Yahoo! (YHOO) Q2 Earnings Preview: Will Yahoo! Need to Search for a Beat? (MSFT, GOOG, AOL)

Shares of Yahoo! Inc. (Nasdaq: YHOO) are trading basically flat ahead of the company's second quarter earnings release, expected after the market closes today, July 20. Shares are down 0.07% to $15.09.

Yahoo! is expected to report EPS of $0.14 on revs of $1.16 billion. For the first quarter, YHOO posted an EPS of $0.22 and revs of $1.597 billion, both topping Street estimates. For the second quarter last year, the company reported EPS of $0.16 and revs of $1.14 billion, compared to the consensus for EPS of $0.16 and revs of $1.14 billion. The current analyst estimate is a 12.5% reduction from last year's second quarter.

Whisper numbers for the quarter are around EPS of $0.15 and revs of $1.17 billion.

Shares of Yahoo! have dropped through the quarter, down about 15% to $13.84 at the end of June. The stock got a little back since the end of the quarter, and is trading down 12.3% since the start of 2010.

Yahoo! is trading rather richly, with a forward P/E of 22.1x FY10 EPS, compared to 17x for Google (Nasdaq: GOOG), and 15x for AOL, Inc. (NYSE: AOL).

Data from Bloomberg has 17 analysts with a Buy rating on the shares, 17 with a Hold, and 1 recommends to Sell. The analyst price target average is $19.55, with a high of $24, and a low of $16.

Analyst Ratings Through the Quarter
At the end of April, post-Q1 earnings, Olympia Capital Markets started YHOO with a Neutral rating and $18 price target.

In early May, Piper Jaffray reiterated their Overweight rating on the shares, with a $20 price target. Piper says that Yahoo's display business remains healthy.

Susquehanna upgraded shares to Positive, with a price target of $19. Current valuations of $15 represent a compelling risk/reward, Susquehanna says. In June, the firm also added Yahoo! to its Best Ideas List in a Turbulent Market.

Mid-May saw Caris & Co. start Yahoo! at Buy with a $21.50 price target.

Following a recent investor day in May, Citi maintained their Buy rating on the shares, keeping a $22 price target. Citi notes that some key takeaways include: 1) Updated and more confident outlook, 2) CFO Morris indicated that Yahoo! is unlikely to unload Asian assets any time soon, 3) robust display ad outlook, and 4) no timeline change on search transition.

Following the same investor day, Needham & Company maintained their Hold rating, noting that some takeaways leaned more toward reshuffling of deck chairs rather than game changing.

Summary
Rival Google reported second quarter earnings that, arguably, disappointed some investors and analysts (though a tense relationship with China weighed on the company through the quarter). Though Google has limited outlets for increasing revs currently, Yahoo! does have a sole focus on display ads, but is making a strong push into more creative ways to retain users, mainly through the use of social networking and more unique content on their site. One notable move is a stronger affiliation with the wildly popular social networking site, Facebook.

While Google's results were impacted by heavy hiring, don't expect the same at Yahoo! In fact, expense management should be a key to the quarter.

During the quarter, Yahoo! acquired Associated Content, adding enhancement to their social, mobile, local, and media offerings, as well as offer advertisers more options. The acquisition is expected to be completed in Q310. The move is seen by many as an opportunity for Yahoo! in the pursuit of providing more content to users that is not offered by traditional media sources.

Early in the quarter, the company's [now former] CTO Ari Balogh left the company. The move didn't affect the shares dramatically, but some see it as adding another challenge in the company's efforts to mount a turnaround.

Yahoo! also acquired Koprol, a social networking site HQ'd in Jakarta, Indonesia, adding to Yahoo''s plans to expand their global presence.

Finally, the company also committed to a $3 billion stock buyback at the end of June, showing more confidence in the company, and adding value for shareholders.

Yahoo! will no doubt talk about search as an integral part of their strategy going forward, which is now outsourced to Microsoft. Analysts have been moderately bullish on the shares, with many coming back from an investor day with a positive outlook. A discussion from CEO Carol Bartz about the company's push to strengthen their display ad revenue is what should also be expected during the call. An update on the Microsoft partnership, which began shadow-testing certain keywords over the last few days, should crop up. And there's always talks of a potential acquisition/partnership with Foursquare, MySpace, and others. Heck one day Yahoo! itself may be in play as a again as a takeover target, after the botched deal with Microsoft (Nasdaq: MSFT) years ago.

Yahoo! Inc. is expected to release their Q210 earnings on Tuesday, July 20, 2010, at approximately 4:00pm EDT. Stay tuned to StreetInsider.com's Earnings section to see our analysis of the highly-anticipated quarterly results within seconds of their release.

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