Knives sharpening at Yahoo

By Yi-Wyn Yen

Yahoo chief Jerry Yang will face a highly anticipated call with Wall Street on Tuesday when the company reports its fourth quarter earnings after the closing bell.

Analysts say they are expecting Yahoo (YHOO) to announce a significant round of layoffs after published reports last week suggested that the Internet giant could cut up to 2,000 jobs of its 14,000 workforce this quarter. While Yahoo will neither confirm or deny the rumors, tech analysts will surely cast a negative outlook on the company if it fails to address cutbacks.

“We won’t know the financial implications until the layoffs get announced,” says Steve Weinstein, an analyst with Pacific Crest Securities. “But if it doesn’t, the expectation will grow exceedingly. This is a stock that was at $40 [two years ago]. You’re seeing investor frustration. Yahoo has to find ways to regain momentum.”

Wall Street is clearly losing patience with Yahoo. In July, Yang promised investors a 100-day review, but little has changed since then. Yahoo continues to fall behind Google (GOOG) in search. For the first 11 months last year, the distant No. 2 search engine lost four percentage points almost entirely to Google, according to comScore. Google owns 70%t of the global search market compared to Yahoo’s 14%.

Yahoo is making progress in graphical display ads, its core business, but it’s not clear if that will be enough to satisfy shareholders. Analysts estimate that big-brand advertising, which shows up on Yahoo’s homepage and on other key services like Yahoo Mail and MyYahoo, its personalized homepage, will increase revenue 16% in the fourth quarter. Yahoo’s integration of online ad network Blue Lithium and major partnership deals with WebMD (WBMD) and social networking site Bebo will help stimulate growth this year, but fears of an economic slowdown could shrink display ad dollars.

“Either management turns the company around or it’s forced into M&A,” UBS analyst Ben Schachter wrote in a note last week.

The longer Yahoo’s stock price under performs, the more the fire sale rumors from private equity vultures and big media sharks like Microsoft (MSFT), News Corp. (NWS), and Comcast (CMCSA) will persist. Yahoo shares have depreciated 22 percent since Yang returned to the top spot nearly six months ago. Last Tuesday the stock hit a 52-week low of $18.72 after reports claimed Yahoo would be making cutbacks.

For now, Yang has to deal with more immediate problem to solve — boosting employee morale while appeasing shareholders. Yahoo in a statement last Tuesday said it would “eliminate some areas of the business that don’t support the company’s priorities” and “reduce emphasis in others.”

“There’s a right way to do layoffs. Do them all at once, and do it quickly,” says Jeffrey Pfeffer, a professor of organizational behavior at the Stanford Graduate School of Business. “The big issue with these damn rumors is that no one knows anything, and everyone feels threatened by layoffs. It’s really disruptive to employees.”