Yahoo Reports Profit Drop, Plans to Cut 10% of Jobs

Oct. 21 (Bloomberg) — Yahoo! Inc., the Internet company that rejected a takeover offer from Microsoft Corp., reported a 64 percent drop in profit and announced plans to cut at least 10 percent of its staff after advertising spending slowed.

Third-quarter net income fell to $54.3 million, or 4 cents a share, from $151.3 million, or 11 cents, a year earlier, Yahoo said today in a statement. Sales, excluding fees passed on to partner sites, rose 3 percent to $1.33 billion.

The online ad market, dragged down by slumping consumer spending and tighter credit, is putting pressure on Chief Executive Officer Jerry Yang to slash costs. The staff cuts, representing at least 1,500 jobs, are part of a plan to save more than $400 million annually. Yahoo also said it was saving cash for acquisitions, fueling speculation that a deal to buy Time Warner Inc.‘s AOL unit may be in the works.

“They have a lot more they could cut,” Darren Chervitz, research director at Jacob Asset Management, said in an interview with Bloomberg Television. “This company over the years built up a lot of fat and bureaucracy in the organization.”

Yahoo, based in Sunnyvale, California, rose 85 cents, or 7 percent, to $12.92 in extended trading after the job cuts were announced. The shares, down 48 percent this year, had fallen 79 cents to $12.07 in regular Nasdaq Stock Market trading.

Lower Forecast

Yahoo forecast 2008 gross sales of $7.18 billion to $7.38 billion, down from a previous prediction of at least $7.35 billion.

Excluding items such as stock-options expenses, profit was 15 cents a share last quarter, matching the average estimate of analysts surveyed by Bloomberg. They had predicted sales of $1.37 billion, excluding the fees paid to partner sites.

U.S. Web ad sales growth may fall below 20 percent this year for the first time since 2002, according to Collins Stewart Plc. Yahoo gets most of its revenue from advertising, either in the form of search links or display ads such as Web banners.

The company has slightly more than 15,000 workers, Chief Financial Officer Blake Jorgensen said today in an interview. Yahoo hired consulting firm Bain & Co. last month to evaluate expenses.

Yahoo also may reduce its number of contractors, which currently total “a couple thousand,” Jorgensen said. The company is cutting real-estate costs, as well as evaluating the procurement system it uses to order services.

Yahoo may choose to contract with other companies for some of the features it offers online, as it did this year when it converted its music download service to one offered by RealNetworks Inc., Jorgensen said.

Handling a Recession

“The focus is to make sure we are better positioned to handle a long-term, protracted recession if that does occur,” Jorgensen said. “We’re also making sure those costs get out of the system for good.”

Yahoo is holding back on stock buybacks and conserving cash, potentially for use in acquisitions, Jorgensen said on a conference call. The company would consider purchases that boost its share of users and ad buyers, Yang said.

“To the extent we see a way to add onto that scale and strength, I think we need to do that,” Yang said. “We can gain a lot of scale in this type of environment because there isn’t a lot of growth in terms of spending.”

The comments indicated that Yahoo is close to a deal to purchase AOL, said Colin Gillis, an analyst at Canaccord Adams Inc. in New York. Yahoo and Time Warner have been discussing a transaction since at least April.

Pluses, Minuses

An AOL acquisition would make Yahoo more vulnerable to a decline in spending on picture ads online, since that’s AOL’s strength, said Gillis, who advises holding on to Yahoo shares. If growth accelerates in 2010, the deal could help Yahoo by widening its portion of the market, he said.

Jorgensen declined to comment on AOL. Keith Cocozza, a Time Warner spokesman, didn’t return a phone message.

While Yahoo leads the market for picture ads, it trails Google Inc. in promotions that run alongside search results, a category advertisers increasingly prefer because they can measure how often consumers respond, said Sandeep Aggarwal, an analyst at Collins Stewart in San Francisco.

U.S. sales of display ads will grow 17 percent this year to $8.3 billion, trailing search ad growth of 22 percent to $11 billion, Barclays Capital said in a report this month.

Google fielded 63 percent of U.S. Web search queries in August. Yahoo ranked second with 20 percent. Microsoft, which offered as much as $47.5 billion for Yahoo this year, had 8.3 percent.

Google Partnership

Microsoft walked away from takeover talks in May after Yang sought a higher offer. Yang instead agreed to let Google sell some search ads for Yahoo, a partnership under review by the U.S. Justice Department.

The agreement with Google faces opposition from advertisers, rivals and consumer advocates, who say it will harm competition. The companies said this month they would delay the agreement until the government completes its review.

Microsoft CEO Steve Ballmer said last week that a deal between his company and Yahoo might still make economic sense. There are no discussions now, Redmond, Washington-based Microsoft said. Yahoo spokesman Brad Williams declined to comment.

To contact the reporter on this story: Crayton Harrison in Dallas at [email protected]

Last Updated: October 21, 2008 19:27 EDT
By Crayton Harrison

Source: Bloomberg