SAN FRANCISCO - It's not a pleasant time to be a Yahoo Inc. employee or shareholder.
Hoping to snap out of a financial malaise, Yahoo is preparing to lay off as many as 1,000 workers in the Sunnyvale-based company's biggest purge since it was scrambling to survive the dot-com bust seven years ago.
Cost-cutting like that normally makes investors happy, but Wall Street wasn't in a celebratory mood late Tuesday after Yahoo reported a 23 percent drop in its fourth-quarter profit and provided a tepid outlook for 2008.
The one-two punch pounded Yahoo's already sagging shares, hurling the stock 9.4 percent lower when trading opened Wednesday. Shares fell $1.96 to $18.85. The backlash extends a decline that has obliterated $35 billion in shareholder wealth since the end of 2005, slashing Yahoo's market value by more than 50 percent.
Unless Yahoo can bounce back soon, the company could face more pressure to find a buyer or make another dramatic move like hiring rival Google Inc. to run its search engine and generate more ad revenue.
Microsoft Corp. has been mentioned as Yahoo's most likely suitor, although more analysts are starting to question whether Yahoo's deepening funk will scare off potential bidders.
Jerry Yang, a Yahoo co-founder who became chief executive seven months ago in an attempt to shake things up, remains confident better times are ahead as the company realizes the gains from recent acquisitions and ad partnerships.
But he indicated the big payoff is unlikely to come before 2009, warning in a prepared statement that Yahoo still faces "headwinds" this year.
"This sort of transition takes time," Yang said in a conference call with analysts Tuesday. "But we have the talent and the strong cash flow it takes to succeed."
Investors, though, appear to be growing weary of waiting for a turnaround that has been promised for the past 18 months. Yahoo shares dropped $2.09 in extended trading Tuesday after finishing the regular session at $20.81, up 3 cents.
"I'm surprised by how slowly they seem to be moving," said Cantor Fitzgerald analyst Derek Brown. "Yahoo still has quite a bit of work ahead."
In its most drastic step since Yang became CEO, Yahoo is drawing up plans to whittle as many as 1,000 jobs from its payroll — a 7 percent reduction of its 14,300-employee work force.
Yahoo indicated some employees whose current jobs are eliminated may be offered new assignments in other parts of the company. Further details are supposed to be released by mid-February.
Yahoo expects to absorb a first-quarter charge of $20 million to $25 million to pay for severance costs and other expenses incurred in the layoffs.
The cost cutting could reduce Yahoo's annual expenses by more than $100 million, helping offset some lost revenue from a re-negotiated partnership with AT&T Inc. to provide high-speed Internet service.
Under a new deal announced Tuesday, Yahoo and AT&T will share revenue generated through online advertising. Previously, AT&T had paid Yahoo a portion of the fees collected from subscribers to their cobranded Internet service. Analysts had estimated that arrangement generated about $250 million in annual revenue for Yahoo.
To ease the pain of the transition, Yahoo will receive an upfront payment of $300 million to $400 million from AT&T.
Yahoo's profits have been falling even though advertisers are spending more than ever on the Internet.
The bulk of the additional online ad spending has been pouring into Internet search leader Google, which was smaller than Yahoo just three years ago and is scheduled to release its fourth-quarter results Thursday.
Yahoo earned $205.7 million, or 15 cents per share, during 2007's final three months, down from net income of $268.7 million, or 19 cents per share, at the same time in 2006.
Reflecting the gloomy aura hanging over Yahoo, analysts surveyed by Thomson Financial had projected earnings of 11 cents per share, on average.
For the full year, Yahoo's profit decreased 12 percent to $660 million.
Fourth-quarter revenue totaled $1.83 billion, an improvement of 8 percent over $1.7 billion a year earlier. After subtracting commissions paid to its advertising partners, Yahoo's revenue was $1.4 billion, in line with analyst estimates.
Yahoo estimated its revenue this year will range from $5.35 billion to $5.95 billion, excluding ad commissions. The average analyst estimate stood at $5.92 billion.
Separately, Yahoo announced it hired former VeriSign Inc. executive Aristotle "Ari" Balogh as its new chief technology officer, filling a void created with the resignation of Farzad Nazem last June. Balogh, 43, held the same job at VeriSign.