Update: Yahoo to cut staff by at least 10%; Q3 earnings disappoint

The layoffs will take place by the end of the year

As it announced disappointing financial results for its third quarter, Yahoo Inc. said today that it will lay off at least 10% of its global staff before the end of the year.

The layoffs are the major portion of Yahoo's $400 million cost-cutting plan, which also includes measures for achieving what the company called "structural efficiencies."

Revenue for the third quarter, which ended Sept. 30, increased only 1% to $1.768 billion compared with the same quarter in 2007. Subtracting the commissions that Yahoo pays to its advertising partners, revenue was $1.325 billion, up 3%.

Net income came in at $54 million, or 4 cents per share, down from net income of $151 million, or 11 cents per share, in 2007's third quarter.

On a pro forma basis, which takes into account one-time items, net income was $123 million, or 9 cents per share, down from net income of $153 million, or 11 cents per share.

Yahoo missed Wall Street estimates for revenue and matched their profit expectation. The consensus estimate from analysts polled by Thomson Reuters was for pro-forma earnings per share of 9 cents and revenue -- minus commissions -- of $1.37 billion.

The fourth-quarter staff cuts will be this year's second wave of layoffs for Yahoo, which let go 1,000 employees in February. Yahoo ended the third quarter with 15,200 employees, which means that at least 1,520 of them will lose their jobs between now and the end of the year.

Yahoo also plans to save money by relocating operations to places where it's cheaper to do business, consolidating its real estate, improving procurement and seeking efficiencies in its technology platform. Cost-cutting efforts will continue next year.

In addition, Yahoo cut its full-year revenue expectation sharply from a range of $7.35 billion and $7.85 billion to a range of $7.17 billion to $7.37 billion.

Yahoo co-founder and CEO Jerry Yang tried to put a positive spin on the results during a conference call Tuesday, saying that Yahoo is "well-positioned for future growth."

He said business results were mixed, with some segments doing well, such as U.S. search advertising, while others did not, including U.S.-branded display ads and the general performance of the company in Europe and Asia.

Although revenue was disappointing, Yang pointed out that operating cash flow came in "above the midpoint" of Yahoo's outlook range, thanks to cost management measures this year.

While the revenue forecast was cut because of the "uncertain advertising environment" Yahoo faces, the company is reaffirming its operating cash flow outlook for the year.

"Continued substantial cash flow remains one of our core financial strategies and an important goal," Yang said. "We have the balance sheet strength, liquidity and free cash flow we need to continue to make progress in our core strategies as we work our way through this economic downturn."

Yang also said he was satisfied with the traffic and the audience engagement generated by Yahoo Web sites and online services during the quarter.

Still, the layoffs, Yahoo's plunging stock price and the sagging revenue will no doubt re-ignite the criticism from naysayers who blame Yang and Yahoo's board for causing the collapse of Microsoft Corp.'s attempts to buy the company earlier this year.

In May, after a three-month pursuit, Microsoft walked away from the deal after a $33 per share offer was rejected by Yahoo's board, which sought a $37 per share offer. Yahoo's stock closed at $12.07 per share on Tuesday.

In addition, Yahoo's results look particularly bad when compared to those of its rival, Google Inc., which reported solid third-quarter results last week. Both Google and Yahoo generate most of their revenue from online advertising.

Google reported revenue of $5.54 billion for the quarter, up 31% compared with last year's third quarter. Net income was $1.35 billion, or $4.24 per share, compared with $1.07 billion, or $3.38 per share, in 2007's third quarter.

A big difference is that Google's revenue comes mostly from search advertising, a segment it broadly dominates and which makes up the largest, most robust online ad format. Yahoo, on the other hand, is stronger in display advertising, where demand has weakened.

In August of this year, Google handled 63% of all search queries in the U.S., while Yahoo's share fell to 19.6%, according to comScore. The story was much different a few years ago. In February 2004, Google controlled 34.7% of U.S. searches, while Yahoo's share was 30%, comScore said.

The evolution of the search engine market led to Yahoo's deep crisis. If Yahoo had remained competitive in search, it would be generating significantly more revenue from search advertising and likely finding itself in a much stronger position.

Financial and industry analysts agree that over the past five years, Yahoo has lost its technology edge, which has caused it to miss major growth opportunities in areas like search, online video, blogging, syndicated feeds and social networking.

This year, as the Microsoft drama unfolded, Yahoo has seen a steady exodus of high-profile staffers, as these formerly loyal and committed business and technology leaders give up on the company and morale drops.

Google and Yahoo signed a deal in June to let Yahoo run search ads provided by Google. Both companies had expected to turn on the deal's switch early this month, but have delayed the implementation, while they wait for the U.S. Department of Justice to examine the antitrust implications of the agreement. Yang said the companies continue their conversations with the DOJ.

Yahoo has said that the Google deal represents an annual revenue opportunity of about $800 million and that, in its first 12 months after implementation, the deal could give Yahoo between $250 million and $450 million in incremental operating cash flow.

Yahoo has a number of ambitious technology initiatives that its executives believe will put the company back on track. However, those projects, such as the Yahoo Open Strategy (YOS) project, have a long-term scope.

YOS, announced in April, is a complex project to open Yahoo services up more broadly to outside developers and to create a single dashboard for end users to manage their Yahoo services and online activities in general.

YOS is still in its early stages, and its initial components haven't all been particularly impressive, like last week's revamp of the Yahoo user profiles, which has been blasted by many people who don't like the changes.

Recent rumors have floated about a possible Yahoo-AOL merger. While that deal would give Yahoo a quick market share and revenue boost, industry experts are generally skeptical about whether it would fix Yahoo's problems.

Copyright © 2008 IDG Communications, Inc.

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