Yahoo bested Wall Street expectations today, announcing stronger net income for its third quarter, despite an also expected decline in revenue.

The Sunnyvale, Calif.-based Yahoo reported net income of 13 cents a share, or $186.1 million, on revenues of $1.13 billion for the quarter ended Sept. 30, 2009, which was a decline from $1.33 billion the same period a year ago.

Wall Street estimated that Yahoo (YHOO) would earn just under seven cents a share on revenues of $1.12 billion.

The improvement includes a $98 million gain on a sale of the company’s stake in Alibaba.com in China, which is nonrecurring, as well as other cost-cutting by CEO Carol Bartz.

In addition, Yahoo’s expectations for the fourth quarter are more positive than those of investors.

Also in the earnings numbers: Yahoo had $4.5 billion in cash and marketable securities, as well as 13,200 employees.

But there was something to worry about: Search advertising revenue was off 19 percent and display was off eight percent at “Owned and Operated” sites on Yahoo.

Google (GOOG), in contrast, reported a seven percent rise in its recent third-quarter results last week, and its execs projected a mood of smooth sailing ahead and no more econalypse.

Nonetheless, overall, it was a solid performance from the Silicon Valley icon, especially compared to some of its recent and decidedly rockier earnings reports.

But, while investors can now breathe a little sigh of relief that the bleeding seems to have stopped, they will now likely focus on how much growth the Yahoo can have in the future.

That’s the next story for certain, starting with Yahoo’s analyst meeting next Wednesday, although today’s Yahoo management buzzword was “stablized.”

“With revenue coming in above our guidance and flat sequentially, we had a solid third quarter that signals our major businesses have stabilized,” said Bartz in a press release. “With new products like Yahoo! homepage, our brand revitalization campaign and expansion in the Middle East through Maktoob.com, our execution is improving and we’re focused on what we do best–being the center of people’s online lives.”

Added CFO Tim Morse: “In the third quarter we saw strength in key areas of our business. Our efforts to reposition Yahoo! are still in the early stages, but we’re confident that our investments in the business will enable us to capitalize on growth opportunities as the economy recovers.”

You can read all about it in Yahoo’s press release here, which includes performance tables of third-quarter results, or below without tables.

More to come at the conference call at 2 pm, which BoomTown will blog live!

Here is the Yahoo press release on the quarter:

YAHOO! REPORTS THIRD QUARTER 2009 RESULTS

Company Exceeds Revenue Outlook Maintains Strong Balance Sheet with over $4.5 Billion in Cash and Marketable Debt Securities

SUNNYVALE, Calif., October 20, 2009–Yahoo! Inc. (NASDAQ: YHOO) today reported revenues of $1,575 million for the quarter ended September 30, 2009, a decrease of 12 percent from the third quarter of 2008 and slightly above the second quarter of 2009. Excluding the impact of currency rate fluctuations and divested business lines, revenues for the third quarter of 2009 would have declined 7 percent compared to the third quarter of 2008.

Net income per diluted share for the third quarter of 2009 was $0.13, compared to $0.04 for the third quarter of 2008. Non-GAAP net income per diluted share for the third quarter of 2009 and 2008 was $0.15.

“With revenue coming in above our guidance and flat sequentially, we had a solid third quarter that signals our major businesses have stabilized,” said Yahoo! chief executive officer Carol Bartz. “With new products like Yahoo! homepage, our brand revitalization campaign and expansion in the Middle East through Maktoob.com, our execution is improving and we’re focused on what we do best–being the center of people’s online lives.”

:In the third quarter we saw strength in key areas of our business,” said Yahoo! chief financial officer Tim Morse. “Our efforts to reposition Yahoo! are still in the early stages, but we’re confident that our investments in the business will enable us to capitalize on growth opportunities as the economy recovers.

Revenues

* Marketing services revenues declined 12 percent and fees revenues declined 11 percent, compared to the third quarter of 2008.

* Marketing services revenues were flat and fees revenues increased 2 percent, compared to the second quarter of 2009.

* Marketing services revenues from Owned and Operated sites were $851 million for the third quarter of 2009, a 15 percent decrease compared to $1,002 million for the same period of 2008. The decrease was primarily driven by a 19 percent decline in search advertising revenue and an 8 percent decline in display advertising revenue.

* Marketing services revenues from Affiliate sites were $526 million for the third quarter of 2009, a 6 percent decrease compared to $561 million for the same period of 2008.

Cash Flow and Cash Balance

* Cash flow from operating activities for the third quarter of 2009 was $355 million, a 2 percent increase compared to $347 million for the same period of 2008.

* Free cash flow for the third quarter of 2009 was $258 million, a 20 percent increase compared to $215 million for the same period of 2008.

* Cash, cash equivalents, and investments in marketable debt securities were $4,503 million at September 30, 2009 compared to $3,522 million at December 31, 2008, an increase of $981 million.

Business Outlook

GAAP revenue for the fourth quarter of 2009 is expected to be in the range of $1,600 million to $1,700 million. Non-GAAP operating income before depreciation, amortization, and stock-based compensation expense for the fourth quarter of 2009 is expected to be in the range of $400 million to $450 million. Income from operations for the fourth quarter of 2009 is expected to be in the range of $135 million to $155 million.

It’s not likely the announcement of Yahoo’s third-quarter earnings later today will be quite as exciting as its Open Hack Day in Taiwan this past weekend, but BoomTown will try to make those numbers and the conference call afterward with CEO Carol Bartz as entertaining as possible.

Still, while recent results from both Google (GOOG) and, especially, Apple (AAPL), have been pretty impressive, no one is expecting Yahoo to blow the roof off.

So, here’s what to look for:

Wall Street is estimating that Yahoo (YHOO) will earn just under seven cents a share, with revenue of $1.12 billion. This compares with nine cents and $1.33 billion in the same period a year ago.

Some whisper numbers peg the results at close to 10 cents a share, which would be a sensation, especially given the still-recovering state of display advertising, which is Yahoo’s bread and butter.

Also likely to be asked about is the recent decline in Yahoo’s search share. According to comScore (SCOR), its share in the important U.S. market dipped to 18.8 percent in September, even as both Google and Microsoft (MSFT) saw small gains.

Yahoo is set to start an online search and advertising partnership with Microsoft, as soon as regulators give it the thumbs up, as seems likely.

And analysts will likely ask about the effectiveness of Yahoo’s $100 million marketing campaign, designed to revitalize its image, which it is ramping up.

But Bartz has also been cutting costs and streamlining staff and operations–her strong suit–which could improve the bottom line.

Yahoo shares, while up 39 percent for the year, are down 2.7 percent for the month, even as other tech firms are up.

The stock is down 1.7 percent today, hovering just under $17 a share.

Whether the results and what Yahoo has to say about the year ahead will affect the share price remains to be seen.

Until then, here is a link to a very good Q&A interview Bartz did with the New York Times about her management style, which was posted over the weekend.

Money quote, from the ever-quotable Bartz:

“I have the puppy theory. When the puppy pees on the carpet, you say something right then because you don’t say six months later, ‘Remember that day, January 12th, when you peed on the carpet?’ That doesn’t make any sense.”

Yahoo is set to unveil a major marketing campaign to reset advertiser and consumer perception of the long-troubled company during Advertising Week in New York, which starts a week from tomorrow.

According to numerous sources BoomTown has spoken to about the campaign, Yahoo (YHOO) is–at least with advertisers–going to focus on stressing the size and scale of the Internet giant.

The details of the plan will be made public Tuesday, Sept. 22, at a press conference.

It will take place immediately after a keynote speech–titled “Yahoo’s Consumer Revolution…Round II”–that the company’s new CMO, Elisa Steele, is set to deliver on the second day of the Interactive Advertising Bureau’s MIXX conference.

MIXX is a two-day event, run by IAB, focused specifically on online advertising.

Yahoo CEO Carol Bartz is also going to be attending Advertising Week–during which all the major players in the advertising business gather in Manhattan for a series of events–for a plethora of meetings with big Yahoo clients.

It is likely she and several other senior Yahoo execs will be at the press conference, sources said.

That press event will also include Penny Baldwin, a well-known industry exec Yahoo hired as its SVP of global integrated marketing and brand management in July.

The main message Bartz is set to deliver is that Yahoo is a powerhouse unlike any others on the Web when it comes to online display advertising.

And, in fact, Yahoo–despite all the internal and external turmoil it has undergone in recent years–remains one of the largest sites on the Internet, and is the top player in what is also called graphical advertising, as well as online media and communications.

“The whole push seems to be to remind people of vibrancy of the brand and exactly how huge its reach is,” said one person who has seen parts of the presentation. “It is less Yahoo is back than Yahoo has never left.”

Sources also noted that Yahoo is likely to stick to its plan to push the idea of “your home on the Web” to consumers, which I had previously posted about earlier this summer.

The idea of the Silicon Valley icon being the key hub destination for Internet users does dovetail with pushing its size to advertisers–major marketing messages that will also likely cost a pretty penny.

They will have to–Microsoft (MSFT) has been in the midst of a $100 million campaign for its new Bing search site and will likely spend more when it unveils updates to the service, dubbed Bing 2.0–within the next few weeks.

The company showed the changes it showed to its own employees last week, which was the subject of much tweeting on Twitter.

Yahoo will apparently give more specifics as to the spend for the marketing push at the press conference.

But, many sources said, the company is already out in the advertising market now, buying tens of millions of dollars in advertising online and offline to hawk Yahoo in print, on television and elsewhere.

(Full disclosure: Sources said that campaign will include The Wall Street Journal network, which includes this site.)

“It’s dramatic,” said one source about the marketing outlay.

Since she got to Yahoo, Bartz has continually stressed the need to promote Yahoo products and services more, including in an interview last week on CNBC (you can see that longish video here).

And, in the July earnings call for Yahoo, Bartz said: “In addition, we’re hard at work on plans to reposition our most valuable asset: Yahoo’s brand. Our Q3 plans include an initial wave of incremental marketing spend which will increase substantially into Q4 and next year.”

Also, in a Q&A in the same call, she added more about the long-term nature of the spending on branding:

“The branding and our whole campaign of advertising is just starting; however you have to understand that this is an ongoing campaign so it’s not transient at least for the next year or so. We’re really going to move to reposition the Yahoo brand and Yahoo Company, so right now, consider that as cost that’s in the system.”

What Bartz and other Yahoo execs will likely stress less is search, due to the search deal Yahoo struck in July with Microsoft in which the software giant will take over the back-end technology and Yahoo will sell search ads for both companies.

The company will compete with both Microsoft and Google (GOOG) in garnering the search market still, once the partnership is approved by regulators, with Yahoo focusing on differentiating itself via innovative user interface, design, features and functionality.

Apparently, not everyone leaves Yahoo (YHOO) to join Microsoft.

On Friday, sources said, it was announced internally at Microsoft (MSFT) that Karl Siebrecht (pictured here), the former president of Atlas at aQuantive, is joining AdReady at the end of the month as president and COO.

AdReady, based in Seattle, bills itself as an “advertising technology company focused on making online display advertising accessible and effective for advertisers of all sizes.”

The start-up has raised a total of $12 million in venture funding from Bain Capital Ventures, Khosla Ventures and Madrona Venture Group.

Aaron Finn is its current CEO and president, but is apparently giving up one title to Siebrecht.

And–probably no coincidence–aQuantive’s former CEO is Brian McAndrews, who is now managing director at Madrona.

But, sources said, Siebrecht was introduced to Finn through David Rosenblatt, an advisory board member of AdReady–and who competed with Siebrecht as CEO of DoubleClick, which was bought by Google (GOOG).

Also interestingly, Jason Kilar, CEO of premium video site Hulu, is on AdReady’s board.

Oh, it is a small tech world, after all.

Microsoft bought aQuantive–which is now called Microsoft Advertising–in mid-2007 for $6 billion and Atlas was one of its units.

One of Yahoo’s highest-ranking premium advertising sales execs–David Dickman, VP of West Coast sales–is leaving the company, people familiar with the situation said.

Sources said Dickman, who will leave Yahoo at the end of the month after three years at the company, is reportedly going to Time Warner (TWX) unit Warner Bros. to work in digital sales.

Well liked at Yahoo (YHOO), Dickman was impacted in a sales reorganization done in the spring.

At the time, Atlanta-based regional sales VP Mitch Spolan was named to lead Yahoo’s North American field sales, consolidating its display ad sales groups, which had previously been split between the East and West Coasts.

Before that, Dickman ran the Western sales and another exec the Eastern sales, serving big display advertisers. The latter exec took over agency sales, while Dickman remained running sales on the West Coast, reporting to Spolan.

Dickman’s departure comes after another top Yahoo display ad exec, Todd Taplin (pictured here), left last week. He was regional VP of sales in New England and Canada, responsible for big Yahoo display advertising accounts like Fidelity Investments in Boston.

Taplin–who was also well regarded at Yahoo–took a job at Collective Media in New York, as its new Chief Revenue Officer.

Flux at the Yahoo ad sales group in the U.S.–which accounts for most of the Internet giant’s revenues–will be closely watched by Wall Street right now since it is also charged with selling premium search ads for both Yahoo and Microsoft (MSFT) under the recent deal they struck. Yahoo is also aiming to turbocharge its premium graphical ad sales business.

After a while–in a BoomTown mangling of the old cliché–if you are a nail, everything begins to look like a hammer.

So, it is probably inevitable that the next thing for much-beleaguered AOL staffers to start rumbling about is 2,000 people getting laid off next week, as was reported earlier this week by Silicon Alley Insider.

After all, the Time Warner (TWX) unit has a long history of whacking employees. So, it is easier to assume things will not be different under the regime of the latest CEO Tim Armstrong.

Except it’s not actually true that such massive cuts are in the offing, since–as many sources I spoke to said–Armstrong is only in the early part of figuring out what to do about the cost structure of AOL, after laying out a company strategy and rejiggering management recently.

While the end result of the cost-to-benefit analysis might, in all likelihood, mean layoffs of a chunk of its 7,000 employees–a larger number for its smaller operations.

And, after all, staff costs are one of the biggest line items in AOL’s budget–sources at the company said Armstrong will not rely on simply cutting jobs to craft a more attractive budget for its upcoming spinoff.

Still, there is obviously a lot of pressure on Armstrong to get the financials–which are still largely dependent on AOL’s declining, but money-generating, access business–looking pretty.

That access business did almost $2 billion in revenue last year–about half its sales–and it represented almost all its profits.

In contrast, AOL’s advertising business lagged, dropping hugely over the last several quarters.

Still, Armstrong has laid out a strategy that has included, in part:

Being a new kind of content giant, via a series of branded niche media sites, with about 500 full-time writers and editors and 1,500 freelancers; selling premium display advertising on these sites and strengthening its third-party self-service ad network business; finding a way to use its communications properties to redistribute traffic to other properties in a kind of virtuous circle.

There are also local, analytical and venture elements. But–for all intents and purposes–Armstrong’s plan is a content-and-advertising model, supported for now by the dwindling piles of cash from the access business.

That’s why, of course, costs are the next item on Armstrong’s to-do list.

“The cost structure is the last part of what was going to be dealt with, as Tim has told everyone,” said one person close to the situation about the former Google (GOOG) exec. “But, if it is slash-and-burn only, that would be pretty short-sighted.”

Perhaps, except that it is that exact tactic that has been business-as-usual at AOL for far too long.

BoomTown was so glad we had this time together with Yahoo (YHOO) CEO Carol Bartz and Microsoft (MSFT) CEO Steve Ballmer, just to have a laugh or sing a song about a major Web search and advertising deal.

I liveblogged the conference call, which I updated as it happened.

Did Ballmer scream and jump up and down? Did Carol say something naughty?

Or as the companies said:

SUNNYVALE, Calif. & REDMOND, Wash., Jul 29, 2009 (BUSINESS WIRE)–Yahoo! Inc. and Microsoft will host a conference call for accredited media and financial and industry analysts at 8:30 a.m. ET/5:30 a.m. PT today, July 29, 2009, to discuss the search agreement the companies recently announced. In addition, b-roll footage will be available. The satellite feed of b-roll footage will contain broadcast footage of remarks from Yahoo! CEO Carol Bartz and Microsoft CEO Steve Ballmer, as well as corporate Yahoo! and Microsoft b-roll footage.

B-roll? More like, were Bartz and Ballmer on a roll?

To find out, read on!

5:28 am PDT: It was EARLY on the West Coast and we were being forced at first to listen to really sleepy music like you might hear in a dentist’s office.

Zzzzzzzzz…

5:34 am PDT: Memo Impresario Eric Brown was late! But, as soon as he gets on, the new Yahoo PR head began with an enthusiastic hello about the deal.

Bartz was up first, followed by Ballmer. They were clearly together in the same place, likely in Silicon Valley at some bunker.

“This is a great day for Yahoo,” she said. “It’s a game-changer and I am glad to finally be able to talk to you about it.”

Her patter was clearly scripted, but Bartz was pretty jaunty in her delivery.

And sassy enough to make the first of many dings to former Yahoo savior Google (GOOG)–not by name, but as either “the market leader” or “the competitor.”

Why not just go right to calling the search giant this deal is aimed at battling what Bartz really meant: The Borg.

Bartz stressed that this deal only covers search and the search ad business and not, say, display advertising.

And, she added, while Microsoft’s AdCenter technology will power the money-making, “search will continue to be an integral part of the Yahoo consumer experience.”

Boiling it down, Bartz said: “What this deal is really about for everyone is scale.”

Cue the next Google dig: “The combination of Microsoft and Yahoo search puts the choice back into the hands of consumers, increasingly concerned about the influence of a single player.”

Single player=Darth Vader.

5:40 am PDT: Ballmer was next. “I am so delighted to see [the deal] come to fruition,” he said.

He does not say much more except that he hoped it would “flourish and come to life over the many years.”

Ballmer sounded like someone speaking at a ribbon cutting of a copy store at the mall.

The livelier Bartz came back on, discussing the terms, hewing pretty much to what was already in the press release.

Microsoft’s AdCenter as technology. Integration. 10 years. No display deal. Separate user experience.

Now to the bucks, as Bartz noted, they add $500 million to Yahoo’s operating income, save $200 million in capital expenditures and improve annual operating cash flow by $275 million.

“At its full implementation,” she added. There is always a catch!

Bartz said Yahoo would use the money to invest in its other properties, although she was not specific.

Then, it was onto regulatory issues and getting this party started.

Bartz put on the brakes. “This deal will not happen overnight,” she said.

Actually, not even close. She predicted a closing in early 2010 and it being rolled out over the following three to six months.

Finally, Bartz thanked the tireless teams who did the deal. “With a lot of help from Steve and I,” she said and then quipped, “not always so.”

She and Ballmer were now sounding like a hip mom and dad.

5:45 am PDT: Question time!

The first one was about why the pair did not do a display deal and also how they were going to bridge the huge gap in how much each made per search compared to each other and Google.

Bartz said that the point was to keep the deal idiot-proof. “Frankly, we wanted it as straightforward and simple as possible,” she said.

Ballmer concurred: “We are taking a big bite here.”

As to the earnings gap in search, he said, “The deal in and of itself will let us close gap with the market leader.”

Ballmer tried not to say the word “Google,” but stumbled and did anyway.

The next question was about Bartz’s shift from her “boatloads of cash” quote–which she said, in an interview with me at the seventh D: All Things Digital conference in late May, was a must for a deal with Microsoft–to her new “boatloads of value.”

Simple, she said, trying to gloss it over–Yahoo did not need a big cash payment up front (and it did not get it either).

“As far as we are concerned, the boatload of cash is us preserving our revenue line,” said Bartz.

The next question was about what Microsoft gets out of this deal.

“We clearly see an upside as execution really builds,” said Ballmer.

After more money questions, there is finally one on regulator issues.

Back to Google-bashing from Ballmer.

“I suspect the competitor who may not like more competition is Google,” he said.

Microsoft General Counsel Brad Smith then jumped in and talked about working together and filings in D.C. and making the case.

He said he “looks forward to the debate,” which is just what a lawyer would say.

5:58 am PDT: Finally, the layoff question.

Bartz is clear here. Some Yahoo search employees will be dragooned over to Microsoft, some will move to other parts of Yahoo and some will be let go.

“Unfortunately, there are some redundancies,” said Bartz.

More financial questions, one on the mobile search market, one on innovation, one on scale and one on advertisers.

“Advertisers, especially smaller ones, want to make sure there is enough meaningful market for them and they don’t want to learn three platforms,” said Bartz. “They know how to enter into the Google system.”

She said “Google system” like she was talking about a gulag.

Meanwhile, Ballmer talked about how good it was to now be No. 2. Really, he did, since he was a distant No. 3 before this deal.

6:11 am PDT: Some technology question. Ballmer noted that the deal was not a “rip and replace” of Yahoo’s search for Microsoft. It will be an “integration.”

Next was a question about how this deal measured up to last year’s more money-laden offer by Microsoft.

Bartz said she didn’t just want an upfront payment, but a “true partnership,” with control over the Yahoo user interface and “real skin in the game.”

Ballmer called last year’s deal more investor-focused than operational. “The deal was different for Microsoft, not better,” he said, leaving out the cheaper part.

Finally, I get called on, and ask about who will lead the integration and how it will get done, so as not to create a huge distraction.

Bartz said it would be a “smooth transition…not that different from when Yahoo went from Overture to Panama.”

I did not have the heart to tell her that the transition of the Yahoo ad platform was anything but smooth and one of the reasons Yahoo got into the trouble it has gotten in.

Ballmer noted that the leadership that put together the deal is the leadership of the companies in the digital arena.

I also asked how the deal finally came together, especially after such historical rancor.

“It was like a snowball down a hill,” said Bartz.

But it was also a complex ball of ice, she added, noting “it was not a two-page term sheet.”

More like hundreds of pages. “There was not a high level of abstraction,” said Ballmer.

Finally, finding a kind of married groove–from that time before the random bickering sets in–Bartz noted that “dating is one thing, but having a partnership is another.”

She added: “The good news once we reached a point we believed to be advantageous, [we did a deal]…that’s how partnerships work.”

Well, exactly how it all works out, of course, still remains to be seen.

As BoomTown reported earlier today, Yahoo and Microsoft have struck a search and online advertising partnership that sources said will be announced tomorrow.

But it is eminently instructive to look at the deal that Microsoft had offered Yahoo almost exactly a year ago, which was rejected in favor of a competing bid by fellow Silicon Valley Web rival Google (GOOG).

The Yahoogle deal, of course, failed, after regulators looked askance at a partnership of the No. 1 and No. 2 search players.

The new deal between Yahoo (YHOO) and Microsoft (MSFT), according to sources, certainly seems a lot smaller than the one offered last June, although there might be a surprise yet to come.

But so far, according to sources, there will be no upfront payment to Yahoo, with the focus on a revenue share between the two companies, as had been expected after Yahoo CEO Carol Bartz said she was looking for “boatloads of money” in any deal with Microsoft.

That might not be as forthcoming, since sources also said Yahoo would still sell search ads on its sites and Microsoft’s too, although Microsoft’s AdCenter advertising sales technology will be underneath it.

Doing its own search ads means the cost savings to Yahoo will be less than previously estimated, but it also solves its longstanding issues about control of relationships with advertisers and also of consumer data.

This makes the deal much less significant than ones previously envisioned, which included Microsoft taking over both Yahoo’s search and its text-based search advertising businesses in exchange for large payments and guaranteed revenue.

As it is, according to those familiar with the deal, the software giant still is getting an important coup, since its Bing search technology will be used on Yahoo sites. And Yahoo will be able to focus and innovate better on its strengths, which are in advertising and content.

Whatever is unveiled, there might be goodies yet to come, some of which might be similar to what Yahoo was previously offered by Microsoft.

As I wrote in June 2008:

Well, according to people familiar with Microsoft’s thinking, the goody bag Yahoo turned down was considered by the company to be substantial.

It included, according to Microsoft sources:

• A cash offer of $1 billion for all of Yahoo’s search assets, including its paid and algorithmic search. But Yahoo would also be allowed to innovate in new arenas, like visual search. (This low bid was, most agree, kind of a direct insult to Yahoo techies.)
• A commercial deal to serve Yahoo’s search and search-ad business with a guaranteed economic return that was higher than what Yahoo currently earns with its Panama system.
• An offer to buy up to $8 billion of Yahoo stock for $35 a share from investors like Carl Icahn and others.
• A guarantee to allow Yahoo to keep all data collected from search and search ads, in order to help its display ad business.

Overall, sources said that Microsoft estimated that the deal would improve Yahoo’s operating income by $1 billion.

The smaller Google deal has a lot less in terms of bells and whistles, but allows Yahoo to keep its search business intact.

Microsoft sources say execs were stymied by Yahoo, which offered to sell the entire company to Microsoft up until three days ago.

But, as Yahoo has even said, Microsoft remained steadfast in its lack of interest in a bigger deal, after it walked away a month ago from its botched takeover attempt.

And it is still not interested, even with the pressure a Yahoo-Google partnership now presents.

“Yahoo might still dream of a big deal and hope they can win this game of chicken by doing this deal with Google,” said one person familiar with Microsoft’s thinking, about the possibility of Microsoft now making another offer. “But the big deal is done.”

Even if Yahoo’s stock declines even more precipitously? “It’s no longer a price issue with Microsoft,” said the source. “The company has moved on.”

The source, like many, predicted intense regulatory opposition to the Yahoo-Google hookup from the software giant now.

No kidding!

“It’s war,” said another source. War is a nice way of putting it.

After all that, it finally looks like it’s peace–the terms of which will likely be highly scrutinized in the days ahead.

Multiple sources close to the situation said that the online search and advertising deal between Microsoft and Yahoo has been struck and will be announced within the next 24 hours.

While it is not clear if the actual papers have been inked or approved by the boards of the two companies, sources said it was a formality and that negotiations are complete on a deal that is less sweeping than originally conceived.

In any case, making any partnership is likely to be the cause of much relief at both companies, since they have been trying–without success–to join together to mount a better offense in the sector against the dominant Google (GOOG).

According to sources, as had been previously reported by Advertising Age, there will be no upfront payment to Yahoo, with the focus on a revenue share between the two companies.

Sources said Microsoft search technology will be used on Yahoo sites, although it is not clear if it will be branded as “powered by Bing”–Microsoft’s handsome and innovative new search offering–or not.

In addition, sources said Yahoo would still sell search ads on its sites and on Bing too, although Microsoft’s AdCenter advertising sales technology will be underneath it.

(Panama, we hardly knew ye!)

This makes the deal much smaller than ones previously envisioned, which included Microsoft taking over both Yahoo’s search and its text-based search advertising businesses in exchange for large payments and guaranteed revenue.

Previous discussions also considered Yahoo selling display advertising for Microsoft’s MSN consumer sites.

Doing its own search ads means the cost savings to Yahoo will be less than previously estimated, but it also solves its longstanding issues about control of relationships with advertisers and also of consumer data.

Still, once in place, it is a significant deal in the Internet arena, bringing together two of its most powerful players in an unusual alliance that has been long in coming.

“After three years of trying, it looks like it finally stuck,” joked one person familiar with the situation about the Silicon Valley icon and the Redmond, Wash., software behemoth finally joining together.

And, in fact, Yahoo (YHOO) and Microsoft (MSFT) have been engaged in talks about a variety of partnerships over the years, as well as in a hostile takeover struggle that soured their relationship badly.

But, under new Yahoo CEO Carol Bartz, the companies have re-engaged in recent months, discussing a deal to share search and online advertising technology.

A spokesman for Microsoft declined to comment, as did a spokeswoman for Yahoo (even though BoomTown asked: “Pretty please?”)

The Wall Street Journal just posted a similar story on the deal coming to fruition, as did Advertising Age.

Both posts noted that Yahoo and Microsoft were concerned about regulatory approval, although with Google’s share at close to 70 percent in the search market, it would be hard to argue that their union hinders competition.

Together, Yahoo and Microsoft’s share is about 30 percent.

A search and advertising partnership between Yahoo and Google failed to gain regulatory approval last year–and thank goodness for that!

Yahoo and Microsoft will likely try to paint this one as a counter to Google’s power and hope such an argument will be supported by advertisers, who have long wanted a stronger second-place competitor to Google.

Things are as tight as a tick over at Yahoo and Microsoft about the deal the pair have been discussing over the last months–as execs shuttle back and forth and forth and back and their boards deliberate on what will surely be one of the most important decisions for either company for the near-term future in the digital space.

And, if the pair don’t succeed in doing a deal this week, as many sources at both companies had thought they would, it will be interesting for those headed to Microsoft (MSFT) for its annual analysts meeting–including BoomTown–to poke at its execs until they give as to why.

It’s probably unfair to put such a focus on this possible partnership to join together on search and online advertising, but it’s also hard to resist handicapping it like a horse race.

That’s a mistake, because–while experts in negotiations often warn that the longer any deal takes to strike, the chances it will be struck become more remote–sources close to the Microsoft-Yahoo talks said the struggle to come to terms is due to the extreme complexity of the possible union.

And, as various reports debate the terms of the deal–from upfront payments to revenue share to the amount of data exchanged to branding issues–it is critically important to remember that, done badly or with too much haste, this massive deal is one with even greater potential to tank.

“It could be game-changing or it could be one the biggest bombs ever,” said one exec close to the situation. “So, obviously, everyone is treating this very delicately.”

So, when BoomTown dubbed Microsoft and Yahoo (YHOO) the Lindsay Lohan and Samantha Ronson of the Internet–as in, either break up or get together, but this endless back-and-forth is killing us–I was mostly kidding.

Even though, like clockwork, after looking happy together, Lohan and Ronson had a meltdown in recent days.

So too did Microsoft and Yahoo, when things looked great last week after a contingent of major Microsoft execs visited the Silicon Valley digs of Yahoo, in what sources close to the situation described as the final round of talks among execs before a board look-see.

Well, close but no cigar, in this case, in a deal that most agree the pair desperately need to strike for a variety of reasons.

First and foremost, it is simply because winning in search has everything to do with volume. As in: More Search Queries+More Ads=More Profits.

And, even at 20 percent share, Yahoo does not have enough of that, and what it has is getting less lucrative, even as its rival, Google (GOOG), surges.

Leaving aside all the money Microsoft has blown in the arena, that was clearly the message I got after rereading some of Yahoo’s financial screenshots from its second-quarter earnings last week (which you can see below in the two charts; click on them to make them larger).

And while Yahoo makes a lot of profits in search and it needs to keep that record up, its recent record has been lackluster.

In the chart above, for example, revenue in owned-and-operated search’s year-over-year growth declined 15 percent in the quarter, after growing 18 percent the year before.

(In fact, all Yahoo’s O&O businesses–display, listings and other marketing services–were also down significantly.)

This is not the way you want to see the trend lines going, even in a weak economy.

And, in another worrisome trend, there was also a decline in page view year-over-year growth, which went from 23 percent up in the quarter a year ago to only seven percent in the recent one.

While the new update of the homepage and a renewed marketing push will surely improve that, Yahoo has to once and for all figure out its core goals–which I think have to be clearly aimed at innovating in making everyday digital life easier for online consumers.

As one smart observer told me this week:

“Let Microsoft and Google duke it out in technology….Yahoo’s white space is to simplify everything for its users and neither one of them is as good at it as Yahoo.”

How low can Microsoft go?

Very low, it seems, in announcing really bad fourth-quarter earnings, missing Wall Street revenue estimates by an astonishing $1 billion.

Talk about a game of extreme limbo.

After the market close Thursday, the Redmond, Wash.-based tech giant reported that fiscal fourth-quarter net income fell to $3.05 billion, or 34 cents a share, from $4.3 billion, or 46 cents a share, in the same period a year earlier.

Revenue for the period ended in June fell 17 percent to $13.1 billion. Wall Street had been looking for earnings of 36 cents a share on $14.37 billion in revenue, according to data compiled by Thomson Reuters.

Online advertising revenue took a big hit, decreasing $86 million or 14 percent, to $529 million, as the display advertising business got hard hit.

No surprise–Microsoft (MSFT) shares have been taking a beating in after-hours trading.

BoomTown liveblogged the earnings call.

2:32 pm PDT: The conference was kicked off and Microsoft CFO Chris Liddell–whose jaunty New Zealand accent I never tire of–came on right away, pointing out the very obvious bad news in several different ways, although also trying to find some kind of silver lining.

The quarter, he said, “marks the end of one of the most difficult [periods], but also most encouraging.”

The darkness has a dawn, he noted: “In my mind, we are a stronger company than we were a year ago…but we need to lift our game to a new level in 2010.”

You can say that again!

So Liddell did, saying that “there are some signs that we have at least seen the worst” of the econalypse, and “looking forward, we do not expect trading conditions to get worse.”

Well, how could they?

2:35 pm PDT: Microsoft’s investor relations guy went over the numbers. Crappy results, but meaningful cost savings.

Read the official press release here.

2:48 pm PDT: Liddell came back on and he said this would be one of the most “interesting” years, especially due to a spate of new product rollouts coming, such as Windows 7.

He did some forward-looking, talking about a variety of arenas at Microsoft, from the games business to its product launches to tax rates.

Microsoft has, despite the economic turmoil, a great balance sheet in terms of cash–with over $30 billion.

I think I found a gold lining.

2:56 pm PDT: Question-and-answer time.

The first was about spending on personal computers, which hit Microsoft badly on the downside, said Liddell.

But, as a refresh cycle kicks in, he noted that average selling prices will go up.

It would eventually get “better,” which Liddell pronounced, bitter.

Irony alert!

The next question was about margins. Microsoft has tried to cut costs, said Liddell, although it would never completely offset the bad economic conditions. And he was not making promises.

A follow-up on buying back more Microsoft stock. Nope, because “we’re still not sure we’re out of the woods.”

The next question was about what customers are saying about the Windows 7 upgrade and about server shipments.

No surprise, but server shipments are weak. “We don’t see a lot of pent-up demand in that area,” said Liddell.

As to PCs and Windows 7, he said he has more hopes of people being more likely to start to move over. Or, at least, prepare to do so.

“Then, you start to get into a much more virtuous cycle,” said Liddell.

A question on whether expenses can be slowed more.

Sorry, analysts! Nope.

Another question on looking at PC-refreshing. We’ll see, said Liddell.

Another expense question. Hey, analysts, you might want to stop asking since Liddell is not going to suddenly say Microsoft is lopping off more employees–at least, not right now!

Plus, there are those pricey upcoming product launches, said Liddell, which is going to take some dollars.

“There are a series of relatively small items, which add up,” he said.

3:09 pm PDT: An annuity question. Zzzzzzzzz.

Analysts continued to try to get Liddell to predict when things were going to take off again and return to the golden times when Microsoft was a regular financial powerhouse.

It was admirable that he refused to take the bait and maintained his tone of semi-doom and lessening-gloom.

“I would not promise that it is going to be significantly better,” said Liddell.

3:18 pm PDT: A question about the latest launch of Office in 2010 and its impact on financials.

Liddell said he did not see a significant impact until 2011.

The next question was also one on revenue: “Is revenue going to grow?” asked one analyst in a kind of desperate-sounding way.

Liddell said Microsoft would be watching costs, which would help. As to revenue, which is less controllable, he could not say.

3:22 pm PDT: Although there have been no queries about Microsoft’s discussions with Yahoo (YHOO) about a search and online advertising partnership–which will cost the company a pretty penny, if struck–there was a question about Google (GOOG) and its Chrome operating system.

“We still believe that people will want a client and an Internet-based experience,” said Liddell.

Translation: Google is a mouse that roared!

The final question was about how various geographies are doing. Asia and emerging markets are a place for growth, said Liddell, followed by North America, especially relative to Europe and Japan.

But, the tone of the earnings call? Economically speaking, it’s still a small world after all.

If there’s an earnings call at Yahoo, you know BoomTown is going to liveblog it!

Will Yahoo (YHOO) CEO Carol Bartz say something naughty? (Nope!) What is new CFO Tim Morse like? (Nice!) Will they say anything about the talks with Microsoft (MSFT) about a search and online advertising partnership? (No!)

Oh, it might be a corker!

The earnings results for the second quarter certainly were not.

As I wrote in a previous post:

Yahoo reported so-so second-quarter earnings results today, with a decline in revenues, but with a slightly stronger-than-expected improvement in net income.

For the three months ended June 30, the Internet giant said it had revenues of $1.14 billion, excluding traffic acquisition costs, down from $1.35 billion in the same period a year ago.

That profit was up eight percent, due to cost-cutting. Yahoo said it earned $141.4 million, or 10 cents a share, in the quarter, compared to $131.2 million, or nine cents.

That’s not really saying much, since Wall Street analysts had such low expectations, estimating Yahoo would earn eight cents. But, with a weak advertising market, it is also not that bad.”

Here’s the conference call, updated as it happened:

2:02 pm PST: Music followed by investor relations lady, who had a very nice voice.

She was quick and to the point, and soon enough Bartz was on.

First, she welcomed Morse as CFO, noting he was strong in “efficiency and process.”

Then she pointed out that the new home page for Yahoo–pictured here and you can read about it here–was “available…starting…today.”

Bartz dragged out the words, with a small dramatic flourish.

Then, it was right to the results, which Bartz was bullish on: “Considering the economy, I am pleased with the results.”

Bartz noted that “overall, we are seeing less fear in the marketplace,” although she added that she had no idea when the econalypse would be over.

“It’s easy to see it bumping along the bottom, but it’s too early to call…so, we’ll leave economic predictions to others,” she said.

She moved onto her being happy about all the new execs she had hired, noting that Yahoo was “closing in” on picking an international head (note to myself, get a Yahoo to leak the news to me asap).

2:07 PST: Morse (pictured here) came on and introduced himself. He looks like a CFO and also sounded like one too–calm, cool and collected, as it should be.

After a short talk about his background, he moved onto all the particulars of the quarter–results that had already been released, but Morse repeated them with verve.

I try to listen carefully in these explanations, but I confess that I actually don’t, unless something new happens. It didn’t.

Then Morse was looking forward, including talking some more about marketing spend coming up, as well as explaining what kind of CFO he was going to be.

2:18 PST: Back to Bartz, who started talking about well the long-troubled Silicon Valley icon was doing, even in the weak economy.

She kept calling Yahoo the “world’s biggest Internet media company,” and then said that Yahoo was an “Internet kingmaker” for other Web sites.

Well, it’s kind of true on both counts, so we’ll overlook the bragging.

Bartz then quickly moved through all the various arenas at Yahoo–from advertising to the home page to mobile–where Yahoo was trying to improve and increase its business.

She apparently is aiming to make online ads less annoying–if successful, I propose that Bartz should be awarded some medal of honor.

“We have a clear simple vision to be the center of people lives online,” said Bartz in conclusion, throwing in “kingmaker” again. “At the end of the day, we know who we are and know what we need to do to win.”

2:33 pm PST: Question time!

The first was about what Bartz thinks about Bing, the new Microsoft search engine, because it might take a while for these Wall Street analysts–reporters don’t get to ask questions–to screw up the courage to ask her outright about any Microsoft deal.

Bartz was unusually cordial, which is how someone about to be hitched needs to be.

“I think Bing is a good product…I think Microsoft should be given kudos for Bing,” she said. Hmmmm….

The next question was about the intent of Yahoo to invest in search, as opposed to display advertising. Another veiled Microsoft search deal question.

Bartz noted that Yahoo was investing in the user. Nice way not to answer the question!

2:38 pm PST: A question about spending and if there was going to be more.

Bartz noted that Yahoo was restructuring costs, rather than cutting and burning. She noted, for example, that more marketing spend was part of the plan.

Morse used a bucket analogy, and talked about draining costs back and forth, which was apt.

The next question was about advertising revenues, and whether they would grow. Also, more questions about costs.

Morse noted good strength in a lot of areas in the premium sector. As to cost structure: “We’re repositioning the business.”

2:48 pm PST:

Another cost question. I am officially ignoring it.

The next question was about how Yahoo was going to keep fixing APT, its newest advertising platform, which some think is too hard to use.

Bartz, who has insulted it in the past, was now kind of nice about it, noting that they were working on making it better.

A question about owned-and-operated search and its relationship with Yahoo’s affiliate search, which had been stronger. Not a trend, said Bartz flatly.

More about search and whether scale matters in search (another sneaky way to ask about Microsoft). “Of course scale matters,” said Bartz, who joked she would be happy to switch share positions with Google (GOOG).

A question about the new home page and its monetization and why it was announced today, as opposed to the fall, as planned.

Bartz did not really explain why or about revenue, but she sounded good.

The last question was about improvements in search share and monetization (translation: I want to ask about Microsoft, but I am too much of a wimp).

Bartz talked about better targeting, improved experience, driving relevancy and the prominent position of search on the front page. That will lead to more money, she noted.

Again, it’s not exactly an answer, but it sounded good.

Then it was over, although Bartz ended by urging everyone to “go look at the new home page.”