By delivering earnings and revenue Tuesday that surpassed analysts' estimates, Yahoo added credence to its board's contention that the Sunnyvale-based company is poised for a dramatic turnaround that justifies a higher sales price than Microsoft's initial bid of $44.6 billion, or $31 per share.
But neither the first-quarter results nor Yahoo's outlook for the rest of the year may be compelling enough to cause Microsoft to sweeten its offer.
"This isn't going to make Microsoft come and out offer $35," predicted Canaccord Adams analyst Colin Gillis.
That leaves the rivals at an impasse, just as they have been since Microsoft stunned Yahoo with its unsolicited takeover attempt nearly three months ago.
"This doesn't change the picture much at all," Susquehanna Financial Group analyst Marianne Wolk said.
Yahoo shares fell 62 cents, about 2 percent, $27.92 at the open of trade Wednesday.
It now appears more likely the standoff between Yahoo and Microsoft will be resolved in a divisive battle that could drag on into the summer, opening the door for Internet search and advertising leader Google Inc. to grow even stronger while the other two companies are distracted by their duel.
"If you want to make money off this (stalemate), buy Google," said Global Crown Capital analyst Martin Pyykkonen.
Microsoft has threatened to oust Yahoo's board if the 10 directors don't accept the current offer Saturday. That risky course of action, known as a proxy contest, probably wouldn't be settled until Yahoo's shareholder meeting, which doesn't have to be held until July.
The cash-and-stock bid is now worth about $43 billion, or $29.88 per share.
Steve Ballmer, Microsoft's chief executive officer, reiterated the software maker has no plans to sweeten its offer. "We think we can accelerate our strategy by buying Yahoo and will pay what makes sense for our shareholders," Ballmer said in remarks made before Yahoo's first-quarter report came out.
Jerry Yang, Yahoo's co-founder, CEO and a board member, made it clear the company won't sell to Microsoft unless the bid is raised. "Our ability to execute on multiple fronts is clearly improving," he told analysts in a Tuesday conference call.
Yahoo said it earned $542.2 million, or 37 cents per share, during the first three months of the year, more than triple its profit of $142.4 million, or 10 cents per share, to begin 2007.
Most of the first-quarter improvement stemmed from a non-cash gain of $401 million recorded to recognize Yahoo's stake in the parent company of Alibaba.com, a leading e-commerce site in China that went public last year.
If not for the Alibaba windfall, Yahoo would have earned 11 cents per share - comparable to its profit at the same time last year, on an apples-to-apples basis.
On that basis, the earnings were 2 cents better than the average estimate among analysts surveyed by Thomson Financial.
Perhaps even more importantly, Yahoo provided the same full-year revenue outlook that it made in late January - just two days before Microsoft made its unsolicited bid.
Yahoo's first-quarter revenue climbed 9 percent to $1.82 billion.
After subtracting commissions Yahoo paid its advertising partners, its revenue totaled $1.35 billion - just $30 million ahead of analysts' average projection.
The first-quarter numbers provided a reminder of the ever-widening gap separating Yahoo from Google, whose profit during the same period climbed 30 percent to $1.3 billion on revenue that rose 42 percent to $5.2 billion.
Yahoo expects its revenue to increase more dramatically in 2009 and 2010 as the benefits from its expanded Internet advertising network start to kick in.
"We feel we are on the verge of fundamentally changing the game," Sue Decker, Yahoo's president, said in Tuesday's conference call.
An experimental advertising partnership with Google also could help boost Yahoo's profit. Yang and Decker to declined to discuss the Google tests, which began two weeks ago.
Analysts believe a long-term partnership between Yahoo and Google would be difficult to pull off because of the antitrust concerns that would raised, given that the two companies control more than 80 percent of the U.S. search market.
Yahoo also has been exploring a possible merger with the Internet operations of Time Warner Inc.'s AOL, which has been struggling in recent years.
"We will not enter into any transaction that doesn't recognize the full value of this company," Yang said.
Given the Microsoft bid, Pyykkonen said Yahoo's optimism should be taken with a grain of salt. "You almost have to discount anything positive management has to say because they are just trying to get the (sale) price up," he said.
But Microsoft's bid could rise above its original value even without management upping the ante if Microsoft's own quarterly earnings report - due out Thursday - pushes its shares above $32.60.
Microsoft's stock price finished Tuesday at $30.25, down 17 cents.
Many analysts believe Microsoft will raise its offer to between $32 and $35 per share, or about $46 billion to $50 billion, to prevent its prickly courtship of Yahoo from becoming even more acrimonious.