Yahoo Earnings Meet Forecasts, but Revenue Falls
Leading Internet portal Yahoo Inc. reported third-quarter earnings in line with Wall Street’s expectations Wednesday, but its revenue declined a stunning 44% from a year earlier.
Terry Semel, the company’s chief executive, said in an interview that a pending reorganization to streamline operations will include a new round of layoffs, to be announced by Nov. 15. Last spring, Yahoo shed 12% of its work force.
The near future looks rocky for the Internet bellwether, analysts said, because Yahoo has been unable to rapidly ramp up premium services as the advertising market collapses around it.
“They’ve been talking a lot about alternative revenues, [but] they’ve taken [only] baby steps in that direction,” Paul Noglows, an investment analyst with of J.P. Morgan.
In an expected sign of the contracting ad market, Yahoo’s pro forma profit, which excludes one-time gains and losses, was $8 million, or 1 cent a share, significantly lower than year-earlier profit of $81 million, or 13 cents a share.
Including investment losses and other one-time factors, Yahoo posted a net loss of $24 million, or 4 cents a share. A year earlier, Yahoo had net income of $48 million, or 8 cents a share.
Revenue fell to $166 million from $296 million a year earlier.
For the fourth quarter, Yahoo expects to break even or turn a profit of 1 cent a share pro forma, with revenue of $160 million to $180 million.
Yahoo has historically earned nearly all of its revenue from advertising and related services--a market that has rapidly dried up due to the dot-com bust and overall weakness in the economy. The trend was accelerated by the terrorist attacks of Sept. 11.
In an ominous sign, the number of Fortune 50 companies that advertise on Yahoo has thinned to 25, from 29 in July; and Fortune 100 advertisers slipped to 48 from 54 in the same period, Yahoo said.
Safa Rashtchy, an analyst with U.S. Bancorp Piper Jaffray called such losses of corporate advertisers “very critical.” He added, “the top advertisers spend five to 10 times as much as the average advertiser.”
But Semel discounted the ad drop, blaming it on cyclical market conditions and on the temporary disruption of the attacks.
Meanwhile, Yahoo’s corporate services, such as custom Web portals, and fees from consumer offerings, such as shopping and online auctions, have yet to gain traction. Combined, such ventures make up only 20% of Yahoo’s shrinking revenue.
Paul Noglows, an analyst with J.P. Morgan, said that Yahoo’s chief competitors, Microsoft Corp. and AOL Time Warner Inc., have a major advantage: millions of subscribers who already pay for Internet service. “On top of that billable relationship, you can add ancillary services,” such as $5 a month for music, he said.
Noglows said that Yahoo’s Nov. 15 analyst meeting will be a key juncture at which they must lay out a viable plan for premium services. If not, “there is a very real danger that the name Yahoo becomes increasingly irrelevant to an increasing number of investors,” he said.
Semel said that in November, Yahoo might launch its sale of online digital music, as well as various premium service packages.
But Yahoo will not rush ahead before the technology infrastructure for premium offerings is complete. “When we go out, let’s do it absolutely right,” Semel said.
A failure to regain a growth footing soon could mean the end of Yahoo as an independent company, some analysts said.
“Yahoo becomes more and more popular every day but less and less capable of making money with that popularity,” Rashtchy said. “What does it tell you? Someone will [acquire] them eventually, maybe sooner than people expect.”
Yahoo shares rose 77 cents to $10.93 in Nasdaq trading ahead of the earnings announcement Wednesday. After-hours trading pushed Yahoo’s stock up to $11.30.
