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Oct 18

Yahoo's profit beats estimates, but some analysts fear damage of data breach

Yahoo!

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SAN FRANCISCO - Yahoo Inc reported better-than-expected quarterly adjusted profit on Tuesday, a boost for the beleaguered company whose deal to sell its core business to Verizon Communications Inc has been shaken by a massive data breach.

Verizon's general counsel said last week that the hack, which affected at least 500 million email accounts in 2014, could have a material impact, possibly allowing Verizon to withdraw from the US$4.83 billion deal.

Tuesday's results provided at least an initial indication that the data breach has not led to a quick exodus of Yahoo customers, as some had feared. Customer trends showed growth in pageviews and email usage, Yahoo said.

Still, analysts were split on whether the results dispelled doubts about the deal going through. Yahoo said in a filing with securities regulators shortly before the breach was disclosed that it knew of no cyber risks, raising questions about whether Verizon was informed of the breach in a timely fashion.

JMP Securities analyst Ronald Josey said it was too early to tell if the breach would cause lasting damage, and called customer trends "encouraging."

"The message here is email and messaging is a very sticky product and people want to get to their messages," said Josey.

But Fatemeh Khatibloo, a security analyst with Forrester Research, said the uptick in pageviews and email usage could be the result of "500 million people trying to figure out if they're exposed."

Any loss of users in the future, lawsuits related to the breach and a pending Federal Communications Commission vote that could limit how telecommunications companies can use customer data may encourage Verizon to try and back out of the deal, said Khatibloo.

However, Scott Kessler, an analyst with CFRA Research, said the fact that Yahoo did not see an immediate decline in users was a sign the breach may not be a material adverse change that would affect the Verizon deal.

"The bottom line here is from a fundamental operational and financial perspective, it doesn't seem like much has changed at the company over the last quarter," he said.

Legal experts have said Verizon would have to clear a high hurdle to prove that the breach amounted to a material adverse change that would allow it to pull out of the deal.

REVENUE CHALLENGES

Another positive sign for Yahoo was that revenue from Mavens - the mobile, video, native and social advertising units that Chief Executive Marissa Mayer touts as its emerging businesses - rose 24.2 per cent to US$524 million.

Still, the business showed continuing declines in major revenue categories. Gross search revenue fell 14.1 per cent to US$752.5 million.

Total revenue rose 6.5 per cent to US$1.31 billion, just beating the average analyst estimate of US$1.30 billion, according to Thomson Reuters I/B/E/S. But after deducting fees paid to partner websites, revenue fell to US$857.7 million from US$1 billion.

Yahoo said on Friday it would not hold a call or webcast after the release of the results, citing the Verizon deal.

Analysts at Needham & Co said in a note on Tuesday that decision troubled them, given doubts cast over the Verizon deal by the data hack, and they cut their rating on Yahoo to 'hold' from 'buy'.

Yahoo's shares were up about 1.3 per cent in extended trading after the close on Tuesday.

For the third quarter ended Sept. 30, net income attributable to Yahoo rose to US$162.8 million, or 17 cents per share, from US$76.3 million, or 8 cents per share, a year earlier.

Excluding some items, the company earned 20 cents per share, beating analysts' average estimate of 14 cents.

Verizon plans to combine Yahoo's search, email and messenger assets as well as advertising technology tools with its AOL unit, which it bought last year for US$4.4 billion.

The deal would transform Yahoo into a holding company, with a 15 per cent stake in Chinese e-commerce company Alibaba Group Holding Ltd and a 35.5 per cent interest in Yahoo Japan Corp as well as Yahoo's convertible notes, certain minority investments and its non-core patents.

The deal is expected to close in early 2017, after which Yahoo plans to change its name and become a publicly traded investment company.