a company seeking to engage research analysts more aggressively and present their inner workings in the best possible light.
In theory, Yahoo could even adjust its numbers for the quarter, by piling up sales to favored customers in exchange for discounts later, for example. If it chooses that course, it would represent a significant policy shift, as Yahoo's management has a reputation for being straightforward with analysts on the health of its business.
A different beast
While Google's strong earnings report may say something about the health of its closest search rival, the two companies remain distinctly different in many ways.
Analysts point out that Yahoo's fortunes have been diverging from those of Google for roughly three years now. Despite some signs that Yahoo may have regained some focus of late, that trend has continued unabated, they say.
While Yahoo may have enjoyed the same resilience in the search-advertising market Google experienced the first quarter, it says little about other aspects of online advertising in general.
Unlike Google, Yahoo depends on translating the many graphical-display ads placed across its broad portal into increasing amounts of revenue -- a task that it has found challenging.