Layoffs are good news for Yahoo -- really

(MoneyWatch) Layoffs are generally perceived as a sign that a company is in trouble. And given Yahoo's (YHOO) woes in recent years -- declining sales, poor leadership, key employees running for the exits -- some might interpret the Internet company's announcement today that it will lay off 2,000 workers as yet another sign of the company's terminal condition.

Except that Yahoo isn't dead yet. Unlike fast-fading BlackBerry maker Research In Motion (RIMM), Yahoo has some underlying strengths, and there's reason to think that new CEO Scott Thompson is finally doing what's necessary to revive the company.

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When a company's performance has steadily declined over time, a number of factors offer clues about its future, including:

• How bad are the financial fundamentals?
  
• Is there a strong customer base?
• Are costs in balance with income?
• Are changes in culture necessary?
• Are the right managers and executives in place?
• Does the board grasp the issues and will it respond helpfully?
• Are products and services innovative enough to gain competitive ground?

Financials

Forget a company's stock price -- that alone doesn't tell you how it is doing. Yahoo's income had been trending down, but began to climb again last quarter. More importantly, the company has continued to show positive net income, even as it struggled to find new ways to make money. Last quarter, just over 22 cents out of every dollar Yahoo brought in was profit. The company could be in far worse shape, as the following financial snapshot of its last five quarters shows:

Customer base

Yahoo claims it has 627 million monthly users (although industry estimates suggest the number could be lower). Still, a lot of people go to Yahoo for email, news, financial information, and other services. That may be lower than the number of people using Facebook or Google (GOOG), but it's still a massive customer base that offers significant opportunities for growth.

Costs

Does Yahoo have bloated costs? Probably. A former Yahoo business development manager in Asia recently guessed that the company could shed up to a quarter of its workforce without any adverse effect on its performance. That may or may not be right, but Thompson is obviously starting to shrink Yahoo's payroll, with some analysts speculating that the restructuring may continue. The trick will be balancing cost cuts, both to cheer investors and to free cash for competitive use, with keeping the right people in place to lead its resurgence. For now, this latest pivot by Yahoo suggests the company might be heading in the right direction, even if it is undeniably painful for laid-off employees.

Culture, executive, board changes

The best way to evaluate corporate culture is to see how the company acts. Things have been stagnant at Yahoo, so the need to shake things up is a given. Thompson is not only revamping the company's leadership, but also has pushed to change the overall composition of the board. Given Yahoo's missteps in recent years, that's essential.

Innovation

Innovation and research and development spending aren't necessarily correlated. But within a given company, a significant change in R&D expenses usually indicates that something important is happening.  For example, the decline in innovation at Hewlett-Packard (HPQ) was visible in its shrinking R&D budgets years before the company's management admitted there was a problem.

For its part, Yahoo's R&D expenditures saw a significant drop a year ago, but it has now begun to boost such critical spending. That's not to say the money will be spent wisely or effectively, but it does suggest that Yahoo knows it can't continue doing business as usual.

If Yahoo's sole reaction to its predicament was to lay people off, its epitaph would already be written. And, as Charles Cooper at CNET mentions, the company needs a new strategic plan and not more empty talk, as has happened in the past.

But this latest turn in the road seems different. Although details on the restructuring are hazy at this stage, Yahoo will likely try to retain top talent. The company also is taking steps to improve its board and overall leadership. With luck, the layoffs will indicate a true change in direction, not another excuse for staying the course.

Image: morgueFile user pennywise