Yahoo stumbles again in 3Q, raising stakes on Verizon deal

Posted October 18

— Yahoo stumbled through another rough patch in the third quarter, ramping up the pressure on the slumping internet company to complete its $4.8 billion sale to Verizon Communications.

The results released Tuesday represented Yahoo's first financial update since announcing in late July its deal to sell its digital operations to Verizon.

The numbers showed Yahoo is profiting from a cost-cutting program that has jettisoned 2,200 workers, or about one-fifth of its workforce, during the past year. The Sunnyvale, California, company earned $163 million, or 17 cents per share, more than doubling from the same time last year.

But Yahoo's revenue plunged 14 percent to $857 million after subtracting advertising commissions for the period covering July through September. It marks the fourth consecutive quarter that Yahoo's net revenue has dropped by at least 10 percent, a trend that management forecast will extend into the final three months of this year.

The ongoing erosion won't as matter as long as Yahoo can still fall into Verizon's arms.

The Verizon deal was put in jeopardy in late September when Yahoo disclosed that hackers had broken into its data centers and stolen email addresses, birth dates, answers to security questions, and other personal information from at least 500 million user accounts.

News of the breach raised the specter that people would become leery of Yahoo, causing them to use its services less frequently or abandon them entirely. If that were to happen, Yahoo's email and other online operations including sections devoted to news, sports, finance and entertainment would be worth less to Verizon than the $4.8 billion sale price.

As part of its earnings report, Yahoo also published charts showing usage of its services has held steady since the company dropped its bombshell.

"We remain very confident, not only in the value of our business, but also in the value Yahoo products bring to our users' lives," CEO Marissa Mayer said in a statement.

For the first time in her four-year reign, Mayer didn't hold a conference call or video presentation to review the quarterly results and field questions from analysts. Yahoo cited the pending deal with Verizon for remaining mum.

Verizon signaled it is reassessing the deal last week when its general counsel, Craig Silliman, told reporters that the company is trying to determine if the potential breakdown in Yahoo users' trust damaged the business. The breach also has exposed Yahoo to lawsuits that could saddle Verizon with bills for potential damages and other costs.

"I think we have a reasonable basis to believe right now that the (breach's) impact is material and we're looking to Yahoo to demonstrate to us the full impact," Silliman told reporters.

Yahoo is still investigating the circumstances underlying its security breakdown.

To compound its headaches, news reports published earlier this month revealed that Yahoo started scanning its users' incoming email last year at the behest of federal government officials looking for terrorist activity. In response to the reports, Yahoo described itself as a "law-abiding" company.

Even if it still buys Yahoo, New York-based Verizon could wind up negotiating a lower price, said Douglas Melsheimer, managing director of investment banking firm Bulger Partners.

"Verizon has tremendous leverage," Melsheimer said.

At the currently agreed upon price, the sale is worth about $5 per share to Yahoo shareholders.

Most of the company's value is locked up in stakes that Yahoo owns in Alibaba Group, China's e-commerce leader, and Yahoo Japan. Combined, those assets are worth about $30 billion, or $31.50 per share, after paying taxes on the sale of the holdings.

Yahoo's shares gained 57 cents to $42.25 in extended trading after the third-quarter report. The stock has fallen by about 5 percent since news of the security breach broke.


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