Yahoo Results Just Enough: Microsoft Will Now Raise Bid

Yahoo (YHOO) did what it needed to do: report a solid quarter in the high end of the guidance range. The results were not a blow-out and certainly could have been stronger. However, they should be enough to allow Yahoo to maintain its current Microsoft (MSFT) stance: no deal unless Microsoft raises its price. The possibility of a Google outsourcing deal is still on the table and provides additional leverage.

By refusing to cave to Microsoft’s agree-to-deal-or-we-cut-bid letter, Yahoo has called Microsoft’s bluff. As Microsoft surveys the landscape this morning, it will see three options:

  • Prepare for proxy fight
  • Raise bid privately
  • Walk

Most analysts assume that Microsoft would win a proxy fight. It might, but the battle would be bloody and prolonged, and victory is not guaranteed (a few big Yahoo shareholders will likely hold out for at least a modest increase in price). Walking, meanwhile, would mean declaring defeat, which isn’t Steve Ballmer’s style. The easy way out is a behind-the-scenes offer to raise the pric if Yahoo comes to the table. We suspect that that is the route Microsoft will take.

Quarter Details (More on SAI)

Revenue (Net) $1.35 billion, above consensus of $1.32 billion, upper end of range, but not a blow-out (ie, in line with Yahoo pre-release through NY Post this morning). Revenue could certainly have been stronger: Owned and operated properties decelerated again, to 18% (from 22% last quarter). Overall, revenue growth only accelerated from 8% to 9% Y/Y–not what one would call impressive (bar so low they could have fallen over it–as they appear to have)–but revenue ex-TAC up a better 14% (no acceleration). US Growth good. International horrible.

Adjusted EPS: $0.11, versus $0.09 consensus, in line with whispers. Operating income in line with guidance range (high end). EBITDA down year-over-year, especially in U.S. This will be called “investment,” but it’s ghastly.

Free Cash Flow: Looks impressive at $647 million, but, sadly, this includes $350 one-time payment from AT&T (presumably buy-out of access contract). Adjusted cash flow down 20% year over year: Expected, but lousy. AT&T payment will be recognised will be recognised as fee revenue over four years ($22 million a quarter).

Guidance: Full year revenue guidance range remains the same (bad). Full year operating income guidance and free cash low guidance by $50 million (fine).

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