The size of Yahoo’s headcount reduction is not yet certain, but we will probably get details on the earnings call tomorrow. Current estimates range from “hundreds” to 2,500. We estimate that the mid-point of this range would result in a 2008 operating profit increase of 10%-20%.
In this spreadsheet, we have run five scenarios–from 500 to 2,500 employees–and we have assumed all-in cost of $125,000 per employee. Our own financial analysis suggests that the appropriate number of cuts is about 1,000–this would return the operating profit margin to its level of a year ago–but a source told us last night that the cuts will probably be more aggressive than that.
The cost reductions likely won’t take effect until February, but for simplicity’s sake, we have assumed that they begin as of Jan 1, 2008. We have also assumed no additional cost cuts aside from headcount-related expenses. (The total cost cuts, therefore, are likely to be larger).
Under these assumptions, the impact on 2008 operating profit (and, thereby EPS) is as follows. We suspect news of these cost cuts have already been at least partially reflected in Yahoo’s stock price, which bounced 20%+ at the end of last week.
Cost Reduction: $62.5 million
Operating Profit: +8%
Cost Reduction: $125 million
Operating Profit: +15%
Cost Reduction: $187.5 million
Operating Profit: +21%
Cost Reduction: $250 million
Operating Profit: +26%
Cost Reduction: $312.5 million
Operating Profit: +30%
Details in this spreadsheet.
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