Yahoo to serve up Q1 financials; what's in it for Microsoft?

Yahoo is set to report its first-quarter results on Tuesday, with Wall Street soothsayers predicting the company may ride the coattails of Google's phenomenal quarter.

And for Yahoo, such performance could assist it in capturing a higher buyout bid from Microsoft, which has been loath to up the ante without engaging in formal merger talks.

"We think that a big beat March quarter by Google should increase pressure for Microsoft to acquire Yahoo sooner. From Microsoft's perspective, Google has been growing very fast and no other company has been able to challenge Google to become a compelling No. 2 player in online advertising," Sandeep Aggarwal, a Collins Stewart senior Internet Research analyst, said in a research note.

Aggarwal also noted he has received more clarity on the Yahoo-Google advertising test, which is viewed by Microsoft-Yahoo merger watchers as another lever by which Yahoo may elicit a higher bid from Microsoft.

"Yahoo's testing of Google is an AdSense relationship very similar to any third party Web publishers using Google to monetize its Website," Aggarwal noted in his research note. "This means the backend integration, use of Google's algorithm, or retiring of IT infrastructure by Yahoo does not come into play."

Not only would a strong Yahoo quarter potentially assist in attracting a higher bid from Microsoft, it would also show that Yahoo can execute, despite enormous distractions to its workforce. Microsoft launched its unsolicited bid on Feb. 1, one month after Yahoo began its first quarter. (For full coverage, see "Microsoft's big bid for Yahoo.")

A consensus of analysts' estimates foresees Yahoo reporting earnings of 9 cents a share on revenue of $1.32 billion for the quarter, according to Thomson Reuters. The range among analysts, however, varies as low as 7 cents a share to as high as 14 cents.

And while analysts expect Yahoo to report revenue of $1.32 billion, excluding the cost to acquire traffic, Yahoo's management in January said it anticipated generating revenue of $1.28 billion to $1.38 billion, excluding traffic acquisition costs.

"Google has been seeing relatively higher growth from big advertisers. This means that Yahoo, which tends to have far deeper relationships with big advertisers, should see continuation of growth reacceleration in its...display ad," Aggarwal said in his report. "We think that the display ad can offset a likely modest weakness in search."

Search is expected to show some weakness in the U.S. market, which accounts for two-thirds of Yahoo's paid search business. That said, however, Aggarwal still expects that Google advertisers who faced a low ranking with Google's quality scoring may have defected to Yahoo in the first quarter.