Yahoo's housecleaning, to be completed by the end of the year, 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.
"We are going into what is very clearly a recession mode," Blake Jorgensen, Yahoo's chief financial officer, said in a Tuesday interview.
Yahoo felt the squeeze in the third quarter as the Sunnyvale, Calif.-based company 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.
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.
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 7.6 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, arguing his turnaround plan would yield even bigger returns.
Yang's rebuff is now looking like a horrible mistake as online advertisers curtail their spending in anticipation of 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.
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.
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.
The downturn hasn't derailed Yahoo's biggest rival, Internet search leader Google, which last week reported a 26 percent increase in its third-quarter profit.
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 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 resolving the impasse.
