Yahoo's Yodel Turns Into a Whimper

Layoffs and a refocusing effort can only do so much. CEO Jerry Yang needs to find exciting new products or services if he hopes to make Yahoo sing again

At the Consumer Electronics Show a few weeks ago, Yahoo! CEO Jerry Yang kicked off his keynote speech with a vow: "It is time to get Yahoo yodeling again." But on Jan. 29, after Yang issued a muted outlook for the coming year, including the layoffs of 1,000 employees, it became clear that the turnaround he wants to bring about won't happen for at least another year. As if…..

Yahoo said its fourth-quarter profit fell 23%, to $206 million, on a 14% rise in sales, to $1.4 billion, excluding commissions to marketing partners. But even though that met or outpaced expectations, the company's outlook for 2008 didn't. Yahoo expects revenue of $5.35 billion to $5.95 billion, missing the expectations of many analysts, whose average forecast is for sales of $5.88 billion. "The outlook was the real disappointment," says Rob Sanderson, an analyst at American Technology Research. "They threw in the kitchen sink in terms of reducing expectations."

The stock reeled in extended trading, dropping more than 10%, to $20.81. Even before the report was released, Yahoo's shares were trading at their lowest level in more than four years.
Even as top-line growth fails to meet some projections, spending on efforts to keep visitors glued to the portal could crimp bottom-line growth, too, at least in the near term. Yang expects to continue investing in such areas as Yahoo's home page, its personalized MyYahoo service, e-mail, and mobile features. He also plans to keep spending to improve search as well as to create better technology for marketers to buy both search and display ads on Yahoo. "This sort of transformation takes time," Yang said on an earnings call with analysts. "We are taking an aggressive investment posture. Increased investment is the only appropriate measure at this time."

A Big Ax in Europe

Investors also may be disappointed that Yang, who took over last July with the departure of longtime CEO Terry Semel, didn't make deeper cuts in Yahoo's staff. Some press reports suggested the cuts would affect as many as 2,500 people. The layoffs will mean a charge of up to $25 million in the first quarter, but they could save the company $100 million a year in expenses.

Yang said the cuts, which will come in mid-February, will be not across the board, but selective, focused on areas that aren't doing as well as others. One Yahoo executive told BusinessWeek that sizable cuts probably would come in Europe. Yahoo also has already deemphasized or closed lagging operations such as music subscriptions, photos, and a social-networking service called Yahoo 360.

Analysts had hoped that Yahoo's results might offer clues as to whether the economic slowdown will hit online advertising. The concern is that companies such as Yahoo and Google (GOOG) will suffer from pared marketing budgets. Some analysts also fret that cash-strapped consumers will reduce spending, in the process clicking on search and other ads less often, which also would mean less revenue for the likes of Yahoo and Google. Indeed, this possibility, coupled with small declines in Web search activity in December, prompted investment bank Stanford Group in Houston to cut its Google stock rating to "hold" from "buy" on Jan. 24. "Advertising-driven media typically slows down in a recession, so online advertising should decline in a recession, ultimately," says Stanford analyst Clayton Moran.

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