• by Mark Walsh  @markfwal, April 22, 2008

When Yahoo announces first-quarter earnings today, analysts expect results to meet financial projections and possibly spur a higher takeover bid from Microsoft.

In quarterly previews, analysts forecast that Yahoo will report earnings at the high end of its guidance, ranging from $1.28 billion to 1.38 billion in revenue and $400 million to $450 million in EBIDTA. The consensus estimate is $1.32 billion in revenue and earnings of 9 cents a share for the quarter.

Increased optimism on Yahoo's results was sparked especially by solid first-quarter earnings turned in last week by Google. Yahoo has also reiterated during the quarter that it expects to meet its first-quarter guidance.

Analysts also say a healthy quarterly showing could strengthen Yahoo's hand in negotiations with Microsoft. The Web portal has twice rejected Microsoft's initial $31-a-share offer price as substantially undervaluing the company.

Microsoft in an April 5 letter threatened to lower its bid and oust the Yahoo board unless the Web portal begins to engage in merger talks in the next three weeks. Microsoft CEO Steve Ballmer cited weakening market and economic conditions in defending its takeover offer as not only fair, but generous.

Raising the stakes in their takeover standoff, Yahoo recently began a two-week test in which Google is providing paid search ads for a small portion of Yahoo search queries. The Wall Street Journal has reported that results from the test so far have been positive, possibly paving the way to a longer-term ad partnership with Google.

Yahoo has also reportedly continued talks with Time Warner about a merger with AOL as an alternative to a Microsoft deal. While analysts still anticipate a Microsoft-Yahoo marriage, they believe Microsoft may be under greater pressure to raise its bid after today's earnings report.

"We believe that the Microsoft/Yahoo deal ultimately goes through, and that events over the past few days could push Microsoft to sweeten its bid," wrote RBC Capital Markets analyst Ross Sandler in a report issued Monday previewing Yahoo's first-quarter earnings.

Some major Yahoo shareholders, including Legg Mason, have already indicated that they would like to see Microsoft increase its acquisition offer. In an interview, Sandler said a key factor on whether Yahoo can force Microsoft to up its bid will be its full-year guidance.

"If Yahoo comes out firing and raises guidance, the bid goes up a few bucks," he said. "It's hard to say exactly how high right now, without knowing what they'll do with guidance."

In an effort to bolster its bid price, Yahoo in March released a bullish three-year financial plan projecting a tripling of revenue to 8.8 billion (excluding traffic acquisitions costs) and a doubling of operating cash flow to $3.7 billion by 2010.

With Microsoft's April 26 deadline fast approaching for Yahoo to start negotiations, however, Piper Jaffray analyst Gene Munster predicts a proxy fight before a deal is concluded.

"As long as Yahoo reports quarterly numbers as expected," he wrote, "we believe Microsoft's actions in hiring a lobbying firm and preparing an alternative board...are likely to result in a stalemate that could continue until Yahoo's annual shareholder meeting this summer."

Among other issues that analysts will be eager to gain more insight on from Yahoo are the status of strategic alternatives to the Microsoft bid, results of the Google ad test, and the condition of the online ad market, expecially in regard to display advertising.