The purge outlined Tuesday represents a 10 percent reduction in Yahoo's payroll of about 15,000 employees. It's 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.
Things got worse in the third quarter as Yahoo earned $54.3 million, or 4 cents per share. That was a plunge of 64 percent from $151.3 million, or 11 cents per share, at the same time last year.
The profit in the latest quarter was knocked down by nearly $37 million in fees that Yahoo incurred during its negotiations with Microsoft and an unsuccessful attempt to replace its board of directors. Yahoo also absorbed a $30 million charge to account for the diminished value of an investment in Alibaba.com, one of China's top Web sites.
If not for those one-time items and changes in its 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.
Yahoo's determination to rein in its expenses seemed to please investors, who have been disillusioned with the Sunnyvale, Calif.-based company's direction for years.
Yahoo shares edged up 30 cents, or 2.9 percent in extended trading after ending the regular session at $12.07, down 79 cents.
The depressed stock price is particularly galling to Yahoo stockholders, given that Yahoo had a chance to sell to Microsoft for $33 per share in May.
But Microsoft withdrew its offer after Yahoo Chief Executive Jerry Yang balked at the price because he believes his turnaround plan would yield even bigger returns.
Yang's rebuff is now looking like a horrible mistake as online advertisers rein in their spending to save money in what is expected to be the worst recession in a quarter century.
Signaling it expects the turbulence to extend well into 2009, Yahoo plans to trim $400 million from its annual expenses of $3.9 billion before January.
"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.
Besides pruning its payroll, Yahoo is considering closing some of its U.S. offices and sending some work to lower-paid workers overseas.
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.
"We are going into what is very clearly a recession mode," said Blake Jorgensen, Yahoo's chief financial officer, in an interview.
The downturn hasn't derailed Yahoo's biggest rival, Internet search leader Google Inc., which said last week its third-quarter profit rose 26 percent.
But 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 tough times. Google, in contrast, specializes in text-based ad links that only cost advertisers when the ads are clicked on.
Both banks and retailers scaled back their ad spending in third quarter, Yang said.
Yahoo has been hoping 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 resolving the impasse.