Digital Media

Yahoo's revenue is under pressure.

(Credit: Yahoo)

Yahoo, which announced a profit drop of 78 percent for the first quarter of 2009 on Tuesday, said it plans to cut about 5 percent of its employees.

Yahoo's first-quarter net income dropped 78 percent annually to $118 million as the company struggled with the recession's effect on online advertising, but the company's cost controls helped soften the blow--at least for shareholders. Several hundred Yahoo employees will be directly affected in the third major layoff in a just over a year.

"To allow flexibility for accelerated strategic investments and targeted hiring in its core operations, Yahoo expects to reduce its number of current employees worldwide by approximately 5 percent. The majority of impacted employees are expected to be notified within the next two weeks. The company is also continuing to implement non-headcount cost reductions," Yahoo said.

New Chief Executive Carol Bartz said in a statement that the company is positioned well for an economic recovery.

"Yahoo is not immune to the ongoing economic downturn, but careful cost management in the first quarter allowed our operating cash flow to come in near the high end of our outlook range," Bartz said. "While we experienced pressure in both display and search advertising in the first quarter, we believe Yahoo remains one of the most compelling advertising buys on the Internet."

Revenue, excluding commissions paid to partners that carry Yahoo advertisements, declined 14 percent from $1.352 billion to $1.156 billion, well short of the $1.204 expected by analysts.

Update 2:22 p.m. PDT: The Yahoo finished the first quarter of 2009 with 13,500 employees, so a 5 percent cut would affect about 675.

Yahoo cut 1,520 employees last December and about 1,000 in early 2008

But the cuts this time are different, Bartz said in a conference call.

"This is not the kind of across-the-board (cuts) Yahoo undertook in the fourth quarter in response to the macroeconomic environment," Bartz said. Instead, she said, it's part of Yahoo's effort to streamline, trim its product portfolio, eliminate duplicate efforts, and enable hiring in areas where the company wants to invest.

So what are the areas where Yahoo plans to focus its attention? Bartz called out its home page, sports, news, finances, mail, search, mobile, and entertainment.

"We will maniacally focus on our most important products," Bartz said.

Overall, she said, page views worldwide increased 8 percent, she added.

Update 3:15 p.m. PDT: Yahoo announced Jeff Russakow will become senior vice president of customer advocacy, reporting to Bartz, on Friday. Previously he led global enterprise support services, corporate strategy, and other operations at Symantec.

"We need to do a better job of listening to Yahoo!'s users and advertisers and incorporating their feedback into our products and processes," Bartz said in a statement.

The company also is hiring a chief financial officer to replace Blake Jorgensen, who said Tuesday's conference call with financial analysts will likely be his last with Yahoo, and a head of international operations.

It took awhile, but the recession has definitely sunk its teeth into Google's financial performance.

"No company is recession-proof. Google is absolutely feeling the impact," Google CEO Eric Schmidt said in a conference call Thursday after reporting first-quarter financial results.

Google's revenue growth rate has been slowing, but for the first time since it went public, the company's quarter-to-quarter revenue declined. (Click to enlarge.)

(Credit: Google)

The company, as is customary, reported results that most business only dream of, recession or not. Its net income grew 8 percent to $1.42 billion and its revenue, excluding commissions paid to advertising partners, grew 10 percent to $4.07 billion. It generated free cash flow of $2 billion for the quarter, the vast majority of it derived from money advertisers pay Google when people click on ads next to search results.

But everything is most definitely not coming up roses. Google's revenue, after ascending steadily quarter after quarter, peaked in the fourth quarter and declined 3 percent in the first quarter. Google's business is still relatively strong, and it's been hit by the recession less than many in the tech world, but it's been hit nonetheless.

Curtailed clicks
Why? In short, because people are buying less and advertisers consequently are advertising less. As an Efficient Frontier study released earlier this week showed, advertisers are getting more conservative by bidding for search terms where there is a proven return on investment (ROI).

Here's Schmidt's explanation, including his assertion that the company's overall business of showing ads next to search results is still intact:

Users are still searching, but buying less. What that means is the ads are converting less. There's more window- and comparison-shopping, purchasing lower-priced goods. In other words, users are doing the right thing. They're doing what you'd expect them to do given the enormous economic changes around us.

Advertisers are still spending, but they're lowing their bids to manage their ROI. They're behaving correctly in our view. One way to say that is our advertising model is working. The user and advertising behavior we're seeing is entirely rational, and the auction model is working for both.

In short, Google Chief Economist Hal Varian's "Wal-Mart effect," in which people under financial pressure would steer more of their purchasing behavior through search engines in an attempt to get the best deals, has its limits.

Creeping pessimism
To put this in context, let's retrace some history over the previous four earnings conference calls. The company's statements have grown gradually more pessimistic:

First quarter 2008: "We've looked at this really carefully, and we do not see an impact as of this time," Schmidt said. "We're well positioned should economics change. We continue to do well because our model is so targeted, and targeted (advertising) does well in most scenarios."

Google CEO Eric Schmidt

(Credit: Stephen Shankland/CNET)

Second quarter 2008: "Despite the weakness in the economy, advertising revenue seems to be holding up remarkably well in most sectors. I think this illustrates the point that we have made several times: during periods of slow economic growth, the last thing an advertiser wants to cut is its spending on search-based advertising," said Google chief economist Hal Varian.

Third quarter 2008: "It's clear the economic situation is so fluid that we're all in uncharted territory...It's clear the global economic situation is worse than predictions just a month ago," Schmidt said, and Varian added, "When there is a recessionary event, and people are counting pennies and researching purchases, this potentially has an upside for Google...We think this kind of effect could work to Google's benefit potentially."

Fourth quarter 2008: "In some ways, the fourth quarter was the easy part," Schmidt said, when the economy was in "uncharted territory. Now it's clear we're in recession. We don't know how long this period will last. We're certainly prepared to get through this (with) no problem."

So yes, Google has been getting more cautious about the economy and its effects, but Thursday's assessment was the most sober by far. In contrast, other companies including Yahoo saw these effects sooner and issued cautionary statements earlier.

Through a Google lens darkly
One curiosity about the timing disparity is that Google, through analysis of search activity through what the company calls the "Google lens," has a view on the economy most other companies lack. Where a business such as Proctor & Gamble has to look at sales data and surveys to project consumer sentiment, Google can look directly at what people are searching for.

Searches on "bankruptcy" increased 53 percent in the last year, and those for "unemployment" more than doubled, said Jonathan Rosenberg, senior vice president of product management.

So what comes next? Google clearly isn't done with search advertising, and there are plenty of opportunities for more money: Google can improve search results overall, drawing ever more search traffic. It can show ads more often, as long as it maintains the quality standards to avoid showing irrelevant or inappropriate ads. It can draw more advertisers to search advertising, increasing the bidding for search terms.

And of course, the company is working on any number of other projects, from closely aligned ones such as ads on image search results, to more distant ones such as graphical "display" ads on YouTube that are targeted at users based on their Web-surfing behavior, to remote ones such as charging subscriptions for online office productivity tools. Such areas are subsidized by search results today, but there could come a day when they stand on their own.

Even though the recession's teeth took a bite out of Google's results, even though Google has trimmed a number of projects that didn't pass muster, and even though the company's employee count actually dropped for the first time, the company still has plenty of money to invest in its other areas.

"We think Google is now well placed for the recovery as it occurs It appears (advertisers') shift to online ROI...is outpacing, on a relative basis, any on loss of economic activity. We benefit from that," Schmidt said. "Our priorities remain unchanged. Basically, long-term growth."

Updated at 3:13 p.m. PST with details from conference call.

Yahoo handily cleared Wall Street's pessimistic earnings expectations for a grim fourth quarter and matched anticipated revenue, but charges swung the Internet pioneer to a net loss for the quarter.

The company reported a net loss of $303 million for the quarter ended December 31, compared with net income of $206 million from the year-earlier quarter. The loss was a goodwill impairment charge of $488 million and restructuring charges of $108 million. Revenue, excluding commissions to partners dubbed traffic acquisition costs, dropped 2 percent, to $1.38 billion.

However, excluding various items, the company reported net income of 17 cents per share, compared with the 13 cents that analysts surveyed by Thomson Reuters expected. Yahoo essentially matched the revenue expectation of $1.37 billion.

New Chief Executive Carol Bartz looked on the bright side.

"Despite the challenging economic environment, Yahoo delivered adjusted operating cash flow above the midpoint of guidance for the fourth quarter," Bartz said. "The company also made important investments while aggressively managing costs, leaving us better positioned to weather the economic downturn and emerge stronger, when advertiser spending improves. We have work to do, but I am excited by Yahoo's opportunities, and encouraged by the tremendous innovation and momentum I've seen since joining the company as CEO."

(Credit: Yahoo)

Update at 2:20 p.m. PST: On the conference call, Bartz said she's already settling in: "(It's been) eight days since I joined Yahoo, and I'm already feeling at home," she said.

"As an outsider reading the press last year, it was easy to assume (that) Yahoo was fully distracted by turmoil" and that very little was happening, Bartz said. But seeing things from the inside, Bartz said she saw plenty of products.

"Fundamental issues" Bartz has identified to work on include "sharpening focus, improving the pace of decision making, and streamlining the business." The CEO said she'll "move swiftly" to capitalize on Yahoo's assets and take advantage of its opportunities.

Chief Financial Officer Blake Jorgensen said Yahoo's investments in search are paying off, with the company holding its own in market share compared with Google.

Search revenue was up 11 percent globally and 18 percent in the United States, Jorgensen said. In the United States, search queries increased 10 percent compared with the year-earlier quarter. Overall, revenue per search grew in the mid-single digits, he said.

In the first quarter, Yahoo expects lower revenue and earnings. Total revenue should be between $1.53 billion and $1.73 billion, not factoring out traffic acquisition costs of about 27 percent, Jorgensen said.

Yahoo's recent earnings-per-share results.

(Credit: Yahoo)

Update 3:13 p.m. PST: When it comes to breaking Yahoo up or selling it altogether, Bartz sounded more like former CEO Jerry Yang than suitor and Microsoft CEO Steve Ballmer.

"Did I come to sell the company? No. I'm here because I see a tremendous collection of assets" that can be made stronger for users, advertisers, employees, and shareholders," she said.

And will Yahoo immediately sell its search business? She didn't "arrive a preconceived notion," and wouldn't rule it out but there's value to keeping it in the company, she said.

The quality of Yahoo's search is increasing, the company is holding share against Google, and has three times the search volume of Microsoft, she added. "That kind of focus increases the value of the product. It's good for our brand and our shareholders, no matter what our long-term plan," she said.

Overall, Bartz mounted an aggressive defense of a company under siege.

"This is a fantastic Internet property and it doesn't deserve everybody trying to pick it and pull it apart," Bartz said. Looking at statistics such as how many users Yahoo has, how long they stay on the site, and how they value its properties, she said, "This is not a company that needs to be pulled apart and left for the chickens."

(Credit: Yahoo)

(Credit: Google)

For the last quarter of 2008, Google followed the example of Apple and IBM, not Microsoft and Intel, reporting financial results above financial estimates amid a grim economic environment.

Google also announced a stock option exchange program intended to keep its employees happier.

For the quarter ended December 31, the company reported net income of $382 million, or $1.21 per share, a big decline from the $1.21 billion from the year earlier. Factoring out various costs, including stock-option expenses, though, the result was $5.10 per share, 15 cents above the $4.95 expected by analysts surveyed by Thomson Reuters.

Total revenue was $5.7 billion, a 24 percent increase over the $4.83 billion from the year-earlier quarter. Excluding $1.48 billion in commissions paid to partners, called traffic acquisition costs, Google had $4.22 billion in revenue, ahead of analysts' projections of $4.12 billion and the year-earlier $3.39 billion.

"Google performed well in the fourth quarter, despite an increasingly difficult economic environment. Search query growth was strong, revenues were up in most verticals, and we successfully contained costs," Chief Executive Eric Schmidt said in a statement. "It's unclear how long the global downturn will last, but our focus remains on the long term, and we'll continue to invest in Google's core search and ads business as well as in strategic growth areas such as display, mobile, and enterprise."

Update 2:11 p.m. PST: In a conference call, Schmidt offered more caution than before about the economy, even as he said the company performed well in the fourth quarter.

"In some ways, the fourth quarter was the easy part," Schmidt said. Then, the economy was in "uncharted territory. Now it's clear we're in recession. We don't know how long this period will last. We're certainly prepared to get through this (with) no problem."

Schmidt also declared Google showed "tight controls over most costs, something that had eluded us, but we've got it down now."

Indeed, Google has cut contractors, laid off 100 recruiters, and closed many projects that didn't pass muster. Google is clearly undergoing an attitude adjustment while trying not to damage its attempt to foster innovation.

Google now has "more focused resource allocations going into 2009," said Jonathan Rosenberg, Google's senior vice president of product management. "The review process is now a part of how we do business."

Missing from the conference call were Google co-founders Larry Page and Sergey Brin, who might appear on future calls but for now will "continue to focus on technology," Schmidt said.

However, CFO Patrick Pichette wouldn't share any details about whether Google's cost containment is mostly done or only beginning. "We're just managing responsibly given the environment," he said.

Google pays commissions called traffic acquisition costs to partners, but TAC has been shrinking.

(Credit: Google)

Update 2:30 p.m. PST: Schmidt continued to bang the drum for search advertising, Google's main source of revenue.

"Advertisers invested where the ROI (return on investment) was highest--in other words, online," he said. "The quickest way to get revenue was targeted Google advertising."

Investors were inclined to agree with Schmidt's guarded optimism. Google stock was up $7.24, or 2 percent, to $313.74 in after-hours trading.

Google is more limited by the number of searches people perform than the number of advertisers vying through the AdWords auction process to have their ads shown, Rosenberg said. Google is paid when searchers click on search ads, and the cost per click (CPC) is a measurement of advertiser interest.

"Overall, the CPC is really driven by users and not quite as much the number of advertisers coming in and out over time," Rosenberg said. "If there were fewer transactions, it would adversely impact us. I don't think there's a CPC-based deflationary spiral because a modest number (of advertisers) went out of business. The auction is fairly robust. Many others would come into the auction if a transaction was going to be consummated."

And people kept searching and clicking those ads. The total number of paid clicks rose 18 percent compared to the year-earlier quarter, Pichette said.

Google will report financial results Thursday for the last quarter of 2008, but the crystal-ball set likely will be watching for indications of how much Google's belt-tightening efforts will help the search and advertising giant's future profits.

It's not clear exactly how deeply Google is affected by the recession. The company has been bullish about how its search-ad business is better able to withstand a down economy because advertisers can find out just how well a campaign is faring financially and because cost-conscious buyers might use Google's services more. But the economic malaise has proven a lot stronger than in recent months, and Google's optimistic pronouncements have largely been replaced by more cautionary statements. Research firm eMarketer last month lopped $1.3 billion off its 2008 online advertising measurements for 2008 after the market slowed significantly.

More pointedly, they've also been supplemented by contractor cuts, layoffs--including 100 recruiters this month--and the closure of many projects that didn't pass muster in what's clearly a broad assessment of what to keep and what to drop. Google may be an unusual company, but it's not immune to the mundane forces of capitalism, and the company is clearly undergoing an attitude adjustment.

Google's still going to be profitable--this is no General Motors tale. For the fourth quarter, analysts surveyed by Thomson Reuters expect an average of $4.95 per share in net income, with revenue of $4.12 billion excluding commissions called traffic acquisition costs, or TAC. That's almost flat from Google's third quarter, when the company had revenue of $4.04 billion after TAC, but still a step up from $3.39 billion in the fourth quarter of 2007.

eMarketer pruned its 2008 online ad measurements by $1.3 billion when the economy slowed.

But what's still not clear is how much we should be reading into Google's results when it comes to the broader economy. There's no doubt things look bleak, yet some tech bellwethers--Apple and IBM for example--didn't feel as much pain as had been expected.

And Google probably isn't the best canary in the coal mine. Yahoo, with its mainstream advertiser base, started feeling the economic pressures earlier. Google's results are probably a better predictor of, well, Google's future results. The company relies mightily on search ads, a market it dominates. Most other big players, Yahoo included, are chiefly involved with display ads.

This post was updated at 2:20 p.m. PDT to include Amazon's announcement that it won't launch an upgraded Kindle until next year.

Amazon's third-quarter revenue was in line with analyst expectations, but e-commerce doesn't appear to be immune to the economic slump pounding offline and online retailers alike.

For the quarter ended September 30, Amazon reported $4.26 billion in revenues, up 31 percent compared with $3.26 billion in third quarter of 2007. The numbers came in on the low side of Amazon's forecasts from last summer. The company said revenue would be between $4.2 billion and $4.4 billion. Analysts, on average, expected revenue to be $4.28 billion.

Amazon rival eBay last week lowered fourth-quarter revenue expectations, and Wall Street was very interested to learn how Amazon thought it would fare during the holiday season. Forrester Research expects online retail growth to slow for the first time this holiday season as a result of the weak economy.

Forrester estimates that shoppers will spend $44 billion online during the holiday season. That figure represents a 12 percent increase from last year, but it's the slowest rate of growth for online retail to date.

During a conference call after the earnings release, Amazon executives said sales of the Kindle, the company's digital book reader, continue to surpass expectations and the company doesn't have plans to introduce an upgraded model until next year at the earliest.

Amazon's stock closed trading Wednesday at $49.99. Shares, however, dropped as much as 16 percent in after-hours trading, changing hands recently at $43.75, down $6.24 or nearly 13 percent from their closing price.

Wall Street has hammered Amazon's share price; the stock is down more than 50 percent from its 52-week high of $101.09.

Net income for the quarter was up 48 percent to $118 million, or $0.27 per diluted share, compared with net income of $80 million, or $0.19 per diluted share for the same period last year.

Amazon said the fourth quarter, the vital holiday period, will produce revenue of between $6 billion to $7 billion. That represents growth of 6 percent to 23 percent. During the conference call, company executives didn't provide many more details on what they think the holiday quarter will bring.

Amazon saw a 48-percent increase in net income.

(Credit: Amazon.com)

Google shares jumped nearly 9 percent in intraday trading Friday, as analysts chimed in with favorable reports following the company's .

Google climbed as high as $384 a share during the day, after reporting a stronger than expected third quarter on Thursday after the markets close. Google's rally marks its second consecutive day of gains, in which its shares have risen as much as 11.7 percent.

Analysts overwhelmingly gave Google a thumbs up in its ability to control costs in the quarter, aiding the company's ability to exceed analysts earnings estimates.

UBS Securities analyst Benjamin Schachter, noting he expects Google to exhibit strong cost controls going forward, increased his earnings estimates for Google to $19.80 a share from $19.18 a share for 2008, as well as bumping up 2009 estimates to $22.69 a share from $21.92 a share.

Jim Friedland, an analyst with Cowen & Co., noted that Google hired 519 employees in the quarter, compared with 1,830 a year ago. And capital expenditures stood at $452 million in the third quarter, compared with $698 million in the previous quarter and $842 million in the first quarter.

J.P. Morgan analyst Imran Khan also touted Google's ability to control costs, but he also expressed concern about Google's revenues going forward.

Said Khan in his research note:

We think the company benefited from progress made in increasing coverage and stronger than expected network revenue. Going forward, we expect the macroeconomic drag to be slightly offset by market share gains from other search engines and other forms of advertising media. However, as our economic outlook has deteriorated, we are lowering our (fiscal 2009) domestic revenue estimate to $11.9 billion from $12.6 billion.

Goldman Sachs also cut its Google revenue estimates for 2008 through 2010, as well as lowered its price target on the Internet titan.

Goldman dropped its Google revenue forecast to $15.8 billion from $15.9 billion for fiscal 2008, lowered its 2009 forecast to $18.2 billion from $19.4 billion and its 2010 to $20.6 billion from $23.2 billion.

Said Goldman in a research note:

Results did not tell us much about future revenue, as Google did not comment on intra-quarter trends except to highlight the consumer fascination with the financial crisis, which may or may not imply fewer commercial searches (more queries for gold bars, fewer for brokerage accounts?)...We reduce our price target to $520 (prior $650) due to slower long-term revenue growth and incorporation of stock-based compensation into our DCF (discounted cash flow).

Goldman, however, raised its earnings outlook for Google for 2008, citing tight cost controls and higher margins and a healthier free cash flow as a result. Earnings estimates were raised to $20 a share from $19.45 a share for 2008.

But given questions around Google's future revenues in a challenging environment, Goldman lowered its earnings expectations for 2009 to $22.20 a share from $22.46 a share, and in 2010 to $25.25 a share from $25.42 a share.

After 10 straight quarters of grabbing a favorable foreign-exchange rate, Google's luck is expected to hit a bump in the third quarter, according to a report Monday by a Wall Street analyst.

The search giant, which relies on more than half of its gross revenues coming from overseas operations, is expected to take a sequential $22 million hit to its third-quarter gross revenue, due to unfavorable exchange rates, according to a report by Collins Stewart analyst Sandeep Aggarwal.

As a result, Google's anticipated international gross revenue is expected to come in at $3.03 billion for the third quarter, verses $3.25 billion had the exchange rates stayed the same.

Over the past 10 quarters, Google has enjoyed a favorable exchange rate, as the local currency in many of the countries that it operates has shown strength against the dollar. But as the dollar has grown relatively stronger in the quarter, especially against the yen in Japan, Google has seen its favorable exchange rate evaporate.

Nonetheless, Aggarwal notes in his report:

Though Google will not have currency benefits in Q3 and U.S. growth is moderating, our view is that Google will be able to meet the Street's expectations due to the combination of healthy CPC (cost per click) improvement and international strength.

Google is expected to post worldwide gross revenue of nearly $5.77 billion in the third quarter, up from $4.83 billion a year ago and an increase from $5.37 billion in the previous quarter.

Google's third quarter ends September 30.