Advertising Reliance Still a Drain on Yahoo!’s Bottom Line

Online portal Yahoo continues to feel the burden of its dependence on advertising revenue, posting a slim pro-forma profit but announcing layoffs.

The Santa Clara, Calif.-based company saw before-charges income of $7.6 million, or $0.01 per share, on revenue of $180.2 million for the first quarter. That narrowly beat analysts’ expectations of a breakeven quarter, according to Thomson Financial/First Call. Those revisions were lowered last month, when Yahoo issued an earnings warning.

Including charges, the company posted a quarterly loss of $11.5 million, or $0.02 per share — a far cry from the firm’s net profit of $67,599,000, or $0.11 per share, in the previous year.

Next quarter, Yahoo said it anticipates a pro-forma loss and an additional one-time charge of $40 million to $60 million in severance and restructuring costs. But in successive quarters, Yahoo said it would post increasing pro forma income as the operational savings becomes apparent.

But what president Jeff Mallett described as “modest” growth in Yahoo’s business services (including Web hosting, Webcasting, domain name registration and its B2B marketplaces) won’t be enough to save Yahoo from its reliance on ad revenue as its chief source of income. And with advertising comprising nearly 83 percent of Yahoo’s revenues, Mallett said the company has been forced to cut about 420 positions, or 12 percent of its workforce, in order to keep its expenses in line with slipping income.

Mallett said that cuts in marketing and sales expenses would accompany the layoffs. In all, the cuts are expected to shave $7 million to $9 million per quarter, beginning in third quarter.

Next quarter, Decker said Yahoo expects a pro forma loss of $10 million to nil, or approximately breakeven on a per-share basis.

“We made some decisions that were difficult, but which ultimately balance the investment in our growth areas with the adjustments to our near-term business plan to better position Yahoo for long-term growth,” said chairman and chief executive Tim Koogle. “While we streamline our business over the second quarter to become more efficient and align our costs with the current market environment, we remain steadily focused on developing and delivering the essential services that will result in Yahoo becoming the Internet’s leading global consumer and business services company.”

It’s not all bad news, however, and Mallett pointed to several trends that he said would enable Yahoo to continue to be a major media player. While the company saw a quarter-to-quarter decline in advertisers — from 3,700 to 3,145 — Mallet said it was a result of the company’s efforts to focus its attention on high-paying clients. New advertisers included Miller Brewing, Cingular and Restoration Hardware.

Mallett also said Yahoo is seeing some traction for its new ad sizes by advertisers like The Gap and Kodak, which generated an average of 150 percent greater clickthrough rates than they had using standard banners on the portal.

He added that Yahoo is using the Terms and Conditions for online media buying recommended to the industry by the American Association of Advertising Agencies and the Interactive Advertising Bureau, which should help streamline sales.

Mallett also pointed to Yahoo’s hiring of traditional media vets as another way in which Yahoo plans an ad rebound. In addition to tapping Reader’s Digest’s Gregory Coleman as executive vice president of North American operations, Mallet said Yahoo has snagged Reuters’ David Graves as senior vice president of Media and Leisure, and Tiana Wimmer, formerly of American Express, as general manager of Direct Marketing.

“As evidenced by the significant increases in our audience and traffic figures, Yahoo continues to be a leader when it comes to attracting and retaining online consumers,” he said. “The loyalty of our users is one of our strongest core assets … As we remain focused on building the Internet’s leading consumer and business services company, the increase in active registered users demonstrates our unique ability to convert visitors into members.”

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