Yahoo! Earnings! ........ zzz

Yahoo! posted net income of $542.2 million, compared to $142 million a year ago. Nice increase? Well, not exactly, since $401 million of the gain was related to the IPO of Alibaba.com (better known as the kitchen sink). In other words, they made about what they did a year ago - they were flat. Flat is not good on Wall Street. To add insult to injury, international revenue fell 11%, while U.S. revenue was up 19%. Nice increase on the domestic side, but given that the U.S economy is slowing, 19% more of a shrinking share is not good. It looks like the "!" will need to be officially stripped from Yahoo! since the past excitement continues to be lost. Steve Ballmer and Microsoft now need to figure out whether they should continue to offer $31 a share. On the other hand, he is probably dancing something like he did at a past MSFT shareholder meeting, given that he and Microsoft are now back in the driver's seat, not that they ever left. I am really not sure what other cards Yahoo! has left to play. It is hard to see anyone else offering more the $31 a share, and also hard to see how Yahoo! can sustain even $28 if Microsoft were to walk away. Sure, Yahoo! gave good guidance, and mentioned how they are on track to doubling operating cash by 2010, but what do we really expect them to say? Those that bought the $30 and $32.5 calls this last week, hoping to see a huge quarter, followed by Microsoft capitulation and prostrating, are going to have to keep wishing. Their wishes may still come true, but the strategy payoffs are a little less guaranteed, especially with short-term options. Instead of being forced into submission, Ballmer is doing the dance once again, and Jerry Yang would be smart to join in. The Yahoo! board might also want to join the conga line as well - to keep wearing out the dance theme - since the shareholder activist and their lawyers are probably firing up the briefs as we speak.

Tickers: MSFT, YHOO