Yahoo Needs Google Magic for Q1

The financial community is waiting to see how Yahoo performs for its first-quarter earnings report April 22, the second of the three search and online ad bellwethers roiling the space with new products, coups and secretive backroom dealing.

Google reported Q1 earnings last week. Microsoft reports April 24, but Yahoo is top of mind today for financial analysts.

Here's why: Most experts agree at this point that Microsoft will succeed in its quest to buy Yahoo, but it is difficult to play Nostradamus on the price. Microsoft's original Feb. 1 offer for Yahoo was for $31 per share, which at the time was worth $44.6 billion. Currently, the offer is valued around $43 billion.

If Yahoo has a fine quarter, it could ratchet up the value of the company, which has resisted Microsoft's offer, claiming the $43 billion undervalues it. Yahoo is said to be seeking closer to $40 per share.

Microsoft may raise its bid if Yahoo performs well, but a poor quarter from Yahoo could entice Microsoft to lower its bid.

With this possibility looming over it, Yahoo would love some of Google's magic. The search leader trounced expectations with a 31 percent profit amid unfounded concerns that paid clicks were dragging down the company's bottom line.

Financial analysts expect Yahoo to notch revenue of $1.33 billion on earnings per share of 9 cents. Citi Investment Research is betting Yahoo comes in at $1.34 billion on earnings per share of 10 cents.

Moreover, the research company said Microsoft's offer will continue to float Yahoo's stock price, which was $28.69 in trading early April 22.

"We anticipate an in-line quarter and further believe that the stock price will continue to be supported near-term because of the Microsoft bid," wrote Citi analyst Mark Mahaney.

Moreover, Mahaney said Google's own Q1 success and Microsoft's commitment to buying Yahoo pegs the company "as one of the best defensive plays in the Internet sector in this recessionary environment."

Mahaney isn't saying that lightly, citing Yahoo's 19 percent year-over-year growth in display advertising in each of the last two quarters, which mirrors the company's display share, according to ComScore.

Moreover, he said he expects new inventory from acquisitions such as Rivals.com, the application of Right Media and Blue Lithium ad networks to sell Yahoo inventory, the company's integration of display and search sales, and a renewed focus on monetizing nonpremium inventory to bolster Yahoo.

Yahoo has other things going for it. The company has announced or released more products in the last few months than it has in several quarters. While these products are not currently material to earnings, they demonstrate Yahoo's direction on winning new users and making money from the Web in Googlelike fashion.

In addition to purchases such as video ad platform Maven Networks and Web analytics company IndexTools, Yahoo introduced OneConnect, a mobile communications suite that synchronizes users' social networks, e-mail, instant messaging and text messaging platforms.

There are also new OneSearch voice recognition tools, new efforts to embrace the semantic Web for search, and a Google Gearslike browser technology called BrowserPlus in the mix.

Yahoo also joined forces with Google and MySpace to form the OpenSocial Foundation, reaffirming its commitment to the open Web after embracing OpenID.

Such news portends grand plans for Yahoo, something IDC's Rachel Happe approves of. "I believe it indicates a product strategy and direction that rolls up into something bigger," Happe told eWEEK. "They've started to be very aggressive about opening up their services and participating in standards."

Strategically, Yahoo has also taken steps to get closer to Microsoft enemy Google by running Google search ads on its own search platform. Yahoo management is expected to provide more color about this partnership, which had reportedly been doing well and wraps tomorrow.

Rumors also abound that the company has discussed a deal with Time Warner to merge with AOL.

As for other things to expect on Yahoo's Q1 call today, Mahaney said he will be listening for management's thoughts on why the Microsoft's offer is insufficient for shareholders and what value-creating alternatives are available to the company.