UPDATE 3-Facing headwinds, Yahoo to cut jobs, invest more

(Adds details; executive and analyst comments)

By Eric Auchard and Michele Gershberg

SAN FRANCISCO/NEW YORK, Jan 29 (Reuters) - Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz) posted a drop in quarterly profit on Tuesday and forecast 2008 revenue below Wall Street forecasts as it cuts jobs and invests to shore up its Web advertising business.

Shares in Yahoo fell nearly 11 percent in extended trading. Yahoo's revenue forecasts for the upcoming year disappointed investors, even though Wall Street analysts have already slashed their expectations of Yahoo's ability to increase Internet advertising revenue in a weakened U.S. economy.

The company warned that it faced "headwinds" in 2008 and outlined a plan to cut about 1,000 jobs. It also revised a deal with AT&T Inc (T.N: Quote, Profile, Research, Stock Buzz) that will cut into revenue this year. The restructuring will lead to better cash flow in 2009, it said.

"Yahoo is a company and a business in transition," said Cantor Fitzgerald analyst Derek Brown, who rates the stock neutral. "The payoffs are not likely to show up until at least the second half of this year or perhaps sometime in 2009."

Most advertising sectors, including autos, pharmaceuticals, telecommunications and packaged goods, are off to a solid start this year and are expected to enjoy growing online budgets during 2008, President Susan Decker said.

However, financial, travel, and retail advertisers -- sectors hit hard by the weakening economy -- suffered declines from a year ago, Decker said. She cautioned that: "We're obviously watching economic developments very closely."

Fourth-quarter profit fell more than 23 percent to $205.7 million, or 15 cents per share, from $268.7 million, or 19 cents per share, a year ago. Overall revenue rose 8 percent to $1.83 billion and revenue excluding payments to advertising partners rose 14 percent to $1.4 billion.