Yahoo's Mayer addresses email breach, but not customer churn

Yahoo delivered pretty much as expected in what could be its last earnings report as an independent company.

The Sunnyvale, Calif.-based company, which is in the midst of being acquired by telecommunications giant Verizon, beat Wall Street expectations for earnings and met expectations for a drop in sales during the months of July to September. Shares of Yahoo (YHOO) were up 1.5% to $42.32 in after hours trading Tuesday; the stock price is up 30% for the year.

But major questions remained unanswered. For instance: Is the merger still on target for a first-quarter 2017 closure?

Some complications have arisen for the $4.83 billion deal: Earlier this month, a U.S. government source said Yahoo had complied with a court order to scan emails for terrorist digital signatures. This followed the September revelation that information from at least 500 million Yahoo accounts was stolen from the company in 2014 by what it believed was a state-sponsored actor.

 pushback could be two-fold," said Robert Peck, Internet equity analyst with SunTrust Robinson Humphreys. "Why didn’t you disclose (the hack) to us and you have been giving user information to the government. As users find that out, do they therefore churn off your platform? Verizon may have thought they were buying a billion users or so, well maybe that number is about to change materially for them where they are not getting exactly what they thought they were getting."

Yahoo CEO Marissa Mayer addressed the pending merger, saying the company remains "busy preparing for integration with Verizon." She didn't elaborate; the company did not host a post-earnings release conference call with investors, citing the pending merger.

Mayer also addressed the breach and government cooperation incident in her remarks, saying it was confident in the "value of our business." "We take deep responsibility in protecting our users and the security of their information. We're working hard to retain their trust and are heartened by their continued loyalty as seen in our user engagement trends."

Even before the recent incidents, Yahoo has seen its business marginalized by competition from Google and Facebook. Its overall share of the $194.6 billion global digital ad market is expected to fall from 2.1% in 2015 to 1.5% this year, amounting to $2.98 billion, according to eMarketer.

Now the concerns about privacy and security could reduce Yahoo's audience, something that would also likely drive down revenue, says Martín Utreras, forecasting analyst at eMarketer. "There's millions of users of Yahoo Mail ... (and) they use that as a gateway to other Yahoo services and they are also servicing ads through that," he said. "In general, we think it is something that could have an affect in their engagement."

In its earnings report Yahoo noted an uptick in page views, searches and emails sent. However, without any context of search and page terms "to me that story is explained by 500 million people trying to figure out if their data was breached or not," said Fatemeh Khatibloo, principal analyst Forrester Research.

And Yahoo included language about the increased risk of lawsuits in its release. "If I am Verizon, I am trying to get out of this deal at this point," she said.

Outlook falls short

For the current quarter, Yahoo forecast revenue after traffic acquisition costs of $880 million to $920 million, below analyst expectations of $938.4 million.

Yahoo reported non-GAAP third-quarter earnings of 17 cents, compared to 15 cents a year ago — and better than expectations of 14 cents per share, based on analysts polled by S&P Global Market Intelligence.

The company reported net income of $163 million, compared to net income of $76.3 billion one year ago, surpassing expectations of $42 million. 

Revenue minus the cost of traffic acquisition fell 14% to $857 million, within Yahoo's guidance of $840 million to $880 million and in line with estimates of $860 million. The company reported revenue of $1 billion in the same period a year ago

Follow Mike Snider on Twitter: @MikeSnider


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