Microhoo: A frenetic week ahead; Yahoo could turn the tables on Microsoft

It's crunch time for the Microsoft-Yahoo saga. Yahoo reports first quarter earnings on Tuesday and if the results are good the company could get a little negotiating leverage against Microsoft, which is chasing Jerry Yang & Co.

It's crunch time for the Microsoft-Yahoo saga. Yahoo reports first quarter earnings on Tuesday and if the results are good the company could get a little negotiating leverage against Microsoft, which is chasing Jerry Yang & Co. like a lovelorn teenager. Microsoft reports its earnings on Thursday and will be set to respond to whatever Yahoo says. And Saturday marks Microsoft CEO Steve Ballmer's deadline for Yahoo to enter negotiations or face a proxy war.

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Got all of that? Bottom line: The next five or six days will critical. Yahoo and Microsoft could have a deal this time next week. Or the two parties will be on course for a protracted proxy battle. Another possibility: Yahoo and Microsoft will tango, but not accomplish much of anything. Hanging in the background of this drama are a few key secondary players. Will Google play the spoiler? Will an AOL-Yahoo deal make any sense? The scenarios--outlined by Henry Blodget--are almost endless.

But it all really starts with Yahoo's earnings report. Yahoo has already indicated that its first quarter is in line with Wall Street estimates--analysts are expecting the company to report earnings of 9 cents a share on revenue of $1.32 billion, according to Thomson Financial. Wall Street estimates for the second quarter (earnings of 11 cents a share on sales of $1.37 billion) are slightly higher. Should Yahoo beat estimates and raise its outlook for the second quarter it could garner enough leverage to nudge Microsoft to increase its offer to $35 a share from $31 a share.

The chance of a Yahoo earnings miss are very slim. The big question is whether Yahoo will significantly raise its outlook and detail a larger pact with Google. Such an outcome would force Microsoft's hand.

Among the key items to watch on Yahoo's conference call:

  • Will Yahoo detail more reasons why Microsoft's bid doesn't cut it?
  • Can Yahoo weather an economic downturn? Google stuck to its "we're recession proof" argument. Can Yahoo make that same claim?
  • Panama. Given Yahoo's flirtation with Google on outsourcing search what's the future of Panama? Yes, we know Yahoo's test with Google is limited, but that may not last for long.
  • Yang has played a good quarter of chess against Microsoft. Will that moxie be reflected in his conference call comments?

Citigroup analyst Mark Mahaney has the following Yahoo first quarter cheat sheet:

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There is a wild-card with Mahaney's cheat sheet. Yahoo won't get the international sales boost that other companies in the tech sector have. For instance, Google gets half of its sales from abroad. Given the weak dollar, which makes U.S. goods cheaper to buy overseas and boosts sales because of currency conversions, Google, IBM and Intel got a nice quarterly cushion.

However, Jeffries analyst Youssef Squali reckons that Yahoo gets about a quarter of its revenue (net of transaction acquisition costs) from overseas. While Yahoo's 25 percent chunk of international revenue is enough to meet estimates it won't enable the company to deliver a blowout quarter.

Following Yahoo's quarterly report, Microsoft will be set to take the stage. The company can still talk as if it could lower its bid. Actually increase its bid to get Yahoo to the table. Or just continue the banter.

Microsoft's quarterly results, however, will also be notable. The key issue: Has this Yahoo fascination distracted the software giant in its fiscal third quarter? Are other units suffering as management pursues Yahoo? Does Ballmer need an intervention to talk him down from this Yahoo thing, which is sparked by Microsoft's obsession with Google? Will Ballmer dangle his Saturday deadline out there to pressure Yahoo?

Analysts are expecting Microsoft to report third quarter earnings of 44 cents a share on revenue of $14.5 billion, according to Thomson Financial. Thomas Weisel analyst Tim Klasell says Microsoft is "well positioned" but he doesn't expect significant upside surprises like the software giant delivered in the first half of its fiscal year.

Klasell expects Microsoft's online unit to remain a dog. "We note that this small division is undergoing multiple transitions, including the aQuantive integration, and the company's stated plans to continue to invest, with or without Yahoo!, precludes near-term profitability," says Klasell.

That lack of profitability for Microsoft's online division may point to an increased bid for Yahoo. But first Yahoo has to deliver the goods to give Microsoft an excuse to raise its bid.