Yahoo Warning Ends Day of Speculation
Internet bellwether Yahoo Inc. became the latest victim of the technology meltdown Wednesday, announcing that it will seek a new chief executive and warning that the company might only break even this year.
Yahoo said it will break even in its first quarter as revenue will slow to $170 million to $180 million--down sharply from previous estimates of $220 million to $240 million. Analysts had expected Yahoo’s first-quarter earnings to be 5 cents a share.
Perhaps more disturbing to investors, the company said full-year 2001 earnings could drop to zero. A consensus of analysts recorded by First Call/Thomson Financial had estimated Yahoo’s full-year profit would be 36 cents per share.
“The patient’s pulse is barely beating right now,” said Derek Brown, an analyst with WR Hambrecht. “If they are talking about break-even as a possibility [for 2001], that’s a dramatic decline,” he said. “Shocking is one of the words that would come to mind.”
Safa Rashtchy, an analyst with US Bancorp Piper Jaffray, wondered whether the news might warrant substantial financial restructuring for Yahoo. “Our worst-case scenario was about $190 million” in first-quarter revenue, he said “This looks pretty bad.”
The announcements, after the market closed, capped a day of nervous speculation.
First, Yahoo’s chief financial officer canceled a speech to market analysts. Then Nasdaq halted trading in the company’s stock. The Santa Clara, Calif., company’s shares had fallen $1.44 to close at $20.94, a 52-week low, before the halt.
After the company’s announcement, Yahoo’s stock plunged to $17.88 in after-hours trading.
Yahoo, one of the Web’s most popular sites, has lost about 90% of its market value in the last year. Yahoo hit a 52-week high of $205.63 last March; its current market capitalization is about $10 billion.
After starting as a search engine in the mid-’90s, Yahoo grew into a full-service information and shopping portal and became one of the most popular destinations on the Internet. Yahoo was also one of the Net’s biggest financial successes, with revenue nearly doubling last year to $1.1 billion with a profit of $291 million.
But advertising, which accounted for nearly 90% of the company’s revenue last year, has suffered from the dot-com meltdown and the overall slowing of the economy. And the current quarter’s shortfall came from a soft ad market for traditional and Internet companies alike, said Jeff Mallett, Yahoo’s president.
Yahoo recently said it plans to create a more stable revenue base this year by increasing revenue from premium services to consumers--such as photo finishing and Web site hosting. It also is increasing its contracts to provide corporations with custom Internet portals.
The early signs for Yahoo’s new fee-based services haven’t been encouraging, though. The number of items for sale on its online auctions has fallen dramatically since it began charging fees for listings in January.
Tim Koogle said Wednesday that he will step aside as Yahoo’s chief executive, , though he will keep his job as chairman. Koogle will stay on as CEO until a new chief is selected.
Koogle predicted that the company will emerge stronger from the economic downturn--relying on nearly $2 billion in cash, with no debt. “We will use these assets to weather the current economic slowdown,” he said in a conference call to analysts.
Analysts praised Koogle’s vision and his prowess in building the company. Yahoo now claims 185 million unique users worldwide, and 1 billion page views per day.
Finding a replacement will be difficult, like “getting someone to step in front of an avalanche,” said John Corcoran, analyst with CIBC World Markets Corp.
But the change could be key to Yahoo’s future, experts said.
“Yahoo’s got to find a way to fit itself into the media marketplace a little more strategically,” said Lanny Baker, an analyst with Salomon Smith Barney.
WR Hambrecht’s Brown concurred. “It’s very possible that the company will need a massive retooling, “ he said.
Acquisition rumors have swirled around Yahoo for months, though until recently the company’s high market valuation seemed to put it out of reach.
But industry insiders have predicted that once Yahoo’s stock dropped below $20 a share--a barrier it breached Wednesday--Yahoo could become a prime takeover target for media giants such as Walt Disney Co. or Viacom.
Those companies are widely viewed as needing a strong global Internet presence to compete against the newly formed AOL Time Warner Inc., the world’s largest media company.
Merrill Lynch Internet analyst Henry Blodget suggested recently that Microsoft Corp. might also find Yahoo an attractive partner in its battle for online supremacy against AOL Time Warner.
But Wednesday’s news might scare off possible suitors, said US Bancorp Piper Jaffray’s Rashtchy.
“The problem is that if they are really losing advertising, and the other areas haven’t yet worked out . . . the potential takeover companies are probably going to be a bit more cautious,” he said.
If Yahoo can staunch the bleeding and diversify its revenue sources, it stands a strong chance of thriving in the long run, some analysts predict.
“The advertising business is in a total meltdown faster than anyone thought,” Baker said. “Is it permanent? Absolutely not.”
On Wednesday, Yahoo’s board also authorized spending $500 million to repurchase company stock--an apparent effort to show confidence to the marketplace in Yahoo’s future.
