At Yahoo!, No Profits and No Visibility

Updated from 5:15 p.m. EST:

After a day of fanciful speculation, tech investors were jolted back to reality Wednesday evening when Yahoo! (YHOO) forecast a sharp earnings shortfall and hinted at poor forecasts to come.

Yahoo! Yikes!

Skittish Analysts Slash Yahoo!

At Yahoo!, No Profits and No Visibility

Commentary

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After the stock market closed, Yahoo! warned that first-quarter earnings would fall substantially short of estimates and that forecasts for the rest of the year are in doubt as well. The company also said it would seek a replacement for CEO Tim Koogle, one of the search engine's founders, and that it would buy back stock to support its flagging shares. After a day in which the stock was halted for most of the regular session, Yahoo! stock reopened to a 13% drop after hours.

Getting Weaker...

Yahoo! forecast a break-even first quarter on revenue of $170 million to $180 million. Wall Street had forecast earnings of 5 cents a share on revenue of $232 million. That consensus itself represented a sharp reduction from start-of-the-year levels: Before Yahoo! issued a Jan. 10 earnings warning, analysts polled by First Call/Thomson Financial expected it to earn 13 cents a share, and revenue was hoped to be in the neighborhood of $325 million.

More bad news is likely during Yahoo!'s first-quarter conference call, scheduled for April 11, when the company plans to update guidance for the full 2001 year. Though the consensus among analysts is for 2001 EPS of 36 cents, financial chief Sue Decker alluded to a goal of "break-even profitability" for year 2001. Pressed by one analyst for confirmation that Decker had given downward guidance for the year, Koogle said the company, like others, was in the dark about how 2001 would turn out. "We simply don't have good visibility on the back half of the year," he said.

"It's a staggering reversal of fortune," says Derek Brown, who covers Yahoo! for W.R. Hambrecht. "Expectations for the year -- for the next two years -- will be coming down dramatically." Brown, whose firm hasn't done underwriting for Yahoo!, rates the stock neutral.

The announcements cap a suspenseful Wednesday for Internet investors, following the announcement that Yahoo! was making a last-minute pullout from a Merrill Lynch investment conference. Trading in Yahoo! was suspended soon after the market's open and remained suspended all day. The early trading halt and the lack of an immediate explanation Wednesday morning had traders speculating wildly about the company's future, reviving years-old rumors that a tie-up with a big media company was imminent, for one.

Rank and File

Yahoo!, joining a long list of tech companies that have reduced earnings and revenue guidance this year, cited the weakening economy, lower ad spending and its transition to "more traditional" advertising customers for the shortfall. The company said its marketing-services businesses would be hit hardest by the slowdown.

A key part of Yahoo!'s first-quarter visibility breakdown, the company said, was the value of deferred revenue as a forecasting tool. Traditionally, Decker explained, the amount of deferred revenue on Yahoo!'s books at the beginning of a quarter has turned out to amount to 45% to 50% of that quarter's revenue. Unfortunately, Decker said, the $117 million of deferred revenue Yahoo! had at the outset of the first quarter looks as if it will amount to 65% to 70% of the quarter's revenue -- a trend that Decker attributed to "the stalling of corporate budgets in this time of uncertainty." The company said both small Netcos and large corporations are spending less than expected.

The bright spot in Yahoo!'s first quarter appears to be its business and enterprise services operations, including its nascent corporate portal business, which President Jeff Mallett said was growing on schedule.

While business services may be a success, it's dwarfed by the troubles with Yahoo!'s marketing services, or advertising/e-commerce business, Hambrecht's Brown says. "I am surprised to see the stock hanging in at 18 1/2," he says.

Koogle, who has been with Yahoo! since before the company's April 1996 initial public offering , says he will stay on as chairman. Reacting to the sharp decline in its shares in recent months, the company also cleared a buyback of up to $500 million of its shares over two years.

After dropping 8% during its brief regular trading stint Wednesday, Yahoo! dropped $2.25, or 13%, after hours on Instinet, trading at $18.25.

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