Yahoo! Looks Forward, Hopes for Mercy

Although Lindsay says investors will likely be disappointed by Yahoo!'s operating performance, they might nonetheless give it a "get out of jail free" card just this one time, given all the distractions posed by Icahn and Microsoft.

Lehman Brothers' Douglas Anmuth said he expects revenue will be hurt by macro-economic headwinds that are affecting display advertising in particular, but that earnings before interest, taxes, depreciations and amortization could fare somewhat better because of Yahoo!'s recent reduction in headcount as well as cost containment efforts.

"We believe (Monday) morning's settlement between Yahoo! and Carl Icahn -- in which Mr. Icahn and two of his nominees will be appointed to the Yahoo! Board -- likely takes some of the edge off of second-quarter results and reduces the significance of Yahoo!'s annual meeting on August 1," Anmuth wrote in his research.

Youseff Squali, an analyst for Jefferies, noted that display advertising accounts for 40% of Yahoo!'s revenue, and it will likely show slowing growth in the second quarter compared to the first quarter because of a weakening in key categories such as autos and finance.

Paid search, however, should be a bright spot because of Yahoo!'s improvements to cost per clicks and monetization, which more than offset the incremental loss in query share in the U.S. and overseas.

"Bottom line, we expect 2Q to be in line or slightly below expectations -- a good performance considering the weaker economic environment and the company's much publicized battle with MSFT, which obviously is distracting management and the employee base at large," Squali wrote in his research. "Having said that, we continue to expect that MSFT will ultimately buy all of Yahoo! and that a partial search deal is not particularly appealing to us (even if it values the search asset relatively fairly)."

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