Yahoo's good, but not spectacular, quarter

Today's a big day in the high-stakes, back-and-forth drama surrounding Microsoft's $43 billion offer for Yahoo. That's because Yahoo told us how it performed in the first quarter, an announcement that ranks among the most crucial earnings reports in company history. In short: Yahoo had a good (but not spectacular) quarter, beating Wall Street's expectations on revenue and profit.

So what does this mean? Yahoo shareholders can exhale -- the company emerges looking healthier than some thought. Maybe it's not the weakened prey that Microsoft was hoping to snatch up and use against Google. Microsoft may have to consider raising its initial $31-a-share bid -- a move that CEO Steve Ballmer seemed to dismiss earlier today. Or it could take the offer directly to Yahoo shareholders in a proxy fight.

Yet investors weren't too thrilled with Yahoo's news, pushing the stock down 19 cents from its $28.54 close in after-hours trading. Microsoft shares are slightly up from its $30.25 close. Why the unhappiness? Let's delve a little deeper into Yahoo's numbers:

There's a glaring red flag in the earnings report: cash flow is not growing. If you take out a one-time payment of $350 million from AT&T related to a restructured broadband partnership between the companies, free cash flow was only $297 million -- down nearly 20% from the year-ago period. Not a good sign.

Revenue was $1.8 million for the quarter, a 9% increase from the year-ago period. But here's another bad sign: Yahoo is underperforming internationally, with international revenue down 11% to $571 million (U.S. revenue was up 19% to $1.1 billion). For Q2, Yahoo is projecting revenue at between $1.73 billion to $1.93 billion. That's a fairly conservative outlook.

Bottom line: I see Yahoo getting a slight boost, and a bit more leverage, from its quarterly performance. But Microsoft seems to be digging in its heels, refusing to up its bid. Where the situation heads from here is anyone's guess. Perhaps a proxy fight is on its way. Saturday is the deadline Microsoft imposed on Yahoo to seal the deal or face a proxy battle. 

Here's what others are saying about Yahoo today:

MarketWatch: "It is not clear that these results are going to convince investors that the company is worth more money that Microsoft is offering." 

Forbes: "Yahoo! Chief Executive Jerry Yang found a way to get what he needed to keep Microsoft at bay--or at least to wring a better offer out of the software giant." 

Between the Lines: "Yahoo’s report is right down the middle–unlikely to move Microsoft either way." 

BoomTown: "Unless Microsoft steps up and pays more right now, this is not going to end quickly, and will be more a Sisyphean slog than anything else."

Silicon Alley Insider: "The results were not a blow-out and certainly could have been higher. However, they should be enough to allow Yahoo to maintain its current Microsoft stance: no deal unless you raise price." 

Disclosures: I don't own shares of any companies mentioned in this post. And while Microsoft owns this blog, Microsoft does not control, censor or otherwise have any editorial influence over what I write. 

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