Earnings Preview: Is the deck stacked against Yahoo's 2Q?

With the Internet sector desperately searching for a spark to pull it out of its two-month malaise, Wall Street's hoping Yahoo! Inc.'s (Nasdaq: YHOO) second-quarter earnings can serve as a catalyst for another mercurial rally.

But this time around, the deck is stacked against the Internet's most proficient portal.

Interest-rate worries, the normal seasonal slowdown in Internet usage and a pair of huge acquisitions have Yahoo! scrambling to maintain its unparalleled success.

Yet, no one's willing to bet against Yahoo! this quarter, either.

"They beat earnings estimates every quarter and I wouldn't be surprised to see it happen again," said Dawn Simon, an analyst at Brown Brothers Harriman. "Certainly, this quarter will tell us a lot about their management, but there's every reason to think it will come out of this stronger than ever."

A survey of analysts by First Call Corp. pegs Yahoo! for a profit of 8 cents a share in the quarter.

Sales estimates range from $100 million to $115 million.

Even the most conservative sales estimates have Yahoo! growing by approximately 15 percent sequentially.

Last quarter, it pocketed $25 million, or 11 cents a share, on sales of $86 million. First Call predicted it would earn 8 cents a share in that quarter.

"We believe Yahoo! will have another strong quarter," said Henry Blodget, an analyst at Merrill Lynch, in a research note. "Yahoo! usually beats consensus and we would not be surprised to see it do it again. We would caution against wild enthusiasm, however, especially with regard to page views."

Watching the page views

Most analysts wouldn't comment on their page view estimates, perhaps afraid to set the bar too high for all the world to see. But there's no way Yahoo! will be able to match the dazzling traffic figures it's enjoyed in quarters past.

Last quarter, it reported 235 million page views in March, up 41 percent from the 167 million it had in December. It also had more than 47 million registered users.

Blodget was one of the few analysts to go out on a limb, predicting 305 million page views a day in June, a sequential increase of 30 percent.

Of course, that includes about 40 million page views from its $3.56 billion acquisition of GeoCities. While GeoCities did record 62 million page views last quarter, Yahoo! doesn't count mini-pages called "pop-ups" in its traffic count.

Acquisitions test management

Speaking of the GeoCities deal, Yahoo! already announced that it would take $68 million charge in the quarter and layoff 100 GeoCities employees.

Simultaneously, it's integrating its $5.7 billion purchase of Broadcast.com.

Acquisitions of this size are almost necessarily dilutive to future earnings.

"There's going to be some moderate dilution down the road, but I'm not sure if we'll see much of that this quarter," said David Levy, an analyst at ING Baring Furman Selz. "Still, Yahoo!'s in the driver's seat and has a market-leading position."

Multimedia Yahoo!

By nabbing GeoCities and Broadcast.com, Yahoo! has improved its reach and its multimedia possibilities.

"This is the biggest test for Yahoo! so far," Simon said. "Not only in terms of integrating all these employees and technologies, but how they use these assets."

Yahoo! is working on a plan to create a personalized multimedia portal for Net users, that combines user-created content and communities from GeoCities with the audio and video streaming aggregation skills and technology of Broadcast.com.

But that broadband portal effort is still in the works. Meanwhile, Snap.com two weeks ago became the first portal to launch a so-called "broadband'' portal for Net users with the kind of high-speed access needed.

While conventional wisdom suggest that Yahoo! can't continue much longer as an independent entity, the company hasn't give any signals that it's in the market for a telecommunications partner. Moreover, there hasn't even be the scent of such a rumor on Wall Street.

As for the stock, Yahoo! shares have mirrored the rest of the Internet sector. After peaking at $244 a share in April, the stock rapidly fell to $119 in mid-June.

But the stock has surged up to $161 a share of late, a typical pre-earnings move for Yahoo!. Twenty of the 26 analysts following the stock rate it either a "buy" or "strong buy."

"It's a good value right now and will be for the foreseeable future," Levy said. "I love the portal sector and Yahoo! is still is the undisputed leader."