This Just In: Yahoo's Q4 Will Be "Strong" (YHOO)

We said earlier that we expected Yahoo’s Q4 results to be “fine.” We have since been told by a well-placed source that the results will be not “fine” but strong. What’s more, says the source, Q1 numbers will also be strong, suggesting that Yahoo’s guidance on Tuesday’s call may not, in fact, be below current estimates.

(Caveat: Our source is not in a position to know exactly what Yahoo’s numbers are, so we aren’t guaranteeing this information, but it jibes with other anecdotes we’ve heard, and we feel good about it.)

Of course, there’s a catch. Our source believes Yahoo’s Q4 and Q1 numbers will be strong in part because much of the company’s display ad inventory was sold many months ago, via long-term contracts, when the economy was roaring, and that these contracts will start rolling off in Q2 and Q3–about the time the economy (and advertising) is expected to be in the tank. The source therefore believes that, later in the year, there is a chance that Yahoo’s now re-accelerating growth will hit a wall.

Based on our previous experience with long-term ad contracts heading into a recession, this makes sense to us. Long-term contracts mask the deterioration of spot market demand and pricing, and when they come up for renewal, the adjustment is sudden and painful. We don’t know how much of Yahoo’s display ads are based on long-term contracts (search is mostly spot market), but we would not be surprised if the percentage were significant.

In any event…  In light of the source’s conviction, we are now expecting Yahoo to post surprisingly strong numbers and reasonable guidance on Tuesday. Q4 is largely old news, however, and the underlying traffic and longer-term outlook will still be critical for the company’s (and stock’s) longer-term performance.

Disclosure: Henry Blodget has a long-term position in Yahoo. Not that he’s happy about that.

See Also: Yahoo Earnings Preview: Mercifully Low Bar

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