The Windows Observer--Ballmer Downplays Yahoo's Financial Results

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Volume 5, Number 16 -- April 23, 2008

Ballmer Downplays Yahoo's Financial Results

Published: April 23, 2008

by Alex Woodie

Microsoft's $40 billion quest to acquire Yahoo encountered another hurdle yesterday following impressive financial results from the Internet search and portal provider. Revenues of nearly $2 billion and net income of more than half a billion dollars for its first quarter ended March 31 generally exceeded analysts' expectations. Steve Ballmer, the CEO of Microsoft, downplayed the significance of the quarterly announcement, saying it wouldn't affect Microsoft's offer.

Yahoo's revenues of $1.8 billion during the first quarter of 2008 represented a 9 percent increase compared to the first quarter of 2007, and it exceeded analyst expectations of $1.32 billion. Its net income of $542 million for the quarter more than tripled the $142 million in brought in last year, and brought earnings to $.37 per share, which exceeded analyst expectations of $.09 per share.

However, much of that increase in net income was due to a one-time gain of $401 million related to the IPO of Alibaba.com, a company Yahoo has an equity interest in. Without the boost Alibaba.com provided to the bottom line, Yahoo's net income would be much less. This is reflected in its reported operating income of $121 million, a 28 percent decrease compared to the $169 in operating income the company brought in during the first quarter of 2007. In any event, Yahoo's financial results were generally viewed as favorable by Wall Street, the major media outlets, and, of course, Yahoo itself.

Yahoo CEO Jerry Yang said the results verify the company's strategy. "Yahoo is beginning to realize the benefits of the very substantial and deliberate long-term investments we've made to capitalize on the opportunities ahead in display [advertising] and to recapture momentum in search," stated Yang, who largely staked his company's independence and his reputation on Yahoo's ability to deliver strong financial results for the quarter.

Yahoo's positive financial results give it more ammunition in its battle to fend off Microsoft, or at least force the software giant to increase its bid. Since Microsoft made its unsolicited billion bid for Yahoo on January 31, the company has maintained that the offer substantially undervalues the company. The offer, which is a mix of cash and Microsoft stock, was initially worth $44.6 billion to Yahoo, or $31 per share, but it has since declined in value to around $40 billion, or about $29 per share, due to due to declines in Microsoft's stock.

Yahoo insiders have said $34 per share would do the trick. But a bigger bid from Microsoft doesn't appear to be in the offing.

Even before Yahoo published its results yesterday, Ballmer was preemptively downplaying Yahoo's results with comments made during the launch of a new Web portal in Africa. Ballmer was quoted as saying: "I wish Yahoo all the success with its results, but it doesn't affect the value of Yahoo to Microsoft."

With Yahoo bolstered by its positive results, it would appear that Microsoft will be forced to play its hand by taking its bid hostile and begin amassing Yahoo stock on the open market and getting friendly delegates voted to the Yahoo board. On Saturday, a three-week deadline that Microsoft set for Yahoo to accept its offer expires. Ballmer has hinted that it may actually lower its bid if Yahoo hasn't come to the table by that time. This could get very ugly in a hurry.