Losing faith in Yahoo

By Yi-Wyn Yen

Yahoo chief Jerry Yang faced the Wall Street rowdies on the company’s fourth-quarter earnings call Tuesday, and it wasn’t pretty.

The Internet powerhouse reported a 23 percent drop in profit for the fourth quarter from a year ago and offered a weak forecast for 2008. One thousand jobs will be eliminated by mid-February. And the stock tanked 11% during after-hour trading.

Although the company delivered strong revenues of $1.8 billion in the fourth quarter — an 8% rise, none of the analysts offered congratulations to Yang. Instead, eight impatient men grilled the CEO during the hour-long call about Yahoo’s ongoing turnaround strategy.

Yang told the Street that 2008 is the year the Sunnyvale, Calif.-based company would make a key transformation. But shareholders have heard this story before. The same was said about Panama, its long-delayed ad system for search, which launched last year. Now, Yang says, Yahoo (YHOO) will make “profound, fundamental changes” to its graphical display ad network, its core business. Company execs hinted that its market share for online advertising will grow with better display-ad features by the second half of the year.

“You’re talking about increased investment, which means we should not really expect incremental operating margins to improve any time soon,” said Morgan Stanley analyst David Joseph during the call. “So you’re expecting investors to have some patience. What gives you the high conviction that we should be expecting display advertising to show improving growth towards the latter half of the year when there’s a lot of uncertainties?”

Yang shot back that the No. 2 search engine was “not in the business of prognosticating the economy.” Analysts fear that display advertising — big brands’ preferred way to spend online ad dollars — is the most vulnerable during a recession. While Yahoo relies on display advertising for much of its ad revenue, the majority of rival Google’s sales — an expected $16.7 billion for 2007 — is made in paid search. Google (GOOG) will report its fourth quarter earnings Thursday after the closing bell.

“We saw pretty good display growth in the second half of 2007, about 20 percent year over year,” Yang said. “Obviously we think that’s going to continue….We do believe the investments we’re making now in the display network and platform will enable some key things that differentiate ourselves in the market.”

Yahoo execs did their best to put a positive spin on turning the site into the starting point for web users, offering a premium ad network for advertisers, and plans for a “workforce realignment.” Nevertheless, the numbers were discouraging. Yahoo estimates it will make between $5.35 billion to $5.95 billion in sales this year. The Street estimated $5.9 billion.

The company projects it will have less cash on hand this year as AT&T (T) is expected to share less revenue for providing joint Internet service. Yahoo’s operating income last year was $1.93 billion compared to $1.73 billion to $1.98 billion expected this year.

“Their expectations were embarrassingly low,” says Jeffrey Lindsay of Bernstein. “They need to restructure and monetize. For the minute, we don’t have strong confidence that they’re going to achieve that goal…This management team isn’t doing enough to monetize its really valuable assets.”

Yahoo was vague about its plans to lay off 1,000 workers from its 14,300-employee workforce. Yang said the staff reductions were not across the board and that people could apply for open positions. Chief Financial Officer Blake Jorgensen said the company would take a charge of up to $25 million for the first quarter in connection with the job cuts.