Yahoo's Q2 Earnings Don't Change Much for MSFT

With the industry growing at over 20%, Yahoo! (YHOO) tried to put its best face forward, bullishly hawking a 9% year-over-year growth rate in revenues.

On the income statement:

• 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.
• 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.

Translation: Dollar-for-dollar, it cost a bit more for YHOO to generate those revenues, and this I suspect is due to the fact that it acquired Blue Lithium and Right Media, two big ad networks to pay out a good chunk of the revenue they collect.

• 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.

Translation: As we’ve long said, this company is bloated and needs to reduce layers of management, since labor costs are usually the lion’s share of overhead. R&D costs are usually major sources of costs, too, and we all know that after wasting billions, YHOO is looking at getting close to Google (GOOG) with regards to outsourcing search, or merging its R&D with Microsoft (MSFT) once MSFT acquires them.

• 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.

Translation: This is not good. Many growth opportunities internationally, combined with a weaker USD, is just bad news. All in all, the fact that international decreased shows how weak YHOO is doing in Europe, yet all of this is ironic because YHOO has been pushing its Asian properties as a reason to get more from MSFT. On the positive side, Google is already at 51%, so this suggests YHOO has upside in global operations. Will they execute? What do you think?

On Guidance:

Thankfully, YHOO upped guidance but not by all that much, and frankly, YHOO would right about now sell its mother for a nickel if it meant getting a few pennies more from MSFT After all, there is NO way YHOO remains independent come Q3, let alone Q4 2008.

On the balance sheet:

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.

This remains too little for YHOO to compete effectively for M&A.

Bottom Line:

• I fail to see how this changes much: MSFT is offering more for YHOO than YHOO is able to command from the Street or from other buyers. In fact, one of the main “white knights” (News Corp. (NWS)) is now aligned on MSFT’s side. We explained why.
• Moreover, I was even expecting a 10% likelihood of them announcing a merger with AOL with Google taking over search and guaranteeing an obscene revenue deal. None of that now.
• Initially I thought MSFT would pay $50B, which would have been roughly $34-$35, but the way senior brass has mismanaged this entire debacle, I think MSFT is celebrating over at Redmond.

Here’s what will go down:

Step 1: One last attempt between now and Friday to do this cordially. MSFT will whisper that it won’t go higher than $33… that would be about $46.2B.

If they get rebuffed…

Step 2: Then MSFT will go hostile and this will get drawn out into the dog days of summer with a $31 offer finally being accepted during a formal legal tender.

And really, that is if and only if YHOO stops acting so dishonorably and ceases wasting shareholders' time and value (i.e. stop it with the deals with Google or the excessive severance packages).

Note: I’ve sold the vast majority of my holdings because none of this is based on rationality anymore. It is all emotional and going to get uglier before it gets better. And… I think YHOO might have played with figures, to boot.