Can Yahoo Turn It Around?

Web pioneer Yahoo is set to report earnings Tuesday after the market closes, and with analysts looking for another sour quarter, though the recent revival of speculation about a deal with Microsoft has thrown a new wrinkle into the company's future.

Looking at the numbers, analysts polled by Thomson Reuters are expecting Yahoo (NASDAQ: YHOO) to turn in earnings of 8 cents a share on $1.14 billion of revenue, down from 10 cents a share on $1.8 billion in the second quarter of 2008.

Tomorrow's earnings announcement will be the second under the stewardship of CEO Carol Bartz, who in January took over for embattled founder Jerry Yang, one of the company's founders who was widely criticized for failing to reach a deal with Microsoft last year.

Bartz has moved aggressively to execute a turnaround, announcing a series of layoffs with Yahoo's first-quarter earnings. Bartz has also brought in Tim Morse to replace Blake Jorgensen as CFO, helping solidify her management team.

After several quarters dominated by a storyline of weak ad sales in a down economy, particularly in key verticals such as finance, autos and real estate, one analyst questions how much the numbers even matter.

"While Yahoo's 2Q performance is unlikely to be scrutinized too heavily by investors, the Street is now on the look-out for concrete evidence that the new team is focusing and executing against the strategy and monetizing Yahoo's key online assets," Broadpoint AmTech analyst Benjamin Schacter wrote in a research note. "In other words, the pressure is now on Bartz and her team to show they can execute better than those before them."

Bartz has refused to comment publicly on a deal with Microsoft, save for saying that she was open to it, provided it brought in "boatloads of money."

Yahoo did not immediately respond to a request for comment for this story.

The rumored deal would see Microsoft pay out more than $1 billion to Yahoo up front for its search business, with future payouts down the road in a multi-year partnership.

The idea would be to join forces in an effort to better compete with runaway leader Google, which performed a commanding 65 percent of U.S. search queries, according to the most recent figures from comScore. Yahoo, the No. 2 player in search, saw its share of the market down a tick in June as Microsoft's share rose slightly, likely due to the long-anticipated unveiling of its redesigned search engine, Bing.

"We have suggested for some time that such an alliance would make sense," Standard & Poor's analyst Scott Kessler said in a research note. "We also think the time might be right to finally consummate a deal, after literally years of discussions."

[cob:Special_Report]Given the low expectations analysts see going into the quarter, an announcement of a deal would likely give the most immediate pop to Yahoo shares, which closed Monday trading at $17.01.

Schacter looks for Yahoo to only provide guidance for the third quarter, given the shape-shifting macroeconomic climate.

Among other signs of life in the Sunnyvale, Calif.-based firm include a home page redesign that is nearing completion. The new home page, due out by the end of the year, is expected to sport embeddable widgets and new search features.

"We are quite bullish on the new homepage, but as always, it will come down to the execution, and we simply do not give the benefit of the doubt to Yahoo until the company earns it," Schacter said.