Yahoo Q1 revenue and profit tumble

It will also lay off 5% of its employees to cut costs

Yahoo Inc.'s profit and revenue fell sharply in its first quarter, ended March 31, as the beleaguered Internet company added a softening online ad market to its list of woes.

As part of its ongoing cost-cutting efforts, the company will also lay off employees for the first time under new CEO Carol Bartz.

Yahoo had revenue of $1.58 billion, down 13% from the first quarter of 2008 but higher than the $1.20 billion consensus expectation from analysts polled by Thomson Reuters.

Meanwhile, net income fell 78% to $118 million, or 8 cents per share, compared with $537 million, or 37 cents per share, in the first quarter of 2008, which included a one-time, noncash gain of $401 million, or 29 cents per share, related to Alibaba Group’s initial public offering of, the company said Tuesday.

On a pro forma basis, which excludes certain one-time items, Yahoo had net income of $206 million, or 15 cents per share, down 16% and 17%, respectively, compared with the first quarter of 2008 but exceeding by 7 cents per share analysts' expectations.

As had been rumored, Yahoo also announced it will lay off employees, its third major round of job cuts since early 2008. This time around, Yahoo will let go 5% of its staff worldwide. Yahoo ended 2008 with 13,600 employees, so this would mean that about 680 people will be laid off. Yahoo handed out pink slips to about 2,600 employees in two rounds of layoffs last year.

In a conference call to discuss the results, Bartz said this new round of layoffs is different in nature from the "across-the-board" staff reduction Yahoo implemented in the fourth quarter, when about 1,600 employees were let go.

"It's a natural outgrowth of the work we're doing to streamline our structure, globalize products, slim down our portfolio and eliminate duplication of efforts," Bartz said.

Yahoo intends to reinvest the money saved in what it considers its key areas for growing user engagement and advertising revenue, she said.

Bartz reiterated throughout the call that Yahoo's key online services must be improved in order to dazzle end users, which in turn will attract advertisers.

"The best candidates for focused investment and renewed innovation are those that generate the majority of our traffic and corresponding economic value: the home page, sports, news, finance, entertainment, mail, search and mobile," she said. "Getting these products right is imperative to continue to grow our massive user base and increase user engagement."

The company said that it struggled both in display and search advertising, but Bartz, who took over as CEO in January, claimed that Yahoo will see its fortunes rise when the economy recovers.

Specifically, she said she expects that once the economic crisis passes, companies will increase their spending on the type of online advertising Yahoo specializes in: display brand advertising for which marketers pay a premium for the quality and placement of the ads.

For now, Yahoo expects revenue for the second quarter to be in the range of $1.43 billion to $1.63 billion.

Google Inc., which dominates search advertising, the most popular and least-affected online ad format during the recession, posted financial results last week that were widely praised, considering the tough economic conditions.

Google reported revenue of $5.51 billion in 2009's first quarter, up 6%, and net income of $1.42 billion, or $4.49 per share, compared with net income of $1.31 billion, or $4.12 per share, in 2008's first quarter.

Google's dominance in search usage and advertising is one big reason for Yahoo's years-long financial problems.

Yahoo has also in the past five years consistently misread other opportunities, such as video sharing, blogging and social networking.

Last year, in the midst of a turnaround plan drafted by co-founder and then-recently minted CEO Jerry Yang, Yahoo received an unsolicited acquisition offer from Microsoft Corp.

Yang, his executive team and the board were roundly criticized for what was perceived as an unwillingness to fairly consider the acquisition offers from Microsoft.

Microsoft eventually walked away in May, but it has continued trying to strike a more limited search-advertising deal with Yahoo. On Tuesday, Bartz declined to comment about recent reports that the two companies have been holding talks over a possible search-ad deal.

Yang announced his intention to step down as CEO in November, and Bartz was appointed in January.

In February, Bartz implemented a reorganization intended to simplify Yahoo's notoriously complex corporate structure so that decisions can be made more quickly.

Online advertising spending in the U.S. grew considerably less in 2008 than in prior years, reaching $23.4 billion in 2008, a 10.6% increase compared with 2007, the Interactive Advertising Bureau and PricewaterhouseCoopers reported recently. That growth rate pales in comparison with the 26% jump in spending recorded in 2007 over 2006.

In the fourth quarter of 2008, spending was $6.1 billion, up 2.6% compared with the same quarter in 2007, and 4.5% compared with 2008's third quarter, the smallest quarterly sequential increase since 2001, according to the report.

Search advertising broadened its lead as the preferred online ad format, accounting for 46% of spending in 2008's fourth quarter, up from 42% in the same period in 2007, the report found. For the full year, the search format had a 45% share, up from 41% in 2007. It has been the most popular ad format since 2004.

Copyright © 2009 IDG Communications, Inc.

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