Yahoo announces earnings after the closing bell: Can it out-Bing Microsoft?

Since Carol Bartz joined Yahoo (YHOO) as chief executive officer in January, she has been busy cleaning house, streamlining expenses and trying to turn the struggling search company around. In the process, she has reduced the employee count by five percent, or 700 people. Industry watchers see these moves as an effort to close a deal with Microsoft (MSFT); this could happen as soon as this week, according to All Things Digital.

But how will all this effect earnings? With Yahoo set to announce its second quarter earnings after the market closes today, it seems possible that Bartz's efforts may actually result in a nice surprise for investors. My view: Investors should temper any enthusiasm with a clear dose of reality: Yahoo operates in a tough market that is dependent on advertising; chances are, there will be no good news on this front.

Analysts expect Yahoo to report earnings per share of eight cents on revenue of $1.14 billion, a significant drop from one year ago, when the company earned 10 cents on revenue of $1.8 billion. Gross margins should come in at 71.58 percent, down from 76 percent in the first quarter. The weak market is already reflected in Yahoo's shares, which are down 20 percent over the past year and now trade around $16.70.

When the earnings come out later today, it seems likely that there will be results on the following metrics:

  • Search results: Analysts expect to see a decline around five percent from one year ago; anything less than that will be good news.
  • Share of the search market: It should remain stable with last year, but Microsoft's new Bing search engine could erode that in the future. Hopefully, the company will elaborate on its search strategy.
  • Display ad sales: Analysts are looking for a 22 percent drop.

To get an indication of the company's outlook and its ability to compete against the competition, Bartz will have to address:

  • Whether Yahoo is investing more in its operational hardware and software to bring together all of its programs and provide users with a better experience
  • Its strategy going forward to compete with Microsoft's new search engine Bing -- and the $100 million ad campaign that will go into its launch. The question here is if Yahoo is providing additional resources to market its own business. If so, that could be a positive sign.

Yahoo also plans to announce the launch of a new home page (in beta) this afternoon. This could, perhaps, be designed to ward off the ill-effects of any bad earnings news. The new homepage is supposed to integrate some 65 apps, including linking users Twitter accounts with their Yahoo feed.

Chances are good that Yahoo's earnings today will be muted. But the success of the company going forward will depend on how it addresses these key issues.

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