Yahoo's first quarter good; Not good enough for a higher Microsoft bid; Yang wants more

Yahoo's first quarter good; Not good enough for a higher Microsoft bid; Yang wants more

Summary: Updated: Yahoo CEO Jerry Yang said he was "open to all and any alternatives including a sale to Microsoft" following the company's first quarter results. The brief comments indicate Yahoo hasn't ruled out a Microsoft purchase, but wants something better than the software giant's $31 a share offer.


Updated: Yahoo CEO Jerry Yang said he was "open to all and any alternatives including a sale to Microsoft" following the company's first quarter results. The brief comments indicate Yahoo hasn't ruled out a Microsoft purchase, but wants something better than the software giant's $31 a share offer.

However, Yang declined to talk about potential strategic alternatives with its international holdings or other partnerships.

Yang made the comments on Yahoo's first quarter earnings conference call (notes from and Silicon Alley Insider). Yahoo reported first quarter earnings Tuesday of $542 million, or 37 cents a share, on revenue excluding traffic acquisition costs of $1.35 billion. The highly anticipated report isn't likely to force Microsoft to raise its bid. Yahoo's net income was padded by $401 million -- a gain from the Alibaba IPO. Yahoo estimated that the value of Alibaba and its overseas investments amounts to about $10 a share.

Excluding one-time items, Yahoo reported earnings of 11 cents a share. Wall Street was expecting the company to report earnings of 9 cents a share on revenue of $1.32 billion, according to Thomson Financial.

Yang said he was "very proud" of Yahoo's results, noting that the results were in the top half of its projected range. He noted that Yahoo bucked economic uncertainty.

To say Yahoo's earnings report (statement) was highly anticipated is quite an understatement. The report could have altered the course of the Microsoft bid--either forcing Steve Ballmer & Co. to raise its $31 a share offer or even giving the software a giant an excuse to really play hard ball and lower it.


Instead, Yahoo's report is right down the middle--unlikely to move Microsoft either way. In fact, Yahoo's quarter is anticlimactic, as Microsoft is already playing the game with Ballmer telling Reuters that Yahoo's results aren't going to change his plan. That leaves room for a lot of yapping among Wall Street, pundits, Microsoft, Yahoo and even Google and AOL on Wednesday, followed by Microsoft earnings on Thursday, and a proxy war deadline on Saturday.

Yang kicked the games off on the conference call, noting that Yahoo has valuable assets. He talked up AMP, Yahoo's ad network. Yang reiterated that Microsoft's bid undervalues Yahoo. "Our board and management team continues to be open to all and any alternatives including a sale to Microsoft," said Yang.


Among other notable conference call nuggets:

  • Yahoo president Sue Decker outlined the company's social networking efforts and added that the company isn't aiming to be a social networking site. Instead, Yahoo will integrate social tools into its properties and "facilitate social connections."
  • Decker touted Yahoo's search progress, which she measured on relevancy rates. "We've come from behind 18 months ago to close the relevancy gap," she said. Seems like Yahoo's new mantra will be relevancy not market share. Decker said the goal is to deliver 10 percent compound search growth over the next three years.
  • Decker also said Panama is strong, delivering good gains. "The financial gains we saw in 2007 are continuing into the first quarter," said Decker. Of course, there's an elephant in the room: If Panama is so hot why do the limited test with Google? Decker said there is significant upside to price per click pricing.
  • Speaking of Google, Decker addressed outsourcing search to its rival. She said "we've narrowed the monetization gap," but "there may be more than one way to achieve that goal."
  • CFO Blake Jorgensen said acquisitions and currency exchange rates (weak dollar) each contributed 2 percent to Yahoo's growth. That statement implies a slower organic growth rate.
  • Slowdown in the U.S? Decker said that financial, travel and retail sectors are seeing declines in display and search advertising. "Where we're seeing weakness we're seeing it in both," she said

Yahoo projected second quarter revenue of $1.73 billion to $1.93 billion with operating income before depreciation, amoritization and stock based compensation of $425 million to $475 million. It's not clear how that translates to Thomson Financial estimates given that analyst exclude TAC.

Wall Street estimates for the second quarter (earnings of 11 cents a share on sales of $1.37 billion) are slightly higher.


In the statement, Yang maintained his optimistic outlook through 2010 saying:

We believe we can significantly accelerate our revenue growth, return to our historically high margins, and double our operating cash flow by 2010. This quarter’s solid performance underscores the fact that we are executing on that plan. Yahoo! is beginning to realize the benefits of the very substantial and deliberate long-term investments we’ve made to capitalize on the opportunities ahead in display and to recapture momentum in search.

By the numbers (revenue includes TAC):

  • Revenue on a gross basis was $1.82 billion, up 9 percent from a year ago.
  • Traffic acquisition costs in the first quarter were $465 million, down from $488.7 million a year ago.
  • Operating expenses were higher than a year ago. Total operating expenses for Yahoo were $942 million in the first quarter, up from $789 million. For instance, sales and marketing expenses were $424.6 million, up from $367 million. Product development costs were $305.6 million, up from $239 million a year ago.
  • U.S. revenue was $1.3 billion, up 19 percent. International revenue was $510 million, down 11 percent from a year ago. The international revenue decrease may indicate that Yahoo is losing ground abroad to Google. It also indicates that Yahoo can't get the weak dollar pop that other technology companies have.
  • Marketing service revenue was $1.57 billion, up 7 percent from a year ago. Marketing services revenue from owned and operated sites was $966 million, up 18 percent from a year ago, with affiliate revenue falling 7 percent to $606 million.
  • Severance pay and charges related to Yahoo's restructuring was $29 million.
  • Yahoo generated first quarter free cash flow of $647 million, up 75 percent from a year ago. The rub: That free cash flow includes a $350 million one-time payment from AT&T.

Topics: Microsoft, Banking, Social Enterprise

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  • MS's desperation is a result of Vista's inevitable failure

    and they know it.

    MS's real problem is that they've had it easy for years and years bringing in billions on hype and poor quality software.

    Now, reality is biting.

    Love it. Not even No_Ax and LoveRock can save them, unless they alone can fund Penelope and Rupert.

    Congratulations to all of those who joined the knowledge economy. You learned Linux through your own initiative. You're about to get rewarded handsomely.

    The me too's will be crying into their beer now. Did they buy you a beer while you worked for a better future at your own expense? ;-)
    • Suprised

      I am very suprised that frothy2 didn't mention me. At least, he must have some common sense to notice that I present honest unbiased opinion on every cooment I post on here. Thank you frothy2 for your lack of respect toward all of us who try show that Microsoft is not that bad as most people make it seem! I salute you sir! Oh yeah tell President Bush I say Hey! LOL
    • So what fr0thy2 is really saying

      is that he now understands the writing on the wall, that Microsoft will not disappear, only grow larger, and tha this sale really scares the crap out of him for some strange reason.

      Linux at 2 percent, reality tells him it is not the Microsoft Killer that he prayed it to be, and his beer is watered down.

      John Zern
      • fr0thy2 (i.e. foamy) does seem awfully scared of MS...

        based on his naive understanding of an actual business, US and the world. But lack of knowledge often breeds fear.
    • xp will save them through the tough time, on to the next generation...

      xp, then windows 7 platform.

      they will not make the same mistake twice.

      id bet 10 million on it, if i had the dough.
  • I guess this proves tha it wasn;t about culture,

    but allways about "the Money"

    Imagine that frosty, A company built on Linux, all about greed.

    And here you claimed it was only Microsft that was in it for the money.
    John Zern
    • It is always about the money ...

      I don't think anybody would deny that a company's main requirement is to make as much money as it can.

      MS offered a very low offer that was rejected by Yahoo's board of directors. Their job is to make sure that they get every single penny they can ... not just a few cents on the dollar.

      A few "money hungry" investors didn't like it, but most of them are just "drive-by" investors looking to make a quick buck. They aren't the real investors who believed in the company's ability to make them more money in the long run.
      • economics 101 pallie

        when you buy a company, you make an offer equal to or slightly over the share value price.

        And Microsoft did just that initially. (substantially more than their share price as a matter of fact, and reported first here at zdnet)

        and whats your point?
  • Yahoo did screw it again.

    Yahoo said "we have a bright future with new project on schedule" but at the same time Yahoo fired a lot of worker and shut down some offices.

    Now Yahoo is saying "we are growing!" and they aren't stopped firing personal.

    Can you believe on Mr. Yang?.
    • Interesting ...

      two messages are not going to help him.
    • i dont trust anyone who turned over private us data to the chinese

      And landed some journalist in prison for what... life.

      maybe the company has to many close ties, to the wrong entities.
  • i starting not to care anymore. why should you.

    just want a deal with someone, somewhere to be over with.

    yahoo is a sinking ship (just a hunch).

    and they only reason their stock jumped up a bit, is because of the bidding war. nothing more.

    there certainly not generating any more real revenue from paying customers... are they.