Yahoo beats Street...waits for Microsoft

Earnings top estimates and guidance impresses, but it may not be enough to lure Microsoft into raising its takeover bid for the Internet company.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Internet search giant Yahoo Inc. announced first-quarter sales and profits Tuesday that topped analysts' estimates but it remains unclear if that will be enough to force Microsoft to raise its takeover bid.

Yahoo posted net income of $542 million, or 37 cents per share, nearly quadrupling from a year ago.

But excluding one-time gains from an investment in Chinese Internet stock Alibaba.com, Yahoo's profits came in at $150 million, or 11 cents per share, down 2.6% from a year earlier.

Analysts polled by Thomson Financial, who normally exclude one-time events from their forecasts, were looking for a profit of 9 cents per share.

Sales rose 9% to $1.82 billion. Excluding advertising sales that Yahoo shares with partners (also known as traffic acquisition costs or TAC), the company reported revenue of $1.35 billion, topping analysts' forecasts of $1.32 billion.

Yahoo also offered second-quarter revenue guidance of $1.73 to $1.93 billion, which far outpaced analysts' consensus forecasts of $1.37 billion for the quarter.

All of this comes as the deadline to accept Microsoft's (MSFT, Fortune 500) unsolicited takeover bid - now valued at about $43 billion - approaches on Saturday.

Ball in Microsoft's court

Yahoo rejected Microsoft's initial offer, but Yahoo's earnings may not have done enough to change Microsoft's bid. Microsoft chief executive officer Steve Ballmer said earlier Tuesday that Yahoo's earnings - whether positive or negative - would not change his company's proposal, according to Reuters.

"The likelihood that Yahoo will be able to fend off Microsoft seems very low, mainly because in essence [Yahoo] is a company that's in a multi-year slide," said Cantor Fitzgerald analyst Derek Brown. "Even though the quarter was better than expected, there is uncertainty if it will be a trend."

In order to avoid a hostile takeover bid, Yahoo spent $14 million "for outside advisors related to Microsoft's unsolicited proposal and other strategic alternatives," according to its earnings release.

As part of its strategy to fend off Microsoft, the company also postponed the March 14 deadline for nominating candidates to its board.

In addition, Yahoo is making a concerted effort to right its ship by trimming its workforce by 7% and refocusing on its core display-ad business, "the most fundamental aspect of advertising," according to Yahoo's President Sue Decker. At the same time, Yahoo is also hoping to regain market share in search that it has lost to top rival Google.

"The board's decision to reject Microsoft's bid was based on the strength of our business," said Yahoo co-founder and chief executive officer Jerry Yang in a conference call with analysts, saying Microsoft's offer undervalued the company.

But he added that Yahoo's board is "open to any and all alternatives, including a deal with Microsoft" if the price was right.

Yahoo's rejection of Microsoft's bid prompted rumors that Yahoo is trying to work a counter deal with AOL - the Internet wing of CNNMoney.com's parent company, Time Warner (TWX, Fortune 500). It also sparked talks of a joint-takeover bid by Microsoft and News Corp (NWS, Fortune 500).

Adding to the scramble, Google (GOOG, Fortune 500), which impressed investors with its earnings last Thursday, recently struck a trial deal with Yahoo that will place its AdSense search results on Yahoo's Web site. Some analysts see the partnership as an attempt to disrupt Microsoft's takeover bid.

Ad business steady in uncertain economy

Google last Thursday posted impressive first-quarter earnings, allaying some analysts' fears that Internet search advertising may be vulnerable to the current U.S. economic slump. But Yahoo has recently increased its focus on display ads, also known as graphical or banner ads, which some analysts believe are more likely to be affected by a downturn in the economy.

That's because several of the companies that buy Yahoo's display ads - as opposed to text links that Google predominately offers - are big companies in slumping sectors such as the automotive and financial sectors.

"We're not immune to economic conditions, but we have a very diverse advertising base," said Yang. "We will be well positioned to perform as well as or better than the market as the uncertainty continues."

Shares of Yahoo (YHOO, Fortune 500) were relatively flat in after-hours trading. Yahoo's stock is trading about 50% higher than where it was before Microsoft first made its buyout bid on Feb. 1, as investors have been predicting a deal will eventually go through. To top of page

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