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THE DAY AHEAD: Yahoo leaves a lot of questions hanging

COMMENTARY--In a perfect world, Yahoo investors would have all the answers following the Web giant's first-quarter earnings report. Shareholders would have clarity, renewed enthusiasm and even a little visibility, that all-important Wall Street cliché that's so abused.

Oh well.

Yahoo (Nasdaq: YHOO) did what it could, but its earnings conference call was like a cheap beer--watered down with a bad aftertaste. First, let's get the good stuff out of the way. Yahoo reported a profit of a penny a share on sales of $230.8 million, slightly above estimates.

It also provided an outlook for 2001. The outlook won't please all those analysts who failed to cut estimates enough, but at least Yahoo has enough moxie to predict something. Yahoo predicted second-quarter earnings ranging from a loss of $10 million to break-even on sales of $165 million to $185 million. For 2001, Yahoo sees break-even earnings on sales of $700 million to $775 million.

According to First Call, Yahoo was expected to report second-quarter earnings of a penny a share on sales of $183 million. For 2001, estimates were for a profit of 6 cents a share on sales of $790 million.

That's the watered down part. Now for the aftertaste.

Yahoo left a lot of unanswered questions. Yahoo admittedly didn't have much to work with, but if you had a lot of confidence in Yahoo, you may have lost some. Sure, Yahoo execs sounded like they believed, but analysts didn't. It was kinda murky.

Here are a few questions, we'd like to get answered.

1. Where's the new CEO? Outgoing CEO Tim Koogle said the search was "proceeding really well." We're sure Yahoo is hearing from plenty of candidates. Will it close the deal soon? If we have to wait until the second-quarter earnings call to hear about a new CEO, investors are going to get grumpy.

2. Who's running the show now? It was very interesting how Chief Operating Officer Jeff Mallett did most of the talking on the conference call. It's understandable Koogle would like to step away from the spotlight, but Mallett was the one who was passed over for the CEO job. CFO Susan Decker could also be pulling some strings. Yahoo needs financial discipline, and Decker has it.

3. Is there more fat to cut? Yahoo said it would cut 12 percent of its work force while limiting promotional spending. Though Yahoo's layoffs will save money, the company has added a lot of employees in the last year. Are more layoffs coming? And some of Yahoo's cost savings will be offset by an office move and higher compensation costs. The higher pay is a side effect from a falling stock price--those Yahoo options just don't look as good as they used to.

4. When will Yahoo's percentage of dot-com advertisers fall enough to please Wall Street? Yahoo said dot-coms accounted for 30 percent of first-quarter revenue, down from 33 percent in the fourth quarter. The problem? Traditional advertisers didn't spend enough to change the mix. In fact, sales to traditional advertisers fell 48 percent in the first quarter sequentially.

5. Has the online advertising market bottomed? Yahoo said the online advertising market stabilized somewhat--at least enough to make a guess on 2001 sales. When pressed, however, officials said visibility was limited. Yahoo's projections stand on the assumption that things won't get any worse.

6. What happens after the new CEO is named? Analysts seem to be betting that Yahoo will sell out for $10 to $15 a share in a year if it doesn't turn the business around. Yahoo's new leader may not have much time to work with.

7. Can Yahoo stem the international turnover. Managers of Yahoo's international properties keep jumping ship. Since much of Yahoo's growth will be overseas, it's a worrisome point. Heather Killen, Yahoo's senior vice president of international operations, has left the company.

8. How much can Yahoo diversify its revenue stream? By the end of the year Yahoo will still derive about 80 percent of its revenue from advertising. New efforts such as a subscription service for Yahoo Finance may diversify a bit, but it's still early. Yahoo's best bet? Bolstering the offering for its controversial porn store. Pornography remains the most profitable business on the Web.

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