SAN FRANCISCO — Yahoo Inc.'s leaders still have jobs despite investor misgivings about their decision making, but at least 1,500 workers will be shown the door after the slumping Internet company's profits tumbled yet again in the third quarter.
The 10 percent reduction in Yahoo's payroll of 15,000 employees served as another stark reminder of the challenges facing a management team led by Jerry Yang as the deteriorating economy casts even more doubts about the Sunnyvale-based company's turnaround plans.
Although Yahoo's third-quarter profit plunged 64 percent, the cutbacks announced Tuesday are a small step in the right direction, said Cantor Fitzgerald analyst Derek Brown.
"But it seems like there is still a lot more work that needs to be done," he said.
Yahoo is bracing for a deep downturn likely to extend well into 2009 by trimming $400 million from its annual expenses of $3.9 billion. Besides shedding 1,500 workers during the next two months, Yahoo may close some of its U.S. offices and assign more jobs to lower-paid contractors in other countries.
"We are going into what is very clearly a recession mode," Blake Jorgensen, Yahoo's chief financial officer, said in a Tuesday interview.
Yahoo's determination to rein in its expenses seemed to please investors, who have been disillusioned with the company's direction for years.
Yahoo shares gained nearly 7 percent in extended trading after ending the regular session at $12.07, down 79 cents.
But Yang and his lieutenants have a long way to go to justify Yahoo's decision to spurn Microsoft's takeover bid of $33 per share last May. Microsoft withdrew the offer after Yang balked at the price, asserting his management team was pursuing a strategy that would prove the company was worth than the software maker's $47.5 billion bid.
"The heat is definitely still on Yang," said Canaccord Adams analyst Colin Gillis.
The purge outlined Tuesday marks the second time in nine months that Yahoo has resorted to mass layoffs in what so far has been an ineffectual effort to rebound from a financial funk that has left its stock price near a 5 1/2-year low.
Yahoo is approaching these cutbacks much more aggressively than its last round of layoffs in February, when about 1,000 workers were cut loose. Within a few months, Yahoo's payroll had expanded back to where it was before the streamlining.
"I believe getting Yahoo more fit at this time will provide the flexibility necessary for navigating current conditions and strengthen our position for the future," Yang told analysts during a Tuesday conference call.
Yahoo's housecleaning provides the latest example of how a credit crisis that has already rocked banks and retailers is starting to rattle Silicon Valley, the nation's high-tech heartland.
Online auctioneer eBay Inc. is jettisoning 1,600 jobs while an array of startups are letting go workers to squirrel away more cash as venture capitalists become more cautious with their money. Even Google Inc., a company renowned for its free-spending ways, is starting to cut corners.
Yahoo felt the squeeze in the third quarter as its earnings dwindled to $54.3 million, or 4 cents per share. That was down from $151.3 million, or 11 cents per share, at the same time last year.
If not for nearly $67 million in one-time expenses and a slightly higher tax rate, Yahoo said it would have made 9 cents per share. That figure matched the average earnings estimate among analysts surveyed by Thomson Reuters.
Revenue rose 1 percent to $1.79 billion. After subtracting commissions paid to advertising partners, Yahoo said its revenue stood at $1.32 billion _ about $50 million below analyst estimates.
Analysts have blamed much of Yahoo's past troubles to mismanagement, but the crumbling economy is now looming as the company's biggest headache as online advertisers curtail their spending in anticipation of the worst recession in a quarter century.
Like most Internet companies, Yahoo relies on advertising for most of its profits.
Reflecting the downturn, Yahoo lowered its revenue estimates for the remainder of the year. Now Yahoo projects 2008 revenue of $7.18 billion to $7.38 billion _ down from a forecast of $7.35 billion to $7.85 billion issued three months ago.
But the turmoil hasn't derailed Google, which last week reported a 26 percent increase in its third-quarter profit.
Yahoo is more vulnerable to advertising cutbacks because its marketing system doesn't work as well as Google's and it is more reliant on billboard-type ads that are more difficult to sell in tough times. Google, in contrast, specializes in text-based ad links that cost advertisers only when the ads are clicked on.
Search advertising bolstered Yahoo during the third quarter, with revenue in that segment rising 17 percent to $438 million. But graphic-rich "display" advertising edged up just 3 percent while ads that Yahoo shows on its partners' Web sites plummeted 10 percent as bank and retailers curbed their spending.
Yahoo hopes to boost its revenue by drawing upon Google's technology for some of the text ads shown on its Web site, but the proposed partnership is in limbo while the U.S. Justice Department investigates whether the alliance would undermine competition. Together, Google and Yahoo control more than 80 percent of the U.S. search advertising market.
Yang told analysts that Yahoo and Google are still trying to persuade U.S regulators to allow the companies work together, but didn't specify a timetable for when the impasse might be resolved.