Yahoo! plans layoffs, a sign of ad weakness

Yahoo! (YHOO) may eventually benefit from a deal to combine its search business with Microsoft (MSFT), but for the time being the company is in trouble.

Word has leaked out the the portal company will fire several hundred more people on top of the 2,000 or more that it pushed out last year. The news is a clear indication that Yahoo!'s revenue in the first quarter was bad and that it expects upcoming quarters to be tough.

According toThe Wall Street Journal, "When the company laid off about 1,400 employees last December, it suggested more cuts may be necessary as if the economy worsened"

For the last several years, media experts have assumed that online advertising would not suffer from the same slowdown that has been affecting traditional media. They assumed that Internet revenue would keep rising because its share of the ad market is well below the number of people who used it compared to TV and newspapers. In other words, online ads still have to catch up to the size of the Internet's user base. But that has not turned out to be true. Internet ad CPMs are off as much as 25 percent according to media executives.

The layoffs at Yahoo! may mean the company will come in at the low end of analyst expectations, or over a 15 percent drop in revenue compared to the first quarter of last year. EPS would fall by over half.

The question now is what Yahoo! will do to dig itself out of a hole. Microsoft may be the only alternative, which means that it holds all the cards in a negotiation.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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