Yahoo seeks new CEO, issues revenue warning

The Internet bellwether hits investors with a one-two punch: Chief Executive Tim Koogle is stepping aside, and the company's revenue will fall well below expectations.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
5 min read
Internet bellwether Yahoo hit investors with a one-two punch Wednesday: Chief Executive Tim Koogle is stepping aside, and the company's revenue will fall well below expectations.

In a statement, the leading Web portal said revenue for the first quarter will be revised to between $170 million and $180 million. The company, which reports first-quarter earnings April 11, also said its pro forma net income will break even.

That's well below the $232 million in revenue and per-share profit of 5 cents that Wall Street analysts expected, according to First Call.

Yahoo's woes do not bode well for other Internet companies. Considered one of the New Economy's blue-chip companies, Yahoo is the most trafficked site on the Internet--it served more than 900 million page views and 180 million unique users in December alone. Investors are sure to ask: Yahoo has sneezed, so who gets the cold?

"It's just another dot-com implosion," said Jordan Rohan, an analyst at Wit SoundView. "The forces that caused the implosion of every dot-com advertiser on Yahoo have attacked the mother ship."

The announcement capped a wild day for the company and its shareholders.

Responding to speculation sparked by Merrill Lynch analyst Henry Blodget, the Nasdaq Stock Market halted trading in Yahoo shares just seven minutes after the opening bell--and didn't resume until after the close of regular trading. Before the halt, Yahoo fell $1.44, or 6 percent, to $20.94.

When trading resumed following the announcement, the shares promptly fell to about $18.

Yahoo blamed the revenue shortfall on the weakening economy and cutbacks in marketing spending among its customers. In addition, the company said its transition from relying on ad revenue from pure Internet companies to drawing from traditional businesses was not as quick as it had hoped.

Long way down
Yahoo stock price from March 2000 to present.  

Source: Prophet Finance
"All businesses in the United States are facing challenging economic conditions that have weakened further in recent weeks, and as consumer confidence and spending has deteriorated, a broad range of customers have delayed their spending across all media formats until their economic outlook improves," Koogle said in a statement.

The company said it has hired Spencer Stuart & Associates to conduct an external search for a new CEO. Koogle, who started his stint as chief executive before the company went public, will retain his chairman title.

Asked on CNBC why Yahoo President Jeff Mallett was not immediately offered the top job, Koogle said, "We want to have great new talent to augment our current team."

A source said Yahoo will likely be looking for a leader with a media background. The company "has to be excellent in media," the source said.

There was some speculation Wednesday that Koogle would eventually join the venture capital firm Sequoia Capital. A partner with Sequoia, Michael Moritz, is a director with Yahoo.

Moving from tech executive to venture capitalist is fairly common in the tech industry. Last August former Oracle president and chief operating officer Ray Lane joined the Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers as a general partner. And Jim Barksdale, former CEO of Netscape Communications, started the VC firm The Barksdale Group.

Yahoo also said Wednesday it may buy back up to $500 million worth of its outstanding common stock over the next two years. Yahoo had 565 million shares of outstanding stock as of March 1.

With its shares at $18, the company has a market capitalization of about $10 billion, compared with more than $100 billion when Yahoo stock peaked at a split-adjusted $237.50 on Jan. 3, 2000.

In response to the low stock price, Yahoo last week adopted a shareholder rights plan to deter a hostile takeover of the company.

Why step down?
During a conference call, executives said the company will focus on bolstering its nonadvertising revenues. They said Yahoo's enterprise services division, which licenses the portal to corporations, will outpace revenue forecasts. The company also plans to launch more services that charge visitors for access. Previously, Yahoo has indicated that it hopes to launch a music subscription service where people pay a set fee to download or listen to songs off its site.

According to a source familiar with the company, at the beginning of the year Yahoo began assessing what kind of businesses it should be in, how it could regain its market capitalization, and how it should align its management structure. In the course of that discussion, the source said, Koogle decided that maybe he was not the right person to lead the Web portal through its next phase.

"There were other things he wanted to do," the source said Wednesday.

Yahoo at a glance

HQ: Santa Clara, CA  
CEO: Tim Koogle  
President: Jeff Mallett  
Employees: 1,992  
Annual sales: $1.11B  
Annual income: $290.9M  
Date of IPO: April 1996  
Ticker: YHOO  
Exchange: Nasdaq

Yahoo quotes
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Bloomberg (3/7/01)

During the conference session, Koogle said his decision was based on finding someone to add to the company's "bench strength" once the current economic woes subsides.

Questions persist over the ramifications of this move. Namely, will hiring outside the company cause internal friction that sparks an exodus of established executives? Rumors have persisted over the past few months that Yahoo's Mallett was eyeing the top position and was in line as Koogle's successor.

John Corcoran, an analyst at CIBC World Markets, said Yahoo's plan to look outside the company is wise. Now more than ever, age and experience will quell investor fears.

"When you promote from within and make it a relatively young person from within who hasn't been through many bear markets or managed a company through many tough times, it won't give institutional investors all that much comfort," Corcoran said.

Clearly, Yahoo has stepped into a dark point in its otherwise glowing lifespan. Since its inception nearly six years ago as a Web search directory, the company has grown with a strong economy and the explosion of the Internet economy.

But times have changed. For nearly a year, the stock market for Internet companies has nose-dived. Now's the time, analysts say, for Yahoo to shed its start-up skin and grow as a traditional media company instead of just a dot-com.

"Everybody thought that the Internet was different, but it's not different. These are media companies," said Kathleen Heaney, an equity analyst at Blue Stone Capital. "This will be a period to see how strong their management really is. The test of good management is how well they get through difficult times."

News.com's Dawn Kawamoto contributed to this report.