April 9, 2001 5:00 AM PDT

Building a new Yahoo

As Yahoo prepares to release its first-quarter earnings this week, the Internet bellwether stands at a crossroads.

Yahoo faces a painful reinvention as it shakes up management to offset slumping online-ad sales with new paid services in a tough market for online media companies.

Wall Street will be listening closely Wednesday when the Web portal makes its financial report. But analysts for now say they are more concerned with the company's long-term outlook and news about a replacement for outgoing Chief Executive Tim Koogle than whether it hits drastically reduced earnings and revenue forecasts. Many say they are primarily watching for a layoff announcement.

"I don't think they're going to (announce) a new CEO, which in many ways would be the biggest news that people are looking for right now," said Jeffrey Fieler, an equity analyst at Bear Stearns. "They took away most of the suspense" for the first quarter.

Yahoo's rise and fall has mirrored the fortunes of the Internet stock bubble, growing in a few years from start-up to online media powerhouse with sales of more than $1 billion in 2000. In hindsight, analysts fault the company for becoming overly dependent on advertising--a weakness that became all too apparent when the bottom dropped out of the dot-com economy, wiping out many of its biggest customers.

The pullback has forced an industrywide reassessment of strategies based on giving away content for free to attract "eyeballs" and ad dollars. Yahoo is now seeking to diversify its business, developing for-pay services such as a portal creation business and signing up partners such as Sony Music Entertainment and Vivendi Universal's Universal Music Group to promote a planned subscription music offering dubbed Duet.

In its last earnings report, Yahoo said it drew about 85 percent of its revenues from advertising--a number that helped contribute to its tough quarter. The company has slashed revenue expectations twice and endured a broad shake-up in its upper-management ranks as its stock price dropped to a 52-week low of $11.37 a share last week.

Analysts also said they would not be surprised if Yahoo announced a round of layoffs on Wednesday. The company increased its work force by 50 percent to 3,000 people, according to John Corcoran, an equity analyst at CIBC World Markets. This could open the door to fat trimming.

"We've been hearing rumblings about it," said Derek Brown, an equity analyst at WR Hambrecht, in reference to rumored layoffs. "I think more tellingly, the company's current model is significantly scaled back from what was anticipated two months ago, which suggests that...(no) turnaround is in sight."

The Street expects Yahoo to break even, according to First Call's consensus of analyst estimates. The last time Yahoo cut estimates, in March, executives lowered revenue expectations to $170 million and $180 million for the second quarter. That was down from the $232 million in revenue and 5 cents-per-share profits that analysts had expected.

The company also gave few clues to its performance for the remainder of the year.

Wednesday's results could have a broader effect on online investors. Yahoo is considered a barometer of the health of the Web-based advertising market. If the company reports more bad news, it could hurt many other Internet companies that rely on advertising dollars.

Out with the old...
Analysts do not expect any new developments in the company's CEO search. Spencer Stuart, the search firm hired by Yahoo, is searching for a candidate with experience as a CEO, preferably in the media or technology industries.

Meanwhile, Yahoo has shaken up its management ranks over the past financial quarter. Many longtime Yahoo executives have either changed their roles or retired, while fresh blood has been brought in from the outside.

In March, Yahoo hired Gregory Coleman as executive vice president of North American operations. Coleman, who reports to President Jeff Mallett, will oversee a handful of executives managing different areas of the company's operations. Some of these are company veterans who have since taken on different responsibilities.

For example, Ellen Siminoff, the former head of corporate development and Yahoo's primary deal maker, has become senior vice president of entertainment and small business. A Yahoo representative said corporate development roles will be adopted by the individual business units instead of through a separate division.

Other executives reporting to Coleman include Tim Brady, senior vice president of commerce and network services; David Graves, senior vice president of media; Karen Edwards, vice president of corporate marketing; and Todd Teresi, senior vice president of business operations, the Yahoo representative said.

The list of retirees includes Anil Singh, the company's former sales chief. Coleman will take on Singh's roles until a replacement is named. Yahoo's former general counsel, John Place, also retired and was replaced by Jon Sobel, formerly assistant general counsel.

Have we hit bottom yet?
Wall Street analysts remain divided over Yahoo's near-term performance. Shares of Yahoo surged 22 percent last week when Lehman Brothers analyst Holly Becker issued a note encouraging investors to buy the stock. She reasoned that the worst is over and it is time to buy the stock before the market officially rebounds.

But other analysts are not as enthusiastic. Many are sticking to their "hold" ratings for more solid signs of an economic healing period and an improved online advertising market.

"It's the macrofactors primarily that are hammering Yahoo's performance and stock price," said CIBC's Corcoran. "If the economy stabilizes, then there will be stabilization in online advertising and a stabilization in demand. We're not seeing that right now."

 

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