Yahoo Ekes Out a First-Quarter Beat--and More Leverage Vs. Microsoft?

Posted by: Rob Hof on April 22, 2008

Yahoo had to turn in at least respectable first-quarter results today if it was to have any chance of getting Microsoft to up its unsolicited $31-a-share offer to buy the company. And it did. But whether that will help Yahoo vs. Microsoft remains uncertain, because investors were bidding the stock down a small fraction in after-hours trading on apparent disappointment that Yahoo didn’t beat expectations even more.

The Internet portal reported net sales excluding revenues it shares with partners of $1.35 billion, up about 9% and near the upper end of its own forecast of between $1.28 billion and $1.38 billion. Analysts reckoned about $1.32 billion, so Yahoo clearly beat the Street on revenues.

Yahoo reported a profit of 11 cents a share before certain items such as a $401 million noncash gain from the IPO of China’s Alibaba, in which Yahoo has a 40% stake. That was above consensus profit of 9 cents. But operating profits were down 28%, to $121 million, from a year ago.

After initially bidding up the stock slightly in early after-hours trading from its nearly flat $28.54 Tuesday close, investors turned negative, then positive again, then negative again and stayed there, down a couple of dimes. It’s not clear whether investors’ tepid reaction means Yahoo got less leverage vs. Microsoft than it might have hoped, but it sure is a reflection of the roller coaster this Microsoft-Yahoo battle has been for nearly three months.

Meanwhile, Microsoft CEO Steve Ballmer said today that the quarter wouldn’t “affect the value of Yahoo to Microsoft.” But with that no doubt very carefully worded statement, he’s not saying he won’t raise the bid, either. For his part, Yahoo cofounder and CEO Jerry Yang told analysts during a conference call, “Our board and management team continue to be open to any and all alternatives, including a Microsoft deal.”

Yahoo’s guidance for future quarters largely didn’t change, though it did say operating cash flow would rise a bit more than it had previously forecast. Investors no doubt had hoped that Yahoo would provide higher guidance, though that seemed unlikely given how recently Yang had provided a forecast.

It may be more important for Yahoo’s leverage with Microsoft that it didn’t miss the quarter. The better-than-expected results were about the world’s easiest bet, frankly. For one, Google’s surprisingly strong earnings last week made it apparent that the tanking economy hasn’t yet hurt online advertising as much as some expected. But mostly, Yahoo’s board members would have been insane not to engage in serious negotiations with Microsoft a long time ago if they knew—as they surely did even before the quarter closed on Mar. 31—that results would fall short and weaken their bargaining power.

Skeptics, who surely will include Microsoft’s many designated anonymous people close to the matter, also may question whether Yahoo made the quarter by burning the furniture, as Silicon Alley Insider’s Henry Blodget recently put it—pulling every possible technology and accounting lever to help nudge revenues into the last quarter instead of the next one. Hard to tell this soon after the results are out if that’s the case, though the fact that Yahoo didn’t beat the quarter by more than it did suggests minimal fudging, if any.

But it may not matter either way. These results are just the latest chess move in this excruciatingly twisted game, one that feels like it’s finally going to end pretty soon. If the results end up being just enough to prod Microsoft into upping its bid a few dollars a share that a lot of people think would be sufficient to satisfy Yahoo’s board and the company’s large shareholders, then Yang will have managed a win that few expected him to pull off.

As victories go, this one—which would result in the iconic company getting absorbed into the Borg—would clearly be the Pyrrhic variety. But given Yahoo’s long struggles, Yang & Co. may have to take any victory they can get.

Full text of the release after the jump, and slides for the conference call are here. Silicon Alley Insider and TechCrunch are liveblogging the call.

SUNNYVALE, Calif.--(BUSINESS WIRE)--Yahoo! Inc. (Nasdaq:YHOO - News) today reported results for the first quarter ended March 31, 2008.

“As outlined in our investor presentation, 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,” said Jerry Yang, co-founder and chief executive officer, Yahoo! Inc.

“Not only does Yahoo! have a unique franchise, it increasingly has industry-leading tools, technology and, most importantly, people. It is the hard work, dedication and professionalism of our people that is our greatest asset — and this quarter’s performance demonstrates how well they can perform under unusually challenging circumstances.”

First Quarter 2008 Financial Results

* Revenues were $1,818 million for the first quarter of 2008, a 9 percent increase compared to $1,672 million for the same period of 2007.
* Marketing services revenues were $1,572 million for the first quarter of 2008, a 7 percent increase compared to $1,469 million for the same period of 2007.
* Marketing services revenues from Owned and Operated sites were $966 million for the first quarter of 2008, an 18 percent increase compared to $820 million for the same period of 2007.
* Marketing services revenues from Affiliate sites were $606 million for the first quarter of 2008, a 7 percent decrease compared to $649 million for the same period of 2007.
* Fees revenues were $245 million for the first quarter of 2008, a 21 percent increase compared to $203 million for the same period of 2007.
* Revenues excluding traffic acquisition costs ("TAC") were $1,352 million for the first quarter of 2008, a 14 percent increase compared to $1,183 million for the same period of 2007.
* Gross profit for the first quarter of 2008 was $1,063 million, an 11 percent increase compared to $958 million for the same period of 2007.
* Operating income for the first quarter of 2008 was $121 million, a 28 percent decrease compared to $169 million for the same period of 2007.
* Operating income for the first quarter of 2008 includes a pre-tax cash charge of $29 million for severance pay expenses and related cash expenditures related to a strategic workforce realignment the Company implemented during the quarter. Offsetting this cash charge was a $12 million credit related to stock-based compensation expense reversals, resulting in a net total strategic workforce realignment charge of $17 million.
* Operating income for the first quarter of 2008 includes incremental costs of $14 million incurred for outside advisors related to Microsoft's unsolicited proposal, other strategic alternatives, and related litigation defense costs.
* Operating income before depreciation, amortization, and stock-based compensation expense for the first quarter of 2008 was $433 million, a 6 percent decrease compared to $460 million for the same period of 2007.
* Operating income before depreciation, amortization, and stock-based compensation expense for the first quarter of 2008 includes a pre-tax cash charge of $29 million for severance pay expenses and related cash expenditures related to a strategic workforce realignment the Company implemented during the quarter.
* Operating income before depreciation, amortization, and stock-based compensation expense for the first quarter of 2008 includes incremental costs of $14 million incurred for outside advisors related to Microsoft's unsolicited proposal, other strategic alternatives, and related litigation defense costs.
* Cash flow from operating activities for the first quarter of 2008 was $786 million, an 81 percent increase compared to $435 million for the same period of 2007.
* Cash flow from operating activities for the first quarter of 2008 includes a $350 million one-time payment from AT&T Inc.
* Free cash flow for the first quarter of 2008 was $647 million, a 75 percent increase compared to $369 million for the same period of 2007.
* Free cash flow for the first quarter of 2008 includes a $350 million one-time payment from AT&T Inc.
* Net income for the first quarter of 2008 was $542 million or $0.37 per diluted share compared to $142 million or $0.10 per diluted share for the same period of 2007.
* Net income for the first quarter of 2008 includes the Company's net non-cash gain of $401 million related to Alibaba Group's initial public offering of Alibaba.com, net of tax, which is included in earnings in equity interests.
* Non-GAAP net income for the first quarter of 2008 was $150 million or $0.11 per diluted share compared to non-GAAP net income of $154 million or $0.11 per diluted share for the same period of 2007.

“The heart of Yahoo!'s strategy to win is the simple proposition that if we are the starting point for the most users and provide the most comprehensive, easiest-to-use, ‘must-buy’ platform for advertisers, we can drive the growth in volume and the improvement in yield we need to accelerate growth in revenues and operating cash flow. That, in turn, we believe will deliver attractive value to our stockholders,” said Sue Decker, president, Yahoo! Inc. “This past quarter’s financial results, important acquisitions, and, most importantly, the string of successful product rollouts demonstrate our enhanced execution against our longer-range goals. As we look forward, we are particularly excited by the potential capability of AMP! from Yahoo!, our revolutionary new ad management platform to help us further extend our lead in display advertising, which more than any other area of online advertising we believe has great potential for growth.”

First Quarter 2008 Segment Financial Results

* United States segment revenues for the first quarter of 2008 were $1,307 million, a 19 percent increase compared to $1,101 million for the same period of 2007.
* International segment revenues for the first quarter of 2008 were $510 million, an 11 percent decrease compared to $571 million for the same period of 2007.
* United States segment operating income before depreciation, amortization, and stock-based compensation expense for the first quarter of 2008 was $315 million, an 8 percent decrease compared to $342 million for the same period of 2007.
* International segment operating income before depreciation, amortization, and stock-based compensation expense for the first quarter of 2008 was $118 million, a 1 percent decrease compared to $119 million for the same period of 2007.

Cash Flow Information

In addition to free cash flow of $647 million for the first quarter of 2008 (including a $350 million one-time payment from AT&T Inc.), Yahoo! generated $127 million from the issuance of common stock as a result of the exercise of employee stock options. This was offset by $79 million used for direct stock repurchases, $52 million used for tax withholdings related to net share settlements of restricted stock awards and restricted stock units, and $166 million used for acquisitions. Cash, cash equivalents, and investments in marketable debt securities were $2,848 million at March 31, 2008 as compared to $2,363 million at December 31, 2007, an increase of $485 million.

“Yahoo!'s first quarter 2008 financial performance was on target and aligned with our strategy to generate substantial value for stockholders,” said Blake Jorgensen, chief financial officer, Yahoo! Inc. “Our strong growth in free cash flow, excellent capital position, and ample scale give us the resources to execute our plans to grow operating cash flow substantially. Core revenue grew at an attractive, double-digit pace. The capital expenditures and substantial investments we made in people last year and early this year are now producing gains in our core, long term growth initiatives,” Jorgensen added.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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