Verizon Wants More Data on Yahoo Breach

Verizon officials are not exactly yelling yahoo these days over their pending acquisition of Yahoo's operating business.

In the wake of Yahoo Inc. (Nasdaq: YHOO)'s stunning disclosure last month of a massive data security breach of about 500 million user accounts, Verizon Communications Inc. (NYSE: VZ) is now weighing its options for renegotiating the terms of the $4.8 billion deal signed three months ago. On the company's third-quarter earnings call with analysts this morning, Verizon CFO Fran Shammo said the process of evaluating the implications of the "extremely large breach" has just begun and could take quite a while as the company waits for Yahoo to complete its own security investigation. (See Verizon Sports Big Plans for Yahoo,)

"We are still evaluating what it means for the transaction," he said. "It will be a long process."

Verizon has been expecting to close the deal in the first quarter of next year, subject to approval by its shareholders and regulators. It's not yet clear whether that timing may now change because of the data breach investigation and potential new negotiations.

Verizon officials discussed the Yahoo security issue while reporting financial results that fell short of analyst expectations. In the third quarter, the company posted earnings of 89 cents per share on $30.9 billion in revenue, down from 99 cents per share on $33.2 billion in revenue in the year-ago period. As a result, Verizon shares were trading just above $49 a share late this morning, down about 2.5% for the day.

Despite the Yahoo problem, Verizon executives remain committed to their new digital media strategy. On the earnings call, they stressed the early progress that they're making in building AOL into an online advertising tech powerhouse. Shammo said AOL's ad tech business generated $48 million in revenue for the summer quarter, up 10% from the previous quarter, with the increase primarily driven by expanding programmatic capabilities and new data analytical tools.

"We believe we are strategically well positioned," said Shammo, who's retiring from Verizon at the end of the year after striking deals like the AOL and Yahoo acquisitions. "We have to think about new ways to monetize our capabilities and that's through advertising."

Turning to Verizon's other fledgling media assets, Shammo said Go90, the company's mobile video service, is seeing greater customer engagement after launching a new original series over the summer. He said average daily usage has now topped 30 minutes per user while less than 20% of the traffic is riding on Verizon's wireless network.

Verizon officials also boasted about their early progress on the related IoT and smart city fronts. After a flurry of deals in recent months, the company reported that its organic IoT revenues, led by telematics, rose 24% year-over-year to $217 million in Q3.

"These companies are still maturing," said Shammo, referring to the three new acquisitions -- Telogis, Fleetmatics and Sensity Systems. "We're expecting the ROI on them to happen very quickly."

On the more traditional wireline video end of the business, Verizon reported that it added 30,000 Fios Video subscribers in the quarter, down from 45,000 a year ago, as it continues to recover from its prolonged employee work stoppage in the spring. It now has nearly 4.7 million video customers, up about 63,000 over the last 12 months.

Verizon fared better on the broadband side of the business, adding 90,000 Fios Internet subscribers, down slightly from 96,000 in Q3 2015. As a result, it closed out the quarter with almost 5.6 million Fios Internet customers, up about 250,000 over the last year.

— Alan Breznick, Cable/Video Practice Leader, >Light Reading

KBode 10/31/2016 | 1:19:09 PM
Re: Looks like stalling Good point.

My understanding is Verizon wants a billion off the asking price, and a billion reserved for the inevitable lawsuits. Should walk away with a bit of a bargain if they can work that out. 
kq4ym 10/30/2016 | 10:46:08 AM
Re: Looks like stalling I wonder if a strategy to expect data breaches might be a new way for companies looking for re-notiation of terms to pending deals. Verizon may very well get a big discount on the Yahoo deal. And with the almost certain breaches eventually, a stalling game might be part of lots of acquisition deals coming in future years?
Mitch Wagner 10/21/2016 | 8:31:46 PM
Re: Looks like stalling Not like anybody's going to snatch the Yahoo jewel away from Verizon if Verizon waits. 
mendyk 10/21/2016 | 10:30:43 AM
Re: Looks like stalling One issue for Verizon is whether gains from its "digital" strategy will cover for what may be longer-term losses from its core business. Since the core stuff is orders of magnitude higher than its digital play in terms of revenue, it's hard to see how this works out in VZ's favor.
inkstainedwretch 10/20/2016 | 8:24:25 PM
Re: Looks like stalling The AOL thing is actually working for them in terms of subscribers and ad technology, but it's not adding nearly enough to the bottom line, so investors dismiss it as a disaster (Google "Worst acquisitions of all time" and VZ-AOL pops up on a lot of lists). Yahoo looks like AOL in quite a lot of ways -- it has nice assets that won't show up in a single line item on the balance sheet. So if I'm Verizon, it costs nothing to dither; in fact, dithering might end up saving a $1B or so, and that's not chump change even for Verizon.

Does Shammo really care if the Yahoo thing happens today or next Spring? Of course not.

--Brian Santo
Mitch Wagner 10/20/2016 | 4:13:40 PM
Re: Looks like stalling Why would they want to stall? Is Shammo having buyer's remorse, and hoping to make this his successor's problem?
inkstainedwretch 10/20/2016 | 3:14:49 PM
Shammo's Legacy Shammo will beg the board to wait until after he's gone. Successor Mathew Ellis will beg the board to complete the deal before he signs on.

I kid.

Sort of.

As a practical matter, the machinery that's been set into motion will need three or four months to grind to completion. IMO.

-- Brian Santo
Kelsey Ziser 10/20/2016 | 2:45:57 PM
Re: Looks like stalling Good point - do you think Shammo will close the deal or they'll draw it out until after he's retired?
inkstainedwretch 10/20/2016 | 1:28:23 PM
Looks like stalling No potential acquirer needs Yahoo. Yahoo was never going to be much more than a nice-to-have for anybody. And there can be nothing new about this data breach that can have a material affect on the acquisition. But the longer Verizon leaves Yahoo in limbo, the likelier Yahoo will slip into further disarray, which means it will likelier get cheaper to buy. If Verizon isn't just trying to drive down the purchase price, the only other possible reason for the delay is if Verizon is re-evaluating whether Yahoo's advertising operations are worth as much as it initially thought. Yahoo's 600 million monthly mobile users remain a justifiable reason to buy the company. 

-- Brian Santo.

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