Yahoo's strong first-quarter earnings Tuesday answered some questions in the ongoing Microsoft acquisition saga, but how the story will...

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Yahoo’s strong first-quarter earnings Tuesday answered some questions in the ongoing Microsoft acquisition saga, but how the story will end is no clearer.

Sunnyvale, Calif.,-based Yahoo reported profit, adjusted for one-time items, of 11 cents a share, above the 9 cents a share Wall Street analysts had expected.

Revenue of $1.82 billion was at the high end of the range Yahoo had forecast in January.

For Yahoo to continue to fend off Microsoft’s purchase offer, now nearly three months old, many observers said it had to have a standout quarter.

Everything Yahoo management did leading up to Tuesday indicated their confidence in just such a result, and now it’s in the books.

“We know why Yahoo hasn’t responded positively to Microsoft,” said Matt Rosoff, analyst with Directions on Microsoft. “They knew they were going to have a better quarter than they had last quarter.”

Microsoft’s initial bid was made public Feb. 1, three days after Yahoo delivered a disappointing quarterly report that sent its stock to lows not seen in four years.

By putting off Microsoft long enough to report another quarter’s results, Yahoo is making the case to its shareholders that it’s worth more than Microsoft’s offer, now valued at $43 billion.

Chief Executive Jerry Yang said Tuesday he was “very proud” of the results and the company’s long-term plan for growth. Reiterating language Yahoo has used in previous rejections, he said Microsoft’s offer “substantially undervalues” the company.

Perhaps more important than a strong quarterly report was Yahoo’s forecast for the rest of the fiscal year. This did not dazzle.

Yahoo left unchanged its predicted 2008 revenue, in the range of $7.2 billion to $8 billion, and raised its outlook for operating cash flow by $50 million.

It remains to be seen whether this will persuade Yahoo investors to stand by Yang as he pursues the go-it-alone strategy, especially with Microsoft CEO Steve Ballmer poised to turn up the heat Saturday.

That’s the deadline he gave Yahoo to conclude an agreement on the offer or face a hostile takeover, likely a lengthy process.

The latter would involve making a potentially lower offer directly to Yahoo shareholders or trying to oust Yahoo’s board in a proxy fight.

Before Yahoo reported its results Tuesday, Ballmer said the numbers would have no impact on his calculation of the company’s value.

“We think we can accelerate our strategy by buying Yahoo and will pay what makes sense for our shareholders,” Ballmer said, according to Reuters. “I wish Yahoo all the success with its results but it doesn’t affect the value of Yahoo to Microsoft.”

Brent Thill, director of software research at Citi Investment Research, said Microsoft needs to buy Yahoo to catch Google, the runaway leader in online search and advertising.

“I still think Microsoft’s looking at this over the next five to 10 years and saying this is strategic, we have to do it,” he said.

Despite Microsoft’s public signals that it won’t raise its bid, Thill is among the analysts who think the company could still raise its offer by a dollar or two per share, particularly if the deal was friendly.

“If it’s hostile, which it feels like it’s still going down that route, I don’t think Microsoft’s inclined to raise it at all,” Thill said.

“If this thing truly goes hostile and it drags out, it’s not going to be a good event.”

Microsoft will report the results of its fiscal third quarter Thursday and issue early guidance for the 2009 fiscal year. It has exceeded expectations in each of its previous two quarters.

Thill said it’s frustrating to see Microsoft’s stock weighted down by the uncertainty around Yahoo, particularly with new versions of the company’s biggest products newly on the market after a long development cycle.

Analysts polled by First Call expect, on average, earnings of 44 cents a share. Microsoft forecast revenue of $14.3 billion to $14.6 billion for the quarter.

Benjamin J. Romano: 206-464-2149 or