Yahoo topped expectations despite a 23 percent earnings decline, but shares of the company fell as its sales guidance was light and Chief Executive Jerry Yang warned of 2008 "headwinds."
Investors were disappointed with Yahoo's revenue forecasts for the first quarter and full year, even though Wall Street had already lowered expectations.
"I would classify the results as mediocre and the guidance as cautious,'' said Ryan Jacob, a fund manager at Jacob Internet Fund in Los Angeles. "I think Yahoo is telegraphing the fact that they will be spending more in 2008 to try and regain their competitive position against Google.''
The online advertising and search firm reported a fourth-quarter profit of $205.7 million, or 15 cents a share, excluding traffic acquisition costs. Revenue reached $1.403 billion.
A consensus estimate compiled by Thomson Financial put Yahoo's earnings at 11 cents a share on a topline of $1.406 billion.
In the same period last year, Yahoo brought in earnings of 19 cents a share on sales of $1.228 billion.
Yahoo's sales guidance was lighter than expected. The company said it expects revenue between $1.28 billion and $1.38 billion in the first quarter, compared with forecasts of $1.36 billion for the period.
Yahoo put full-year sales at between $5.35 billion and $5.95 billion, versus projections of $5.89 billion.
Shares of Yahoo tumbled more than 10 percent in extended trading after finishing regular market hours up marginally at $20.81.
"While we will continue to face headwinds this year, we believe that the moves we are making will help us exit 2008 stronger and more competitive and return to higher levels of operating cash flow growth in 2009,'' Yang said in a statement.
Yahoo's larger share of the display market makes it more vulnerable to any spending pullbacks in a recession. Analysts expect key rival Google may fare better in a downturn with its dominance of paid search listings, a form of advertising that is viewed as more closely tied to sales.
In the quarter that ended Dec. 31, Yahoo revamped its search engine and announced several online advertising agreements.
The struggling Internet icon, which has been falling behind rival Google in the search and online ad markets, considered the search engine changes the most significant since Yahoo reclaimed control of the technology behind it several years ago.
Layoffs on the Way
Yahoo's financial funk deepened at the end of 2007, prompting the slumping Internet icon to draw up plans to lay off 1,000 workers.
The company announced the upcoming 7 percent reduction in its 14,300-employee work force during a Tuesday conference call to review its fourth-quarter results.
Yahoo didn't specify which areas of its operations will be trimmed. It will be the company's biggest purge since Yahoo jettisoned 650 workers in the wake of the dot-com bust seven years ago. Management indicated further details will be released by mid-February.
"This is a necessary step in our transformation," Yahoo Chief Executive Jerry Yang said during the conference call.
- Wire services contributed to this report.