AP
Yahoo 1Q profit rises, but that might not thwart Microsoft
Tuesday April 22, 6:24 pm ET
By Michael Liedtke, AP Business Writer
Yahoo 1st-quarter profit more than triples, but that might not be enough to ward off Microsoft


SAN FRANCISCO (AP) -- Yahoo Inc. delivered first-quarter results that surpassed analysts' modest expectations, but the performance might not be enough to fortify the Internet pioneer's defense against software maker Microsoft Corp.'s takeover bid.

The Sunnyvale-based company said Tuesday that it earned $542.2 million, or 37 cents per share, more than triple its profit of $142.4 million, or 10 cents per share, at the same time last year.

Most of the first-quarter improvement stemmed from a non-cash gain of $401 million recorded to recognize Yahoo's stake in the parent company of Alibaba.com, a leading e-commerce site in China that went public last year.

If not for the Alibaba windfall, Yahoo would have earned 11 cents per share -- comparable to its profit at the same time last year, on an apples-to-apples basis.

The results were 2 cents above the average earnings estimate on the same basis among analysts surveyed by Thomson Financial.

Revenue climbed 9 percent to $1.82 billion.

After subtracting commissions Yahoo paid its advertising partners, its revenue totaled $1.35 billion -- just $30 million ahead of analysts' average projection.

The performance provided another reminder of the ever-widening gap separating Yahoo from Internet search and advertising leader Google Inc., whose first-quarter profit climbed 30 percent to $1.3 billion on revenue that rose 42 percent to $5.2 billion.

Perhaps even more importantly, Yahoo didn't raise its revenue outlook for the remainder of year.

That could be good news for Microsoft, which has been betting that its takeover bid will become more difficult to resist if Yahoo can't substantially accelerate its growth amid the decaying U.S. economy.

Microsoft has threatened to oust Yahoo's board if the 10 directors don't accept the current offer Saturday, but that risky maneuver -- known as a proxy contest -- could extend the current impasse into July.

The cash-and-stock bid, valued at $44.6 billion when it was first made nearly three months ago, is now worth about $43 billion, or $29.88 per share.

Without specifying a precise price, Yahoo has maintained it's worth more to Microsoft even though its stock price had fallen below $20 before the bid.

Steve Ballmer, Microsoft's chief executive officer, reiterated the software maker has no plans to sweeten its offer. "We think we can accelerate our strategy by buying Yahoo and will pay what makes sense for our shareholders," Ballmer said before Yahoo released its results.

Yahoo co-founder and CEO Jerry Yang emphasized the company won't consider the sale unless the bid is raised. "Our ability to execute on multiple fronts is clearly improving," he told analysts during a Tuesday conference call.

Investors didn't seem to be impressed as Yahoo shares shed 19 cents in extended trading after dipping a penny to finish the regular session at $28.54.

Yahoo expects its revenue to increase more dramatically in 2009 and 2010 as the benefits from its expanded Internet advertising network start to kick in. "We feel we are on the verge of fundamentally changing the game," Sue Decker, Yahoo's president, said in Tuesday's conference call.

The confident tone of Yahoo's management contrasted with a more glum tenor at the end of January when Yang warned economic "headwinds" might complicate the company's turnaround efforts. The bleak outlook came just two days before Microsoft made its unsolicited takeover offer.

Given the Microsoft bid, Global Crown Capital analyst Martin Pyykkonen said the company's optimism should be taken with a grain of salt. "You almost have to discount anything positive management has to say because they are just trying to get the (sale) price up," he said.

Microsoft's bid conceivably could rise above its original value without management upping the ante. It might happen if Microsoft's own quarterly earnings report -- due out Thursday -- pushes its shares above $32.60. Microsoft's stock price finished Tuesday at $30.25, down 17 cents.

Most analysts believe Microsoft will raise its offer to between $32 and $35 per share, or about $46 billion to $50 billion, to prevent its prickly courtship of Yahoo from becoming even more acrimonious.

Microsoft stands a better chance of making the complex deal work if it has Yahoo's cooperation during the daunting process of melding the two companies' disparate cultures and technologies.

Yahoo ended March with 13,800 employees, down from 14,300 workers at the end of 2007. The company jettisoned more than 1,000 workers during the first quarter, but offset some of the purge by hiring about 600 new employees.