Yahoo CEO steps down, sales and earnings to fall short

Larry Dignan
4 min read

Yahoo CEO Tim Koogle stepped down Wednesday and the leading Web portal's earnings will fall below expectations, the company said in a conference call late this afternoon.

Yahoo said that Koogle will remain chairman. The company is starting a search for a new CEO. Meanwhile, the company said net income will break even in the first quarter. First Call consensus estimates call for a profit of a nickel a share.

The company said revenue will be in the range of $170 million to $180 million, sharply lower than First Call projections of $232.6 million.

Responding to speculation that was sparked by Merrill Lynch analyst Henry Blodget, the Nasdaq halted trading in Yahoo stock earlier in the day, and it never resumed. Nasdaq spokesman Andy MacMillan said the exchange put a halt on the stock after it "had heard a number of rumors in the marketplace early on in the trading day." Prior to the trading halt, Yahoo fell $1.40, or 7 percent, to $20.96.

Speculation on everything from an earnings warning to an acquisition to a change in management was sparked by Blodget, who noted that Yahoo dropped out of his brokerage's Internet conference in New York at the last minute. The conference, which was delayed from last year, kicks off Wednesday and runs through Friday.

Adding more fuel to the speculative fire, Yahoo co-founder Jerry Yang canceled a keynote speech in Deer Valley, Utah, that was scheduled for Wednesday.

Usually when a company drops out of an investment conference, investors worry about a profit warning. And given that Yahoo is expected by many analysts to cut its outlook when it reports first-quarter earnings next month, Wall Street is understandably wary.

"A strategic partner would be viewed as good news, so I'll eliminate that," said Kathleen Heaney, an analyst at Blue Stone Capital. "I'm thinking that Yahoo's thinking that whatever news that's coming out is bad news."

Possible scenarios include lowering expectations further for the first quarter or announcing the departure of one of its top executives.

"They already got expectations down for the first quarter, and maybe they say, 'We've gone through eight weeks in Q1 and it sucks,'" said Heaney. "Or (Yahoo CEO) Tim Koogle is leaving."

In a research note, Blodget did his part to fan the speculation flames even as he noted that Yahoo's cancellation may be much ado about nothing.

"Yahoo has unfortunately had to cancel its appearance at our Internet conference tomorrow," Blodget said. "To our knowledge, Yahoo has never canceled the day before a conference. As a result, it seems prudent to review the usual reasons that lead to such cancellations."

Blodget said those reasons include: a preannouncement or restructuring; a major acquisition or take-over; or a management change. Here's a closer look at the possible reasons for Yahoo's cancellation.

 Blodget said it's "conceivable" that Yahoo could issue a profit warning. The analyst said he thinks the company's projections for first-quarter earnings of 4 cents a share to 7 cents a share on sales of $220 million to $240 million are conservative, but "in the current environment, anything is possible." Blodget also said Yahoo may pull the plug on projects not generating revenue.

 "The shakeout in the Internet sector has reduced the valuations of many companies to husks of their former selves," Blodget said. "We believe that some of these companies would make attractive acquisition targets for Yahoo." Blodget also named names. He said RealNetworks, which isn't attending the Merrill Lynch conference, may be a good target. Blodget also noted that eBay has roughly the same market capitalization as Yahoo.

"There are many other companies we could imagine Yahoo acquiring, but we believe most are too small to warrant a conference cancellation," Blodget said.

 Blodget said a Yahoo takeover is also possible. Yahoo has lost key executives, faces a tough advertising market and could be entertaining offers, he said. "Given the AOL Time Warner merger, we would also not be surprised if the sense of urgency on the part of some of the major media, cable and/or technology companies has increased. It therefore seems possible that the last major stand-alone entity in the Internet media sector might soon capitulate and join the marriage brigade," he said.

Blodget named the usual suspects: Viacom, Bertelsmann, NewsCorp, Disney and even AT&T, who may want to "swap out" Excite for Yahoo. However, Yahoo adopted a shareholder rights plan, which was designed to deter a hostile takeover.

 Management changes could also be on the horizon. "It would be understandable if one or more members of the core senior team decided to call it a day, join their international colleagues and depart for less hectic pastures," he said. Margaret Kane contributed to this story.>