SAN FRANCISCO — Facing rising competition and shareholder unrest, Yahoo Inc. on Tuesday took steps to reverse its flagging fortunes, including its first layoffs since 2001. The company plans to cut 1,000 jobs, or 7% of its workforce.
A lackluster fourth-quarter financial performance, including a 23% drop in profit, and a sober forecast for the coming year put even more pressure on the Internet giant.
Yahoo shares fell 10% in after-hours trading to $18.72 after Chief Executive Jerry Yang acknowledged that the company might have a tough 2008 as it attempts to mount a comeback that could take years.
"We're just starting 2008 and already it is becoming a 2009 story," said Anthony Valencia, media and entertainment analyst for TCW Group in Los Angeles. "It's beginning to seem like it's always a 'next year' story."
Yahoo's profit fell in 2007 despite more advertising dollars than ever flocking to the Web, and the prospects for 2008 might be even gloomier than Yahoo indicated.
Analysts said the forecast didn't appear to take into account the likelihood of an economic downturn that could squeeze online advertising budgets. With its dependence on display ads, Yahoo would be particularly vulnerable, while rival Google Inc. would more easily weather economic turbulence because search ads are more targeted, analysts said.
Yang attempted to reassure investors by saying that Yahoo was making progress in a strategic overhaul that he called the most important in the company's history. He offered few specifics but said Yahoo's investments were beginning to pay off at a pivotal point in the evolution of online advertising, which is expected to grow significantly in the years ahead.
"We are confident we are headed in the right direction," Yang said.
The company's strategic initiatives might make sense, but they won't resonate with an impatient Wall Street, said Clayton Moran, an analyst at Stanford Group Co.
"Investors will be focused on numbers, not rhetoric," he said.
And the numbers tell the story of a struggling Internet pioneer that continues to lose market share to Google and other Internet players. That's despite its status as the world's No. 1 Web destination and heavy investments in its advertising and search capabilities. Google conducted 56% of U.S. search queries in December, compared with 18% for Yahoo, according to Nielsen Online.
Yahoo shares rose 3 cents to $20.81 before the report, then plunged more than $2 in extended trading. Its moribund stock price has fueled rumors that the company could become a takeover target for private equity firms or Microsoft Corp., which has kicked its tires before. Some analysts say Yang, a Yahoo co-founder who replaced Terry Semel as chief executive in June, might be operating on borrowed time.
"It remains to be seen whether Yahoo is an independent company by the time these investments bear fruit," said Laura Martin, senior Internet analyst with Soleil Securities in Los Angeles.
Yang has pledged to streamline operations to focus on key priority areas. Investors have been demanding more radical steps.
Yahoo said it would take a charge of as much as $25 million and lay off 1,000 of its 14,300 employees in mid-February. That was more than expected but not enough to placate Wall Street.
The Sunnyvale, Calif.-based company has offices in Santa Monica, New York and other cities. A spokeswoman would not say where the cuts were expected to occur. Yahoo said employees who lose their jobs can apply for positions in growing parts of the company, making it difficult to assess the effect on head count.
Analysts are also concerned that Yahoo has renegotiated the terms of a lucrative partnership with AT&T Inc. The contract, which was set to expire in the spring, now calls for Yahoo to share revenue from advertising rather than from booming broadband subscriptions. Yahoo did not disclose the new terms.
Company executives told analysts that they were closely monitoring economic developments.
Weaker-than-expected ad spending in the financial, travel and retail areas led to a 23% decline in fourth-quarter net income to $205.7 million, or 15 cents a share, from $268.7 million, or 19 cents, a year earlier, the company said.
Sales rose 8% to $1.83 billion from $1.7 billion in the same quarter a year earlier. After excluding commissions paid to its advertising partners, Yahoo's revenue was $1.4 billion, in line with analyst estimates.
Yahoo predicted full-year 2008 revenue of $5.35 billion to $5.95 billion. Analysts had expected $5.92 billion, according to Thomson Financial.
Separately, Yahoo named Aristotle "Ari" Balogh, 43, its chief technology officer, a spot that has been vacant since last year. Balogh formerly held the same position at VeriSign Inc.