Yahoo Is Cutting Costs Quicker Than Sales Are Declining

Yahoo should be used to struggling, having seemingly moved from one calamity to another for a number of years now. The business had put itself up for sale and attracted interest from a number of buyers, including America's two largest carriers by subscribers numbers: AT&T and Verizon Wireless. Ultimately, Verizon Wireless won out with a bid close to $5 billion for Yahoo's core businesses. Things seemed to be about to improve for Yahoo until the news broke that 500 million accounts had been hacked and potentially sensitive information leaked last year. When the story broke, there was not so much news or comment about the data loss and yesterday, Yahoo announced its third quarter results but declined to have the traditional conference call afterward. As such, this means that the Chief Executive Officer, Marissa Mayer, is saying nothing about the data breach.

It's likely that the main reason for this is she has been advised not to talk about the data hack: last week, Verizon's senior lawyer announced that having 500 million accounts hacked meant the original deal between Verizon and Yahoo was open to renegotiation. Verizon Wireless believe that Yahoo is or at least could be worth less than the original agreed $5 billion. At this juncture, however, it is difficult to determine the effect on the company's valuation with so little information available. In order to judge the likely impact on the business, investors would like to understand how the hackers obtained the information, if there were previous breaches, was Yahoo's corporate email also broken into and when did Mayer know about the hack? We need to wait for Yahoo to conduct an investigation and Verizon to assess the value of the business.

Meanwhile, Yahoo's business continues to struggle. Yahoo's reported earnings of 20 cents a share was notably higher than the expected 14 cents per share earning, but looking through the details this is because Yahoo has massively cut costs. The company had been talking about reducing costs for a number of months so this should not come as a huge surprise. Unfortunately, display advertising revenue was down by 7% and search engine revenue by 14%, which points towards a lack of confidence in the business from both advertisers (and their corporate clients) and consumers using the search engine. These drops were helped in part by improvements in the mobile, video and "native businesses," but overall business revenue was expected to fall to $862 million after allowing for partner payments. It dropped a little way below this to $858 million. Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, a key metric to determine business performance) dropped from $244.2 million to $229.2 million. This highlights that Yahoo's business has shed costs quicker than it has lost sales: it has become more efficient but is still selling less. Investors and especially Verizon now need to wait for Yahoo's data security investigation

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About the Author

David Steele

Senior Staff Writer
I grew up with 8-bit computers and moved into PDAs in my professional life, using a number of devices from early Windows CE clamshells and later. Today, my main devices are a Nexus 5X, a Sony Xperia Z Tablet and a coffee cup.
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