Yahoo may have a new owner before long. Whoever emerges victorious from the months-long bidding battle will face the difficult task of whittling down a company burdened by one of the the highest cost structures in its corner of the technology sector.
Once the go-to gateway to the internet, Yahoo got fat over the years as it navigated the rapidly changing industry in a sprawling effort to be all things to all people -- from search to shopping to news outlet to blogging hub. Spending ballooned on acquisitions and recruiting in an effort to offset declining sales as ad revenue was siphoned off by competitors. Now Yahoo squeezes far fewer sales from each employee than its peers and its core services are on the auction block.
Alphabet, Google's parent, had $315,948 in sales per worker in the first quarter while Facebook garnered almost $400,000. For Yahoo, that figure was less than $116,000. Even the traditionally beefier telecom companies are lean compared with Yahoo. Verizon Communications counts $185,637 in sales per employee and AT&T reaps $144,319. Yahoo's numbers look even worse when subtracting traffic acquisition costs -- the revenue passed onto partners.
Cutting jobs is the most obvious way to come to terms with the excess. While Chief Executive Officer Marissa Mayer has already eliminated thousands of jobs over the course of her four-year tenure, Yahoo's new overlords will likely slash at least another 3,000 positions, according to analysts, depending on which buyer the company might attract.
"We still think it has some bloated costs that could be taken out," said Robert Peck, an analyst with Suntrust Robinson Humphrey, who rates the stock a hold.
Cutting 1,000 more jobs would bring the revenue-per-employee number in line with Verizon's AOL, according to a note Mr. Peck wrote earlier this year. A strategic buyer such as Verizon or AT&T could reduce headcount by an additional 3,000, Mr. Peck said, due to potentially redundant operations in areas such as human resources or marketing. At that level, Yahoo would be among the smallest members of the Standard & Poor's 500 Index.
In what may end up being her last earnings call at Yahoo, Ms. Mayer will present the company's second-quarter results Monday, which analysts forecast will show a significant drop in revenue and profit. Bids for the internet properties are due later in the day, according to people familiar with the matter. A spokeswoman for Yahoo declined to comment.
Yahoo shares were up 0.9% to $38.06 in premarket trading Monday. They gained 13% so far this year.
Yahoo is projected to report second-quarter adjusted earnings of 9 cents a share, down almost 45% from a year ago, according to data compiled by Bloomberg. Revenue, minus sales passed on to partners, is expected to fall 20% to $839.3 million.
Activist investor SpringOwl Asset Management said headcount reductions should shrink the company to 3,000 people, according to a proposal late last year. Such a reduction could be achieved by scaling back efforts in search -- along with spending on general corporate expenses -- or eliminating more employees overseas, according to SpringOwl managing director Eric Jackson. He later said that reducing the company to 4,000 to 5,000 people would also be acceptable. Yahoo had 9,400 employees at the end of the first quarter.
In February, Mayer announced plans to cut staff by about 15% this year as part of a new focus on efficiency that also included office closures, and shutting down some products. Since then, more than 1,000 jobs have been eliminated, but the full financial benefits of those cuts may not be realized until the second or third quarters, Chief Financial Officer Ken Goldman said in May.
Even with a full 15% reduction in staff from the start of the first quarter, Yahoo would still be more bloated than its rivals and potential telecom suitors.
A change in ownership could come soon. Along with AT&T and Verizon, other suitors submitting bids Monday are expected to include Quicken Loans founder Dan Gilbert, along with private equity firms, people familiar with the matter have said. Yahoo drew offers that valued the core assets at around $3.75 billion to about $6 billion, people with the matter have said.
While each suitor has its own plans for what to do with its Yahoo spoils, there's little doubt that streamlining will be part of everyone's priorities.
Sameet Sinha, an analyst with B. Riley & Co., said the revenue-per-employee is a "crucial" metric. Ms. Mayer "got so many chances to get the numerator up," he said.
Throughout her tenure, Ms. Mayer faced pressure from shareholders, most notably Starboard Value LP, to get spending under control. In a January letter to Yahoo's board, Starboard cited annual operating costs that increased by about $500 million over Ms. Mayer's tenure, and $2.3 billion in acquisitions. Even with the threat of a proxy war looming, Ms. Mayer continued to spend, including about $17 million for the rights to the National Football League's first streaming-only game broadcast, and about $200 million for shopping site Polyvore.
As a result, Yahoo's gross margins -- a key measure of efficiency at any company -- fell 14% to 53% in the first quarter. That trails margins of 62% at Google and Facebook at 84% Yahoo also compares poorly with the decades-old telecoms companies, despite their reliance on cost-intensive physical infrastructure. Verizon had 61% gross margins in the first quarter and AT&T had 55%.
One way to improve the employee efficiency ratio would be to drive up sales -- but Ms. Mayer hasn't delivered there either. Overall revenue fell 11% to $1.09 billion during the first three months of the year, the poorest showing in the first quarter since 2004. The decline was even sharper, 18%, when sales to partners aren't included.
"She's had four years," said Brett Harriss, an analyst for Gabelli & Co. in Rye, New York. "That's a reasonable amount of time to expect a CEO to make material operating changes."
-- Bloomberg News