Yahoo Earnings Merit Grade 'B'

Today was Yahoo’s big test, their SAT, their GRE, their LSAT.  All were waiting to see how they’d fare. Would earnings be stellar? Would they be average?  How were cash flows? What was the state of the display ad business?

With Google’s numbers already out, Yahoo’s Q1 earnings were on call to be the second benchmark to measure the Internet ad economy. With Microsoft’s takeover offer pending, the numbers were also set to provide a scorecard against which to measure the bid.  Too low? Too high?  Just right?

Turns out, in the test, Yahoo earned a nice comfortable B… a passing grade, good, not bad, better than average - but not great either.  

For the first three months of the year Yahoo earned $542.2 million, or 37 cents per share.  That result included $401m in non cash gains that account for Yahoo’s stake in Chinese e-commerce site Alibaba.com.   Less the Alibaba income, Yahoo earnings were approximately 11 cents a share, or on par with the $142.4m (10 cents a share) earned for the same period in 2007.

Revenue for the quarter was up 9 percent to $1.82 billion.  Less traffic acquisition costs (fees paid to advertising partners), the total revenue was $1.35billion.  

On a similar basis, analysts were expecting earnings per share of approximately 9cents on revenue of $1.32 billion.  At 11cents and $1.35billion, Yahoo came in ahead of both but hardly at a level of shock or awe.

In other numbers reported: 

•Yahoo’s owned and operated sites accounted for $966m of total revenue, an 18% increase over 2007.  Affiliate sites generated $606m in revenue.

• Net income on an EBITDA (earnings before income tax, depreciation and amortization) basis was off 6% year over year. 

•Free cash flow for the quarter was up 75% percent to $647 million but that includes a $350 million onetime payment from AT&T resulting from the end of the existing DSL partnership. 

•By segments, US revenues were up 19% over the same period in 2007.  International revenues were down 11%.   On an EBIDTA basis, US operating income was down 8% compared to 2007 and the international segment was off 1%.

Spinning these results, Chief Executive Jerry Yang said in a conference call with analysts, “The quarter’s results underscore the fact that our strategy and investments are beginning to pay off."   Additionally, he said, the results give the company added confidence that the “ability to execute on multiple fronts is clearly improving.”

What the numbers don’t explicitly address is the bigger question of whether any of these improvements are enough to reassure shareholders momentum is building and things are looking up (already a majority of polled institutional shareholders were favoring the Microsoft offer to no deal at all). In the analysts call, Yahoo President Susan Decker indirectly tried to address these momentum questions by commenting, “We feel we are on the verge of fundamentally changing the game."  

Unfortunately, Yahoo’s forward guidance doesn’t give any indication of such a “fundamental game change” hitting the bottom line.  Just the opposite, forward guidance remains unchanged.  Current projected numbers are, in fact, the same projections made in January before Microsoft made their bid to acquire the company.  (Though Yahoo does expect to see more dramatic increases in 2009 and 2010).

The one exception to that: relative to Google, and their relative lack of concern on how the general economy might affect their ad business, Yahoo did acknowledge that there was some weakness in online advertising revenue in finance, travel and retail sectors during the first quarter and second quarter to date.  At the same time, the company’s expectation is continued shifts in ad buying from traditional media to online media will compensate for any spending changes among individual ad buyers (or sectors).   

So it goes back to that big test.  Do any of the numbers make a difference?

Earlier in the day, Steve Ballmer said Microsoft had no plans to increase their bid.  He said, “We think we can accelerate our strategy by buying Yahoo and will pay what makes sense for our shareholders.”

Looking at earnings, it doesn’t seem anything in this quarter was stellar enough to convince him to reconsider.    So, as they say in show biz, and as fits the increasing drama in the battle of Microsoft and Yahoo: the plot thickens.