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LIVE: Yahoo Earnings Not As Bad As Feared, But Layoffs to Begin

Posted by: Rob Hof on October 21, 2008

Not surprisingly, Yahoo just reported third-quarter earnings that were weak but not as awful as some might have expected. However, the company said layoffs of at least 10% of the staff of 14,300 will begin in the fourth quarter—about what reports had anticipated.

They will be part, but not all, of a sweeping cost-cutting effort that is intended to reduce its annual costs of $3.9 billion by about $400 million before the end of this year. “Now we are conducting a deep review of our cost structure to identify more opportunities to enhance efficiency and build a stronger and more profitable Yahoo!,” president Sue Decker said in a statement.

Net profit fell 64% to $54.3 million, or 4 cents a share, from $151.3 million, or 11 cents a share, a year ago. Excluding special items such as stock option expenses, profit fell from 11 cents a year ago to 9 cents a share in the third quarter, precisely what analysts were expecting. However, net revenues, after payments to partners for traffic, rose just 3%, to $1.33 billion, slightly short of the $1.37 billion analysts had forecast.

Yahoo lowered its 2008 revenue outlook to between $7.18 billion and $7.38 billion, from its previous forecast of $7.35 billion to $7.85 billion.

Yahoo Chief Financial Office Blake Jorgensen cited “an increasingly challenging economic climate and softening advertising demand” for Yahoo’s results coming in at the low end of the range it had forecast. Although he said in a statement that Yahoo was “disappointed” in the results, he said cost-cutting during the year so far had helped cushion the economy’s impact on operating cash flow. Free cash flow, after capital expenses, fell 31%, to $151 million, from a year ago.

You can view the results and then listen to the conference call online here. After the jump is my full story.

UPDATE: Investors so far seem relatively pleased, with the stock up 5% after-hours.

And the call begins with Jerry Yang. He says Yahoo saw “mixed trends,” with search and performance-oriented display ads showing strong growth but “demand for branded display advertising weakened.” So the company is reducing full-year revenue outlook but keeping its operating cash flow outlook thanks to cost cuts, which will be not only layoffs but cuts in real estate, standardization of its technology platform, and other methods.

He says he remains optimistic about Yahoo’s future because the downturn likely will drive advertisers to reliable venues. The latter, at least, is what I’ve been hearing from advertisers and agencies, but the question will be to what extent Yahoo’s entire ad offering will be the most compelling.

“This is in many ways an unprecedented operating environment,” Yang says. “We believe the online ad market will emerge strong, with Yahoo well-positioned to take share.”

Now President Sue Decker comes on to talk about fairly familiar Yahoo products and features, though one detail—page views up 17%—is a positive sign. But she says overall monetization of pages was lower than expected, especially commitments to branded campaigns. Despite strength in search revenues from its own sites, up 17%, display ad revenues on its own sites was up only 3%, much less than double-digit gains in previous quarters.

Decker’s now talking up APT, its new display-ad platform.

Now it’s on to Jorgensen: Two main themes in quarter, already apparent in previous comments: worsening economic environment coupled with greater cost cuts. “We are cautious about the advertising market in Q4. But we feel we are well-positioned to weather the downturn.” Mentions the Asian properties are valued at $7 billion or so, or more than $5 a share—a clear attempt to point out that Yahoo’s stock is undervalued in his view.

Now, the analysts’ questions:

* How is Yahoo going to improve monetization on its own sites? Decker says mainly the display ad platform, APT.

* Any lift in ad rates thanks to APT? Decker says no data yet.

* Where were the cost cuts in the quarter? Jorgensen: All year, actually. Slower hiring, but mainly hiring in lower-cost areas like India, Eastern Europe, and Southeast Asia.

* Any deadline on the Google-Yahoo deal? Yang can’t say, though I’ve gathered from people close to this that the Oct. 22 deadline mentioned widely isn’t actually a deadline. Talking with the Justice Department and others.

* How confident are you in the revenue forecast? Decker: watching weakness in Asia, but she mentions some “stability” in the U.S. despite some ad cancellations in travel and other areas.

* Could there be more consolidation among companies online, and what would Yahoo’s role be? Yang: Says there are opportunities, especially since ad spending isn’t increasing much, so it’s hard to grow that way. But he offers no specifics.

* How do you see your growth rate vs. Google? Yang: “There continues to be a flight to quality with regard to consumer behavior and advertiser behavior.” Decker more specifically acknowledges the obvious, that Google’s growth rate is faster than Yahoo’s, and talks about various ways Yahoo hopes to improve its search offerings for consumers and its search ad system for advertisers.

* Was there a sharp downturn in September? Decker: “The trends weakened in the latter part of August.” First Europe, then Asia. Also weakened in the U.S. but not as much as the rest of the world.

* What’s the ‘09 outlook? Yang, with a hint of a rueful laugh: “I don’t think we have any visibility into ‘09.”

* What’s the impact of acquisitions on revenue? Jorgensen says acquisitions contributed 1% to GAAP revenue.

* In what departments or functions is Yahoo making cuts? Yang doesn’t provide specifics, just the usual things like real estate.

* How will Yahoo unlock shareholder value? Yang says one way is cutting costs. Conservative on share buybacks, though, so that looks unlikely.

* How much of the weak 3% display-ad growth is due to the economy and how much to losing share to ad networks and niche sites? Decker: Can’t really say yet, but says Yahoo is outgrowing the ad networks.

* How sensitive will Yahoo be to diluting shareholders if and when it does acquisitions? Jorgensen: “We’ll clearly be very sensitive to dilution.”

* Last question: Have you considered hedging out exchange risks in various international markets? Jorgensen: Yes, but doesn’t sound like Yahoo plans to do much on that.

And that’s it for the call. The stock’s now up about 7% in extended trading, so if anything, the details from the call reassured investors—at least to the mild extent that they can be reassured about a company facing this many challenges.

Thanks to aggressive cost-cutting and surprising strength in search advertising, Yahoo! pleased investors on Oct. 21 with third-quarter earnings that managed to meet expectations. But the performance is cold comfort to some 1,500 Yahoo employees who will be laid off as the company looks to slash its $3.9 billion in annual expenses by more than 10% before the end of the year.

The embattled Internet portal said net profit fell 64%, to $54.3 million, or 4¢ a share, from a year ago, on a 1% increase in gross revenues, to $1.79 billion. Excluding special items such as stock option expenses, the profit of 9¢ a share met analysts' expectations. Net revenues, after payments to partners for traffic, rose a meager 3%, to $1.33 billion, just under what analysts had forecast.

All in all, the quarter's results were a relief to investors, who had pushed Yahoo's stock down from the high 20s earlier this year when Microsoft was pursuing the company. In extended trading, Yahoo's stock, which had fallen 6% before the report, to 12.07 a share, rose about 8%. "They didn't go off the rails," explained Jeffrey Lindsay, an analyst with Sanford C. Bernstein. "People reacted positively to their taking decisive action to cut costs."
Search Queries on the Rise

Investors also were somewhat encouraged by the relatively strong performance in search advertising. Yahoo had fallen so far behind No. 1 search engine Google that by June, it forged a deal to run Google ads on Yahoo pages, an agreement that hasn't yet been implemented while it is being reviewed by regulators. Even so, Yahoo said the number of search queries rose 10% in the quarter, and revenue per search jumped a reassuring 20%, due to improvements in its search ad system called Panama.

Still, Yahoo's outlook remains cloudy at best. Thanks to the cost-cutting, Yahoo left in place its forecast for 2008 operating cash flow. But it lowered its 2008 revenue outlook to between $7.18 billion and $7.38 billion, from a previous forecast of $7.35 billion to $7.85 billion. Given that there's only one quarter left in the year—a historically strong one because of holiday advertising—that's a hefty cut in the fourth-quarter outlook.

Much of the downside came in branded display ads, the pictorial and video banners that run at the top and sides of Web pages. Display revenue on Yahoo's pages rose only 3% in the quarter. So-called performance-based display ads, which directly prompt potential customers to click and potentially buy a product, grew faster. But with the economy prompting large advertisers to cut budgets even online, Yahoo's mainstay branding-oriented display ads were much weaker, co-founder and Chief Executive Jerry Yang said during a conference call with analysts. "This is in many ways an unprecedented operating environment," he said.

Like Google's earnings last week, Yahoo's will be dissected for signs of how much online advertising will be hit by the deepening economic downturn. Yahoo said conditions had noticeably worsened in Europe and Asia. But the online advertising slowdown was apparent even before the market meltdown began a little over a month ago. Yahoo President Sue Decker said business weakened around the end of August.

Industrywide, business has slowed for longer than that. According to recently released figures from the Interactive Advertising Bureau and PricewaterhouseCoopers, display advertising declined from the fourth quarter of 2007 to the first quarter of 2008, and also fell again slightly from the first to the second quarter. That hasn't happened since 2002. "If clients have to cut, digital budgets are not going to escape scrutiny," says Clark Kokich, CEO of Razorfish, an online ad agency owned by Microsoft. "You're going to see a softness we haven't seen for the last few years."

For his part, Yang offered little insight into how the weakening economy will affect Yahoo in the coming year. "I don't think we have any visibility into '09," he told analysts. Yahoo isn't expected to provide a 2009 outlook until January.
"Flight to Quality"

However, Yang and Decker said their recent talks with advertisers and ad agencies gave them some encouragement. "There continues to be a flight to quality with regard to consumer behavior and advertiser behavior," said Yang. "I am encouraged that most advertisers who are still spending in this environment are spending with Yahoo."

At the same time, Yahoo faces many other challenges. Since Microsoft walked away from offers to buy the entire company and then only its search business, Yahoo's stock has fallen far below Microsoft's original $31-a-share offer for the company. And while Microsoft CEO Steve Ballmer recently appeared to hint that the company is still interested in Yahoo, it's clear there are no current talks.

Yahoo also has been discussing a combination with AOL, which parent Time Warner has been shopping for months. It's believed a deal would involve Yahoo taking over AOL for something under $10 billion and Time Warner taking a minority stake in Yahoo. According to people familiar with the companies, Yahoo, bolstered on the media front with AOL, might then be willing to do a search deal with Microsoft from a position of greater strength.
Losing Out to Social Networking

However, it's not clear that such a combination would help Yahoo regain ground lost to fast-growing social networking sites such as Facebook and News Corp.'s MySpace, let alone Google. Despite a monthly audience of 500 million people worldwide, Yahoo has been unable to break into social networking, a key potential growth area.

That's not all the drama surrounding Yahoo. Its proposed deal to run Google search ads on some of its pages is under intense scrutiny by the Justice Dept., which is expected to make a decision soon. Although few people expect the arrangement to be opposed outright, many legal observers think Justice could push for limits that could make the alliance less lucrative. Yahoo has said the deal could contribute $250 million to $450 million to its cash flow annually.

Not least, Yahoo's plight also has been sending a steady stream of talent out the door, from engineers to executives. And the layoffs could hurt morale even further, especially if Yahoo doesn't announce specific jobs to be cut until later in the year. For now, both employees and investors see limited upside in the near term.

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Reader Comments

Jim Campbell

October 21, 2008 05:31 PM

We talk about job cuts and downsizing as if it ends there. After the layoff the real problems present themselves. Marriages often crumble, difficulty raising children financially and mentally occurs and the stress involved has taken many lives. If we feel the effects of this it's often because we don't allow ourselves to consider alternatives such as self employment. I'd been downsized twice in a five year period for business reasons not associated with performance. As a result I asked for a better alternative and attracted a website and the rest is history. Take a look. It may be what you're asking for too.


October 21, 2008 05:34 PM

There is only one person that needs to be FIRED at Yahoo! JERRY YANG

This guy is the WORST. What a total utter IDIOT. He CRIMINALLY abandoned shareholders interests when he turned down $33/Share.

He deserves NO SEVERANCE NOR PARACHUTE golden or otherwise unless it is a burning parachute and he was wearing it as he was pushed out of a plane.

More competition

October 21, 2008 05:58 PM

We need more competition in search engine front. Yahoo is basically dead. MS is not competitive. Some one please come out with better one than google.

Steve Bonser

October 21, 2008 07:00 PM

Look at the endless innovation spewing out of Google. What Yahoo! needs is a team of highly motivated young turks who can function like the Google Labs team. Without coming up with game changing, cool new services and features, they're going to be the next AOL.


October 21, 2008 07:06 PM

Typical idiot trying to manage the cost side by offshoring everything to the tech bots in India, when he could easily get better results with 1/5 the people onshore.

Frank Jones

October 21, 2008 07:14 PM

At least Yahoo! employees get notice of when the layoffs are going to be. In my industry, notification of layoffs happen on the same day as the actual layoff.

PNW Trojan

October 21, 2008 08:51 PM

yang is to leadership and vision as bush is to leadership and could throw balmer in this 'wonderful' group too. Sooo many losers....


October 21, 2008 09:19 PM

Now we are conducting a deep review of our cost structure to identify more opportunities to enhance efficiency and build a stronger and more profitable Yahoo! said president Sue Decker. Notice dear Sue reacts (not thinks) the way she is programmed to react. Profits go down and immediately react and fire workers who are in no way responsible for Yahoo's failures. Instead of firing 10% of ordinary workers why don't you fire 80% of middle management Sue and then walk out the door yourself? It seems like a perfect opportunity to come out with something bold. Bold is usually not a trait possessed by manager types but why not say this: Yes this is a tough time but we are going to innovate our way out. We are going to establish 10 programming teams each tasked with a mission of creating something completely novel and innovate. Teams will be organized as teams, work as teams, succeed as a team and not be encumbered with tepid cowardly managers. In fact these teams will not have ANY managers! The market will directly decide their fate (by accepting or rejecting their new products). And Wall Street reactionaries (non-thinkers) push the stock up on Sue's news. And then when unemployment numbers come out these same reactionaries (non-thinkers) will push the stock down again. It is really unbelievable how humans, blessed with wondrous nervous systems capable of contemplating virtually anything will continually react emotionally to events the same way over and over again. If you decide not to utilize your thinking capabilities Sue then perhaps you should exit.


October 21, 2008 10:19 PM

so many bitter undereducated overprivileged idiots. if you're laid off, there's probably a reason. blame it on yourself and not on outsourcing or jerry yang of anything.

Karla Guzman

October 22, 2008 12:34 AM

Considering layoffs as a solution for Yahoo’s downturn seems to be too practical of a solution that would only improve cash flow statements in the short term. In the process, Yahoo could cause low morale among employees which could be detrimental to successful performance. Additionally, the company may lose invaluable assets that could help the company’s financial future. As an alternative, Yahoo should perhaps hire a consultant to develop a human capital strategy to leverage the knowledge, experience, expertise, and potential of employees, as this could be the root of the problem. Yahoo could also mimic some of Google’s best practices that encourage employees to discover and apply their talents by allowing them to work on a project of their choice within various departments in the company.


October 22, 2008 11:58 AM

Hey, Sad-

"Bitter, undereducated, overprivileged idiot..."??

If there were a few being laid off, then you could argue your point more effectively. But 10% of a 14,300 person employee base is too much to attribute to individual poor performance.

Sorry, but you don't make sense.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.



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