Digital Media

Buffeted by a steep drop in its advertising revenues, News Corp. on Thursday reported an 8.4 percent decline in its fiscal second quarter revenues and missed analysts expectations.

Revenues fell to $7.9 billion in the quarter ended December 31, compared with $8.6 billion for the same quarter a year ago. Wall Street was expecting the media giant to generate $8.39 billion, according to Thomson Reuters.

News Corp. posted a net loss of $6.4 billion, or $2.45 a share, during the quarter, compared with a net profit of $832 million, or 27 cents a share, a year earlier.

Excluding impairment charges, the company generated a net profit of 12 cents a share. Analysts, however, were expecting the media giant to post a profit of 19 cents a share, according to Thomson Reuters.

News Corp. CEO Rupert Murdoch said in a statement:

Our results for the quarter are a direct reflection of the grim economic climate. While we anticipated a weakening, the downturn is more severe and likely longer lasting than previously thought.

As a result, we have been taking actions to preserve a solid level of operational profitability and a strong balance sheet without sacrificing future growth. We are implementing rigorous cost-cutting across all operations and reducing head count where appropriate.

News Corp. shares were up 2.01 percent in after-hours trading to $7.60 a share. During the regular trading session, News Corp. posted a gain of 2.76 percent to $7.45 a share.

During the quarter, News Corp. reported an adjusted operating loss of $38 million from its "other" category, which includes Fox Interactive Media, as well as Fox's MySpace site. The decline in Fox Interactive was spurred on by, in part, by its launch of MySpace Music. Additional contributing factors included a growth in unique users and an internal expansion of Fox Interactive.

Google attracted the greatest number of unique visitors among the top 10 Web brands for the month of December, while AOL was best at keeping its users glued to its site, according to figures released Tuesday by Nielsen Online.

During December, 133.9 million unique visitors went to a Google site, while Microsoft followed with 125.8 million visitors. Yahoo was third with 117.8 million visitors, and AOL was a distant fourth at 86 million.

But while AOL held the No. 4 spot in visitors, it took top billing in getting those folks to linger at its sites, averaging 3.4 hours during the month. Yahoo followed closely with 3.1 hours, while Microsoft and Google trailed with 2.24 hours and 2 hours, respectively, according to the report.

And while Facebook had the lowest ranking among the top 10 for unique visitor traffic, its users lingered on the site at a rate similar to Google.

How long visitors linger on a site may come into play as advertisers look to seed Web sites with 15-second to 30-second advertising video clips.

Updated at 7:21 a.m. PDT with a Collins Stewart analyst report.

Former Vodafone chief Arun Sarin reportedly is withdrawing his name from the Yahoo CEO search, in part due to the uncertainty whether the Internet search pioneer will be broken up and sold, according to a report in the Financial Times.

Sarin, who was considered a strong candidate who had made it through to a narrowed list of prospective candidates, reportedly had several issues in considering the Yahoo post.

According to the Financial Times:

Mr. Sarin is considering alternative roles at other U.S. public companies, plus at least one position at a private equity firm, people close to him said.

It is understood that one reason for his rejecting Yahoo was a perceived risk that the company could be dismembered.

Microsoft has repeatedly expressed interest in Yahoo's search business, initially making an offer to buy the entire company for $33 a share and later scaling it back to simply Yahoo's search business after those talks failed Those efforts failed, too, and for the last several months the parties have not held negotiations.

Sarin was thought to be a top candidate, given his executive experience at a large public company, his background in technology, and his deep knowledge of the telecom industry, given that mobility is a growth area for Yahoo.

The Internet pioneer, which has lost its lead in paid search market share and revenue to Google, potentially faces a more difficult task in selecting a CEO than other companies.

Yahoo not only needs to find a chief executive who can improve its fortunes in its current form, but also one who could achieve similar results without a major chunk of its business.

A potential problem for Yahoo and Microsoft is they may be caught in a catch-22.

Microsoft, according to previous comments by sources, is likely to wait until Yahoo names a new CEO before doing the search dance again. But Yahoo may face a protracted effort in attracting a CEO, due to the uncertainty of a deal with Microsoft.

Meanwhile, analyst Sandeep Aggarwal of Collins Stewart, believes that Microsoft is waiting for Yahoo to name its CEO before returning with a search deal that could give Yahoo's stock a $8 to $10 a share lift.

Here's what Aggarwal had to say Tuesday in his research note:

Summary: In our view the only thing left between MSFT & YHOO for a possible search deal is a new CEO at YHOO. We think that by now MSFT has probably completed basic ground work for a search deal structure with Yahoo, given that: 1) CEO (Steve) Ballmer continues to express MSFT's strong interest in YHOO's Search and 2) this is the time of the year when MSFT typically starts the annual strategy reviews process for each of its business units. We continue to believe that a search deal can give YHOO $8 to $10 per share lift. We reit our Buy/$18 PT...

What kind of upside a search deal can provide to Yahoo?
In our view a MSFT/YHOO search deal may not be as lucrative as MSFT's prior offer on May 29th (economic outlook weakened, MSFT gaining traction in search, YHOO search metrics did not improve). At the minimum it can still provide $11bn to $13bn lift to YHOO's EV--assuming $1bn in upfront payment and $1bn in incremental OCF ($300mm in margins and $700mm in minimum savings) @ 10x to 12x fwd multiple.

Structure of a possible MSFT/YHOO Search deal
Though a possible MSFT/YHOO Search deal may be structured in several different ways, we think that broadly it will be quite similar to a Google AdSense type of Search deal but delivering exclusivity/long-term visibility to Microsoft. Hence, we expect a "Sale and Leaseback" structure wherein YHOO sells its Search assets (i.e. Search technology, IT data centers, Search related headcount, and advertisers' contracts) to Microsoft. In return Microsoft pays $1bn in an upfront payment for the assets acquisition and deploys its Search technology at YHOO with minimum guarantees of $2.5bn+ annually in Search revenues to YHOO and $700mm in Op-Ex savings.

Yahoo CEO Jerry Yang announced last month that he will step down.

Shares of Yahoo were up 2 percent to $13 a share in morning trading.

As part of its settlement agreement stemming from a shareholder lawsuit, Yahoo announced Wednesday it revised its controversial severance policy that had the potential of making a buyout of the company more expensive to a prospective buyer.

Yahoo faced investor wrath when it rolled out the change-in-control severance policy in mid-February, less than two weeks after Microsoft announced its $44.6 billion unsolicited buyout bid for the company.

The change-in-control policy would have applied if a buyer took control of Yahoo, or a new board of dissident directors were elected that constituted a majority on the board. The provisions of this policy, investors argued at the time, could have potentially driven up the cost of the acquisition by a couple billion for Microsoft. Yahoo, however, had contended that such estimates were too high, given the change-in-control severance would be triggered only if an employee was terminated within two years after a deal closed, or the employee's duties and responsibilities changed within that two-year time frame.

Under the amended policy, filed with the Securities and Exchange Commission on Wednesday, Yahoo noted five revisions:

1) The period during which the termination of an eligible employee would trigger eligibility for severance benefits is decreased from two years following a "Change in Control" (as defined in the applicable Amended Severance Plan) to one year. 2) The circumstances permitting an eligible employee to terminate employment for "Good Reason" (as defined in the applicable Amended Severance Plan) following a Change in Control have been amended. 3) The Board of Directors in place prior to a Change in Control is given the ability, subject to certain limitations, to terminate or amend the Amended Severance Plans during a Potential Change in Control Period (as defined in the applicable Amended Severance Plan) as part of any Board of Directors approved transaction that would constitute a Change in Control. 4) Any dispute between an employee and the Company concerning an application for benefits based upon a claimed material diminution in the employee's duties and responsibilities will be subject to binding arbitration. 5) Neither the election of a new Board of Directors that is made up of a majority of members who were not members of the Board of Directors prior to the election nor a sale of the Company's search business would constitute a Change in Control.

Although Yahoo has revised what investors had alleged was a defacto "poison pill" designed to thwart a takeover attempt of Yahoo, it has yet to be seen whether it will make a difference in drawing Microsoft back to the negotiating table after buyout talks failed in May. At best, Microsoft's CEO Steve Ballmer has said he's no longer interested in acquiring all of Yahoo, but a partial deal for Yahoo's search business is still of interest.

Yahoo's change-in-control amendment, meanwhile, comes as the company issued 1,520 pink slips Wednesday, as part of an unrelated move to save $400 million in annualized costs amid declining profitability.

Updated 2:43 p.m. PST with precise layoff total.

Updated at 7:23 p.m. PST with comments from Yahoo employees.

SUNNYVALE, Calif.--Yahoo began issuing pink slips Wednesday to the majority of the employees affected by its previously announced 10 percent job cut, the company confirmed.

Most of the 1,520 layoffs affect employees at Yahoo's U.S.-based locations and come from a number of areas within the company, the company said.

"There was an across-the-board review (for potential cuts) and no one area received a pass," said Brad Williams, a Yahoo spokesman, who noted Yahoo engaged in a strategic review of where it would make most sense to cut the positions.

Williams, however, declined to elaborate which areas of Yahoo's business took the greatest hits with the layoffs.

Some employees could be seen leaving Yahoo's Sunnyvale campus with duffel bags with their belongings, or large bags, others with backpacks stuffed tight with their items.

One four-year employee noted that the atmosphere this morning was extremely quiet, whereas on other days its common to find people milling about in the morning and chatting in groups. She noted her working group, or team, was intact as of noon but that layoffs would be occurring through the rest of the day.

Another employee who was recently hired indicated he felt vulnerable to the layoffs, given he had little seniority.

Yahoo is continuing to evaluate which of its operations are no longer a priority and can be shut down and which of its businesses should be placed in a maintenance mode with no further investments, Williams said.

Those decisions are anticipated to come in the following weeks and months, he added.

This latest round of layoffs is part of Yahoo's previously announced plan to reduce its annualized expenses by $400 million by the end of the year, which the company outlined in its third-quarter earnings announcement in October.

Yahoo, which has annualized expenses of $3.9 billion before the cuts, also plans to achieve its $400 million goal by consolidating facilities and moving some of its business to areas where it costs less to operate, as well as shutting down parts of its business and putting others in a maintenance-only mode.

And while Yahoo is in the workforce reduction mode, one start-up sees it as an opportunity to snap up a few talented folks.

TokBox, an online video calling company, is sending out a taco truck to Yahoo's headquarters in the afternoon, in which it plans to hand out free tacos to the recently terminated employees, as well as conduct job interviews, a company spokeswoman said.

For Yahoo, this marks the second time this year it's initiated layoffs. In February, the company cut 1,000 jobs after its fourth-quarter profit took a hit.

And with some economists expecting the recession to continue through 2009, it remains to be seen whether more layoffs will be seen at the Internet search pioneer.

CNET News' Stephen Shankland contributed to this report.

Update at 7:29 p.m. PDT with closing stock price

Major Yahoo investor Ivory Investment Management on Wednesday called on Yahoo's board to restart talks with Microsoft and offered up a search buyout proposal that it claims could yield investors a value of $24 to $29 per share.

Ivory, which holds a 1.5 percent stake in Yahoo, is proposing Yahoo sell its search business to Microsoft for an upfront payment of approximately $15 billion, in which Microsoft then becomes the search provider for all of Yahoo's properties and its existing affiliates.

Microsoft would own and operate the combined search platform, making Yahoo an affiliate that would receive 80 percent of revenue generated from searches performed on its own site. Ivory believes that arrangement could also result in annual cash flow to Yahoo of nearly $500 million.

Yahoo jumped 9.93 percent to close at $13.40 a share Wednesday, rising higher than the broader markets with the Dow Jones Industrial Average gaining .81 percent and tech-heavy Nasdaq up 1.17 percent.

In its letter to Yahoo's board of directors, Curtis Macnguyen, Ivory's managing partner, said:

This deal would offer Microsoft the unique opportunity to immediately gain critical mass to better level the playing field with Google, while it would simultaneously allow Yahoo to both receive a sizable upfront cash payment and increase its prospective cash flow (i.e., EBITDA). There are two key reasons why we believe this proposed deal is extremely beneficial to both parties:

1) Approximately $800 million of duplicate operating costs could be eliminated. This estimate is based upon benchmarking Yahoo's and Microsoft's Online Services Business' operating costs versus Google's cost structure. At the Microsoft analyst day earlier this year, Steve Ballmer described the cost structure in their search business: "I think you've got to think of it as sort of almost more of a fixed expense...We won't have to be as high as Google's $2.3 billion because they're serving up so many more queries, but our COGS percentage will need to be quite a bit higher than theirs will, just to keep up in the ante to index the largest volume of documents on the Web."; and

2) The combined search platform and marketplace would have a much greater "network" effect, resulting in 20% higher monetization rates. Again we quote Mr. Ballmer at the Microsoft analyst day: "We'd like to increase our revenue per search, and the way to do that is to get more queries. The more queries we get, the more advertisers we get, the more keywords they bid on, the higher they bid, you get the virtuous cycle flowing." Furthermore, based on Yahoo's past comments regarding differences in monetization rates between Yahoo and Google, we believe our 20% monetization rate estimate is conservative. On a June 12th conference call this year announcing a search relationship with Google, Jerry Yang described the monetization differential between Yahoo and Google: "At the current monetization rate, we believe there is an approximate $800 million in annual revenue opportunity in the U.S. and Canada on those queries where monetization upside exists." This $800 million represents a 47% increase relative to the $1.7 billion of search revenue from Yahoo's total owned properties. However, this $800 million applies only to a subset of Yahoo's owned properties, so the total monetization differential between Yahoo and Google is actually greater than 47%. Thus, we believe our assumption of a 20% improvement is less than half of the potential opportunity and could grow substantially over time.

Ivory noted that Yahoo could stand to lose $2.15 billion in annual search revenue under its proposal, but said that Yahoo could gain $2.63 billion from affiliate payments from Microsoft and cost savings by eliminating duplicate search operations. The net effect would be $482 million in increased annual cash flow to Yahoo, Ivory estimated.

For Microsoft, Ivory estimated the software giant could increase its annual pre-tax profit by over $800 million.

Ivory said it's opposed to a Yahoo acquisition of AOL and that previous efforts to right itself have not panned out, while a number of key employees have left the company.

Macnguyen ended his letter with this plea:

One of your Board members, Mr. Icahn, has publicly stated that he supports a search deal between Microsoft and Yahoo. Considering the fact that (1) you arguably misplayed your hand by losing the initial $31 per share offer, (2) the stock is down over 60% from that price (vs. a broad market decrease of around 35%), and (3) Microsoft is still reaching out to do a search deal, we urge the remaining Board members to commence constructive discussions with Microsoft immediately. This time around, the Board cannot allow another tremendous value creation opportunity to slip by.

Ivory is not the first Yahoo shareholder to come up with a rescue plan for the struggling Internet search pioneer. Icahn himself, prior to joining Yahoo's board, submitted a joint proposal with Microsoft that called for Yahoo to sell its search business to the software giant.

Yahoo had rejected the Icahn-Microsoft proposal, in part noting its fortunes would be tied to how well Microsoft would be able to monetize the combined search business.

Microsoft and Yahoo representatives declined to comment on Ivory's proposal. And a spokesman for Ivory declined to comment beyond the company's statement and letter.

Yahoo's search for a new CEO is narrowing, with former Vodafone Group chief Arun Sarin reportedly on the list, according to a report in The Wall Street Journal.

Yahoo has authorized reference checks for a few candidates in order to narrow the field even further so the informal search committee can make a recommendation to the board of directors, according to the report.

And while the CEO selection process has moved at a rapid clip since co-founder and CEO Jerry Yang announced in mid-November he would step down as soon as a replacement is found, the process could very well spill into the New Year, the Journal noted.

Sarin, 54, , after serving approximately five years as CEO of the European telecommunications giant. While at Vodafone, Sarin was credited with realigning the company's focus on emerging markets, such as India.

And earlier this year, Sarin delivered a keynote speech at CTIA, where he touted the increasingly popular notion of the mobile Internet.

And prior to his role as Vodafone CEO, Sarin had previously served a brief stint of less than one year as CEO of InfoSpace in 2000 to 2001. He resigned due to the rigors of commuting between InfoSpace's offices in Washington state and his family's home in the Bay Area, the company said at the time.

Sarin apparently has a number of the qualities that Yahoo is seeking in a CEO.

Back in mid-November, one source familiar with Yahoo's thinking noted the company sought:

Someone with prior CEO experience who's got both operational and strategic skills, someone experienced in technology, and somebody energetic and young--which apparently means in his or her 40s or 50s.

The company expects to come up with a pool of about a dozen candidates and settle on one within six months, though there's no hard deadline.

For Yahoo, which has seen its search market share heavily eroded over the years by Google and faces investor wrath for failing to seal a buyout deal with Microsoft at $33 a share, this CEO search could very well be one of its most important search projects to date.

Christmas is coming and so are the pink slips.

Yahoo CEO Jerry Yang noted in his post-quarterly earnings e-mail to employees in late October that employees affected by the 10 percent job cut would be "notified of layoffs in the next several weeks" -- that is, before Thanksgiving.

Apparently it took a little longer to wade through the approximately 1,430 positions.

A report in Dow Jones' AllThingsD site notes that the pink slips are expected Wednesday morning and will be across the board.

And while Yang, in the most recent earnings report call, noted that further layoffs could occur in 2009, AllThingsD, citing an anonymous source, said that an additional 500 positions may be cut through attrition and a hiring freeze.

Yahoo's move to cut 10 percent of its workforce puts it in the ranks of a number of other companies that are paring down their staffs, as a means to offset a hit to revenues as the economy tanks.

Growth projections for online advertising received another knock to the knees on Monday, as analysts continued to lower their outlooks.

The online advertising industry is expected grow 11 percent in the U.S. and 9 percent worldwide next year, down from a previous estimate of 13 percent for both figures, according to a research note by analyst Jeff Lindsay of Sanford C. Bernstein & Co.

Earlier this the month, Jim Friedland of Cowen & Co. placed a much more dire outlook on the industry, predicting an anemic 3 percent growth in the U.S. next year, down from his previous forecast of 13 percent.

In taking such a bearish position, Friedland mainly pointed to a decline in online display advertising, which he expects will suffer from a high single-digit drop-off in ad budgets.

Indeed. Yahoo, which holds a sizable presence in display advertising, last month posted a 64 percent drop in third-quarter earnings and ordered a round of layoffs.

Paid-search advertising in the U.S. is also expected to feel the pain next year, with that segment predicted to post a six-point decline to growth of 11 percent, Friedland said in his note.

In Friedland's prediction of paid search growing in the low double-digits, as compared with display advertising in the low single-digits, Google would do well, given that it's a dominant player in paid-search ads.