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Investors watch clock for Yahoo recovery

CEO Terry Semel has bought the company precious time, but some question whether investors will wait out a three-year plan without some interim signs of recovery.

Yahoo may not be operating on "Internet time" when it comes to its turnaround plan, but the clock is still ticking for the popular Web portal.

CEO Terry Semel bought the company precious time earlier this month when he announced a restructuring strategy to investors, highlighting a plan to make the company less dependent on fickle advertising dollars by 2004.

Yahoo stock shot up as much as 20 percent after the proposal was presented Nov. 15, although it has fallen back in the past few days. Nevertheless, some question whether investors will wait out a three-year plan without some interim signs of recovery.

"Six more months and we've got to see more results," said Safa Rashtchy, an analyst for U.S. Bancorp Piper Jaffray. "Our expectations are low now, so (Semel) can actually over-deliver."

Few expect Yahoo to bounce back as suddenly as it fell: Last year, the Web portal posted record revenue of $1.1 billion, a figure that will drop to about $700 million this year, according to estimates.

The drop-off is almost entirely because of a wipeout in Internet advertising, leading Yahoo to peg much of its turnaround strategy on developing other revenue sources. A cornerstone of its recent proposal is long-term revenue diversification: Though advertising generated 90 percent of revenue in 2000, it will make up just 76 percent of revenue this year and drop to 50 percent by 2004, the company pledged.

Although the plan gave Semel a grace period for reviving the company, investors want to see results long before 2004. The next six months will be crucial to his success, according to one of Yahoo's largest institutional investors.

"Normally, it takes six months for any CEO to get comfortable with their new role and another six months to perform," said the source. "Terry is spending all his time with the company and trying to manage it. (Former Yahoo CEO) Tim (Koogle) was replaced because he wasn't managing the business. That's the reason why most CEOs are replaced--they aren't managing the business."

Semel, rumored to be worth hundreds of millions of dollars from investments and savings, has a personal stake in seeing Yahoo's fortunes rise according to his turnaround schedule. The 58-year-old executive has options to buy 10 million Yahoo shares that vest periodically until 2005. His shares are priced from $17.62 to $75.

The largest block of options consists of 5 million shares priced at $17.62, the closing price of Yahoo's stock on April 16. Those shares vest over three years, with half exercisable April 16, 2002, and the remainder coming due monthly over the following two years.

Semel's annual salary is $310,000--the same amount earned by Koogle. Shortly before Semel took the CEO position, he purchased 1 million Yahoo shares at $17.62 each, giving him an overall potential ownership stake of about 2 percent of the company. But with Wednesday's closing price of $16.21 a share, he has lost $1.4 million on paper because of the investment.

Fitting in
Semel has been in the hot seat since April 17, when Yahoo named the former Warner Bros. veteran to the CEO post. From that date through the end of the third quarter, Yahoo's stock tumbled 49 percent, from $17.32 to $8.81. Although the rest of the market also slid markedly in the last two weeks of September after the terrorist attacks, Yahoo had been on a sharp spiral since July.

During the slide, critics blamed Semel for squandering his first months in office--a time when many believed he should have burst out of the gate as the company's most outspoken advocate. Instead, he appeared publicly only a handful of times and didn't inspire widespread confidence in his ability or vision. At the Industry Standard Internet Summit in July, Semel sat for a question-and-answer session with Yahoo founder Jerry Yang, and Yang did most of the talking.

Some employees also complained about Semel's low profile on the Santa Clara, Calif., campus. After he started working at Yahoo in May, Semel waited a month before hosting his first all-staff meeting. And a crammed schedule of meetings with directors and top executives meant that Semel--whose permanent residence is still in Bel Air, Calif.--had little time for socializing in the campus cafeteria, sources said.

Some insiders say the extent of Yahoo's troubles even took Semel by surprise--as well as Yahoo's Byzantine business structure and innumerable cultural quirks. Semel, used to hanging out at posh Hollywood studios with movie stars and entertainment industry tycoons, did not immediately adjust to Yahoo's dot-com culture, where cubicle-dwelling employees wear jeans, guzzle free soda and call even the most senior executives by their first names. (Semel predecessor Tim Koogle was fondly known as "T.K.").

"I don't think Terry realized how complex Yahoo's businesses were," said one source close to Semel. "That slowed it down for him and made it tough to inspire a lot of confidence early on."

Throughout the summer and fall, detractors also lamented that Semel was not capitalizing on his entertainment industry connections or forging fast liaisons with TV networks, cable companies and movie businesses--a strategy that some say is Yahoo's surest defense against multimedia giants such as AOL Time Warner and Viacom.

But since Nov. 15, when the company announced its recovery plan, many of Semel's critics have backed off. They now say such deals, if they come at all, will take time. And many say Semel's philosophy of "evolution not revolution" is exactly what the company needs.

"He's taking a thoughtful, careful approach," said Paul Noglows, an Internet analyst for J.P. Morgan H&Q. "I would rather see him be slow and right than quick and wrong."

Others applaud the handful of deals Semel has cut in recent months, including the Nov. 14 partnership between Yahoo and high-speed Internet access provider SBC Communications. Still, they temper their enthusiasm with the reality of the economic downturn.

"I'd love to see them do the SBC deal and then a week later do a Verizon deal and then two weeks later do a BellSouth deal," said John Corcoran, an analyst for CIBC World Markets. "Any chance that will happen? No. It's a work in progress?(Semel's) doing as much he can do."

Seeds of turnaround--or a fluke?
It's unclear whether Yahoo's two-week stock run symbolizes a broader turnaround or a market fluke.

The stock has skidded slightly in the last couple of days, and 13 of 24 major brokerage houses covering Yahoo rate it "hold"--a figure that's been roughly constant for three months. As of Oct. 8, bearish "short" traders hold 40.5 million shares of Yahoo stock, or 13.2 percent of the total number of shares available for public trading.

Regardless of Semel's timetable, some question his broader strategy for the turnaround. They want concrete numbers for financial guidance, not overarching business strategies. eBay CEO Meg Whitman, who addressed analysts in late October, upped the ante for Internet executives by flatly announcing a 2005 revenue target of $3 billion.

Although Yahoo and eBay have little overlap in business strategy, such concrete estimates from eBay make Yahoo's "diversification" mantra seem imprecise. With the collapse of the online advertising market, "diversification" has replaced "eyeballs"--now maligned as a goofy metric of the Internet bubble--as the industry's favorite buzzword.

In fact, some analysts question whether Yahoo's diversification provides a convenient cover-up for the advertising collapse. The company's non-advertising revenue, known as business and premium services, increased by a mere $4.5 million in the third quarter, leading some analysts to downplay the significance of diversification, at least for now.

"The services may be 24 percent of the revenue this year, but it's driven by the drop in advertising rather than the rise in the demand for those services," said Jim Nail, an analyst at Forrester Research.

A Yahoo representative declined to comment, saying Semel and Chief Financial Officer Susan Decker covered the diversification issue during the company's annual analysts meeting Nov. 15.

Denise Garcia, an analyst at research firm Gartner, said diversification is a good idea, but it won't bring revenue back to the late 1990s and early 2000, when companies ranging from automakers and entertainment conglomerates were clamoring to advertise on Yahoo and other popular sites.

"Investors should be excited about sites diversifying, but (sites) are not going to get the amount of dollars from business services that they did in advertising dollars," Garcia said.

It's also unclear how long Yahoo's 218 million monthly users will hang on--especially if they have to start paying for services they've used for free for years. According to Nielsen/NetRatings, Yahoo reached 52 percent of the world's total Internet population during October--nearly 5 percent more than its nearest competitor, MSN.

But passionate Yahoo users in online chat groups are starting to poke fun at Semel and his plans to build revenue. One poetic user blasted the company in Dr. Seuss-like prose.

Another Yahoo user, Pamela Parker, took a more reasoned approach, accusing the company and Semel of application overkill in an attempt to find new revenue.

Parker recently downloaded Yahoo's new instant messenger application and then realized Yahoo Messenger was on her desktop and in her start menu. In addition, Yahoo Companion had become part of her Internet Explorer browser--both parts of Yahoo's strategy to pervade individuals' online experiences.

"For Yahoo, these aggressive tactics are not only annoying but genuinely harmful to its brand. After all, Yahoo has always been known as the brand for more experienced and savvy computer users," Parker wrote. "Perhaps the change in corporate philosophy is deliberate, as...Terry Semel seeks to corral users--and brand them with a big Y!--in an effort to inch the company toward better financial performance."'s Dawn Kawamoto and Evan Hansen contributed to this report.