Yahoo's Third Quarter Revenue to be lower than expected due to financial crisis

21 October, 2008


Wall St Braced For New Cuts, Weak Outlook At Yahoo

Things went from bad to worse for Yahoo Inc a long time before the financial crisis spurred a new wave of advertising cutbacks by customers that will cast a pall over its quarterly results on Tuesday.

After rebuffing a takeover bid from Microsoft Corp earlier this year and having recently seen a promising advertising sales deal with Google Inc delayed by regulatory challenges, the company's options have shrivelled.

Wall Street expects Yahoo's third-quarter revenue to grow, on average, by a tepid 7 percent from the year-earlier quarter, although profit is expected to rise 26 percent.

"For Yahoo, there is not going to be any silver lining in the operating sense," Sanford C. Bernstein analyst Jefferies Lindsay said.

Canaccord Adams analyst Colin Gillis agreed. "There are no easy solutions," he said.

Yahoo is poised to reveal cost-cutting moves that will include a new round of layoffs that go beyond the roughly 1,000 jobs, or 7 percent of the workforce it laid off in February, according to a source familiar with the plan.

Besides job cuts, analysts say investors should brace for Yahoo to once again cut its outlook for 2008 and perhaps 2009.

"We expect Yahoo to guide to the low end of its guidance for fiscal year 2008 and take a cautious stance toward fiscal year 2009," Jefferies & Co analyst Youssef Squali said.

In July, Yahoo forecast 2008 revenue of $7.35 billion to $7.85 billion and operating income of $1.83 billion to $1.98 billion before depreciation, amortization and other items.

One of Yahoo's strengths -- its leading market share in online display advertising -- has become its biggest weakness, analysts say. It is especially vulnerable to the finance and auto industry slump.

"Fundamentals began to crack up (late in the second quarter) in display (advertising) and we believe may have worsened in recent weeks," RBC Capital analyst Ross Sandler said in a research note on Monday.

Half of the Sunnyvale, California-based company's revenue is from display ad sales.

Five-Year Low

Susquehanna analyst Marriane Wolk says Yahoo faces an especially tough time selling banner ads in Britain and other parts of Europe, as well as the United States.

While the company has been making strides to diversify sales of display ads to a wider set of affiliated sites off of Yahoo, it remains dependent for much of its display revenue on premium advertisers on its own site, Lindsay said.

Yahoo's shares are trundling along at five-year lows around $12.50 as the company's fundamentals have deteriorated and economic woes have set back efforts over the past year to revitalize its market-leading display ad business.

The stock behaves like a puppet that only jumps when the market perceives Microsoft is warming up to make a new bid.

"Unless you think a takeout situation is realistic, there is no reason to own this (stock) right now," Gillis advises.

RBC's Sandler told his clients on Monday he believed Yahoo shares could weaken further in the near-term.

The shares jumped 15 percent last Thursday after Microsoft Chief Executive Steve Ballmer said a tie-up between the two companies still "makes sense economically" and may still be possible, although no talks have resumed.

"Right now, the longer Microsoft waits, the better off it is," Lindsay said.

Another set of options that existed three months ago may have been slammed shut as the value not just of Yahoo but of its minority holdings in various Asian companies have fallen.

Investors had hoped Yahoo would undertake a massive stock buyback following a sale of its stakes in Yahoo Japan, Alibaba.com of China and other Asian assets.

Analysts who valued the Asian assets at between $7 and $8 per Yahoo share in July, now say the value has dropped below $5.00. "The window to effectively monetize these assets may have closed for the near-term," Gillis said.


(Reuters)













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