Services & Software

Yahoo's turn: Cuts 400 jobs

The leading Web portal reports quarterly earnings that slightly beat Wall Street's expectations but plans to lay off 12 percent of its 3,510 employees to cut costs.

Web portal Yahoo on Wednesday reported first-quarter earnings that slightly beat Wall Street's expectations but said it plans to lay off 12 percent of its 3,510 employees in an attempt to cut costs.

For the quarter, Yahoo reported pro forma net income of $7.6 million, or 1 cent a share, on sales of $180.2 million. That's substantially down from the same period last year, when the portal giant reported net income of 10 cents a share on sales of $230 million.

Wall Street pegged earnings at breakeven, according to First Call's consensus estimates.

With Wednesday's announcement, Yahoo becomes one of the last of the major Internet companies to tighten its belt through layoffs, a move that had been anticipated by some analysts. The company said that by the third quarter after its first-ever mass work force reduction, it expects to begin saving $7 million to $9 million per quarter through these cuts alone. Further cutbacks in discretionary spending could push total savings to $20 million per quarter, but additional expenses could leave an expected net gain of just $10 million per quarter.

"We decided to be prudent and bring our cost base in line, so when the economy firms we can be in a position to take advantage of it," Yahoo Chief Executive Tim Koogle said in an interview, in which he downplayed the possibility of addition cutbacks. "We think we've done what's necessary and sufficent. No business person can predict when the economy will firm, but we've made an assumption that it stays the same."

The Internet bellwether's lackluster earnings paint a grim portrait for the new media sector for the short term. Once primary beneficiaries of the Internet's boom years, Web portals have taken severe beatings from a collapsing stock market. The market's woes have halted venture capital funding into the same start-ups that once paid Yahoo and other Web portals enormous amounts of money to advertise on their sites.

Web media companies were late in feeling the pain but suffered an equally quick bludgeoning. Earlier this week, General Electric's NBC TV network decided to buy back the remaining public shares of its NBCi Web portal. NBC will lay off most of NBCi's over 300 employees, leaving the portal's future in doubt.

Yahoo sits at a crossroads, facing a management shake-up at the same time it seeks to diversify it core advertising business and slash costs. In March, it lowered its revenue estimates for the second time since its last earnings report in January. The company estimated that income would be flat on revenue hitting between $170 million and $180 million.

The Web portal also announced in March that Koogle would step aside but remain chairman. The company has since retained executive search firm Spencer Stuart to recruit a new CEO.

Yahoo did not announce Koogle's replacement Wednesday. However, it said its head of international operations, Heather Killen, would leave the company. Egon Zehnder International, a Switzerland-based executive search firm, will be retained to find her replacement.

"The CEO search has been proceeding really well," Koogle said during a conference call with analysts. "We have been very pleased with interest expressed" by the executives approached so far.

In addition to the layoffs, the earnings report outlined initiatives to slim costs. These include discontinuing some "secondary services," decreasing marketing and promotion costs, outsourcing some of its operations, and centralizing parts of its businesses around the world.

The company said it expects its second-quarter revenue to reach between $165 million and $185 million; it anticipates revenue between $700 million and $775 million for 2001.

Yahoo also said that earnings before interest, taxation, depreciation and amortization (EBITDA) for the second quarter would come in between a $10 million loss to breakeven. For the year, it expects EBITDA earnings between breakeven and $50 million. Earnings per share are expected to remain flat for the second quarter but reach between 2 cents and 6 cents per share for the year.

Wall Street analysts were not surprised by the company's revenue but offered a cautious outlook for Yahoo's performance for the remainder of the year.

"This is shaping up to be a very weak year for them," said John Corcoran, an equity analyst at CIBC World Markets.

Future remains uncertain
Yahoo offered mixed results on several performance measurements that analysts had been watching for as signals of the company's prospects for a quick turnaround.

Including pro forma items, the net loss for the first quarter was $11.5 million, or 2 cents a share, compared with net income of $67.6 million, or 11 cents a share, for the same period last year.

The company met first-quarter traffic projections, reversing a period of slower growth reported late last year. Yahoo said it attracted 192 million unique visitors during March, up from 145 million for the same period last year. It also said that its traffic rose to 1.1 billion page views per day on average during March 2001, up more than 22 percent over December 2000.

Yahoo's e-commerce operations fared better than some analysts had expected. The company said it enabled approximately $1.4 billion worth of such transactions, showing a modest gain.

On the advertising front, Yahoo offered some bad news and some good.

In a blow, the total number of advertisers on the site fell to 3,185 from some 3,700 in the previous quarter. In a research note in advance of Wednesday's earnings, Merrill Lynch analyst Henry Blodget wrote that he expected a moderate increase in the total number of advertisers to 3,800, although he warned that the number might decline because of the shakeout in the dot-com economy.

Regardless of its short-term setbacks, which are directly related to the rapid deterioration of the online ad market, many analysts are hopeful Yahoo can stage a turnaround.

"We saw a substantial drop-off of the number of advertisers and the amount spent per advertiser," said Andrea Williams, an equity analyst at Deutsche Banc Alex Brown. "Those are not the most encouraging trends. I believe that Yahoo will get through this downturn in the market, but it's just going to take a long time."

Susan Decker, Yahoo's chief financial officer, said the company is well on its way toward weaning itself from distressed dot-com customers. She said it expects to have 70 percent to 80 percent of its total ad revenue come from traditional advertisers by the end of 2001.

The company also pointed to other promising signs, saying it saw an increase in the average length of customer contracts, which hit 285 days for the quarter, up from 252 days in December 2000. It also said it has added new "traditional brand" advertisers on its site, including Kia Motors America, Restoration Hardware and Miller Brewing.

Despite Yahoo's predictions of renewed profitability for the year, analysts said the company's future remains uncertain, with some suggesting investors might further pare back their holdings of Yahoo's battered stock in the wake of Wednesday's report.

"Their lack of visibility remains," said Jordan Rohan, an equity analyst at Wit SoundView, referring to the few clues about Yahoo's future performance. "And in this type of environment, that should not support (its current) $9 billion valuation."