Yahoo earnings rise on Alibaba stake

Yahoo's first-quarter net income increased dramatically, but most of the gain was from a noncash gain from the search engine's stake in Chinese Web site Alibaba.

The company reported net income of $542 million for the quarter, compared with $142 million for the same period a year ago. Excluding $401 million related to the initial public offering of Alibaba.com, the business-to-business division of Alibaba, net income slid $1 million.

However, excluding that and other factors, the company reported earnings per share of 11 cents, 2 cents above what analysts surveyed by Thomson Financial expected on average.

Excluding commissions paid to advertising partners, Yahoo's revenue was $1.53 billion, up 14 percent from $1.18 billion in the year-earlier quarter. Analysts had expected $1.32 billion.

(Credit: Yahoo)

Chief Executive Jerry Yang expressed optimism. "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 and to recapture momentum in search," he said in a statement. "We believe we can significantly accelerate our revenue growth, return to our historically high margins, and double our operating cash flow by 2010. This quarter's solid performance underscores the fact that we are executing on that plan."

For the second quarter, Yahoo said it expects revenue to range between $1.73 billion and $1.93 billion. Excluding commissions, which at the company are historically at a rate of about 26 percent, revenue would be between $1.28 billion and $1.43 billion.

Yahoo's future is highly uncertain. In February, shortly after Yahoo announced 1,000 layoffs, Microsoft launched an attempt to acquire Yahoo. This month, Microsoft CEO Steve Ballmer issued a hostile takeover threat, but Yahoo said Microsoft isn't valuing Yahoo "fully."

Since then, the pressure has only increased. Ballmer's deadline is Saturday. Various strategic possibilities have surfaced, ranging from Yahoo using Google's search-ad results or acquiring Time Warner's AOL and buying back its stock with funds from a Time Warner investment. And Microsoft apparently is considering bolstering its bid with funding from News Corp. and an acquisition of its MySpace site.

Further pressure comes from Google, the competitive threat that's catalyzing all these machinations. Google reported a strong quarter last week even as growth slows in the U.S. for people clicking on search advertising.

Strong results could help coax Microsoft to offer a higher bid, an outcome many analysts see as the most likely outcome for Yahoo. Citigroup analyst Mark Mahaney has a Yahoo stock price target of $34 "based on our belief that Microsoft remains committed to its unsolicited $31 bid offer and is capable of and willing to increase that bid in order to conclude this deal."