Yahoo Plans Bloodbath As Profit Falls 64%
Yahoo's third-quarter net income slipped to $54 million or 4 cents a share--from $151 million, or 11 cents, in the year-earlier period. Net revenue of $1.33 billion--after paying fees to partner sites-- increased 3% from a year ago, falling below analyst expectations of $1.37 billion.
Rumored in recent days, the layoffs will eliminate at least 1,500 jobs by year's end, with more possibly to come in 2009. The staff cuts are part of broader cost-cutting moves undertaken by Yahoo aimed at reducing costs by $400 million annually.
"As we saw the online ad market decline in the third quarter, I decided Yahoo needed to accelerate the process of getting more competitive," Chief Executive Jerry Yang explained in a conference call with analysts.
The latest cutbacks follow an earlier round of 1,000 layoffs announced in January and the company's hiring of consulting firm Bain & Co. in September to review the company's cost structure. The Web portal had 14,300 employees at the end of the second quarter.
Even as Yahoo lowered its revenue outlook, Yang expressed confidence that the company's cost-saving steps and audience-building initiatives would ultimately pay off. "Despite the tough environment, I remain optimistic about Yahoo's future," he said. "We believe the Internet ad market will emerge stronger than before."
Yahoo isn't alone in feeling the pain of a weakening economy. A growing number of smaller Internet companies have begun to slash payrolls in response to the slowdown in online advertising.
Excluding search, online ad spending growth dropped from 14% in the first quarter of 2008 to 5% in the second quarter, according to the latest figures from the Interactive Advertising Bureau. Overall Web ad growth this year may fall below 10% for the first time since 2002.
Analysts had already begun to reduce earnings estimates and price targets on Yahoo and other Internet companies in recent days as the toll of the broader economic crisis on ad budgets became clearer.
With spending on search advertising remaining steady through the downturn, Google last week was able to beat analyst expectations, posting a 26% quarterly profit. But with Yahoo getting roughly half its revenue from display advertising, the Web portal is more vulnerable to the slowdown.
Indeed, Yahoo's display ad revenue grew only 3% during the quarter compared to a year ago. Last quarter, it was up 11%. Double-digit gains in remnant--or non-guaranteed--advertising weren't enough to offset the drop in premium display ad spending that makes up the bulk of the company's ad sales, said Yahoo President Sue Decker.
Ad categories such as financial services, automotive, travel and retail continued to show weakness.
With the formal launch of its Apt (formerly Amp) ad system in September, Yahoo plans to capitalize on its traditional strength on the display side. It plans to roll out the platform with its 800 newspaper partners over the next several months before opening it up to other publishers and advertisers next year.
Based on positive results from early testing, many of its newspaper partners have requested accelerated launches, said Decker.
But analysts don't expect the platform to have any impact on 2008 results, and remain skeptical about whether Yahoo will be able to deliver on its promise of "revolutionizing" the display ad-buying process through Apt.
Revenue from search advertising, by contrast, was up 17% year-over-year and on par with the second quarter as marketers continued to shift ad dollars to search as a more measurable and efficient ad buy when budgets tighten. "This was evident in the strength of performance-based advertising and search," said Decker.
Equity research firm Sanford C. Bernstein, however, said in a recent note that Yahoo's U.S. search share declined again in third-quarter 2008 to 14.5% of all searches--down from 15.5% sequentially, and 18.3% in the year-ago third quarter.
Yahoo's plan to bolster its search business by outsourcing a portion of its paid search advertising to Google is pending an antitrust investigation by the Justice Department. The companies recently agreed to temporarily delay going forward with the deal while regulators examine the partnership.
During the conference call, Yang said Yahoo and Google continue to work with the Justice Department and "we hope to put the agreement into effect as soon as possible." Analysts have said the pact could deliver another $300 million in annual revenue to Yahoo.
Rumors of other possible deals continue to swirl around Yahoo. Microsoft CEO Steve Ballmer last week revived hopes of a Yahoo merger by saying at an industry event that a deal between the companies still "makes sense for their shareholders and ours." Microsoft later said the companies were not in any type of deal talks.
Since Yahoo last spurned Microsoft's $31-a-share offer in April, the Web company's stock price has fallen by more than half, closing Tuesday at $12.07. Yahoo's shares were up 8% in after-hours trading Tuesday to about $12.95.
Yahoo's board has reportedly also continued to explore other moves, including a possible merger with Time Warner's AOL. So far, nothing has resulted from on-and-off talks that began earlier this year.
Citing the uncertain economic outlook, Yahoo lowered its revenue estimate for the current fiscal year to a range of $7.2 billion to $7.4 billion from $7.35 billion to $7.85 billion. It maintained its estimate for operating cash flow within the range of $1.8 billion to $2 billion.
With the company expecting slower ad growth in 2009, Yang said that the staffing reduction was only a "first step" toward cutting expenses and that "additional structural changes" could take place next year and beyond. In addition to layoffs, those measures could also include consolidating real estate assets and shifting some operations to lower-cost regions globally.