As earnings beat, Yahoo says it's still preparing to merge with Verizon

Yahoo Q3 EPS beats consensus, revenue meets
Yahoo Q3 EPS beats consensus, revenue meets

Yahoo is continuing to prepare for its acquisition by Verizon and taking "deep responsibility" in protecting users, as a massive hacking looms over the deal.

"In addition to our continued efforts to strengthen our business, we are busy preparing for integration with Verizon," CEO Marissa Mayer said in the company's earnings release. "We remain very confident, not only in the value of our business, but also in the value Yahoo products bring to our users' lives."

Marissa Mayer
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The comments came as the company on Tuesday reported quarterly earnings that topped analysts' expectations and revenue that met estimates. Yahoo shares rose about 1.5 percent after hours, while Verizon stock was up slightly.

Verizon agreed in July to buy Yahoo for $4.8 billion, after Yahoo struggled to adopt "strategic alternatives" for many months amid scrutiny from activist investors. The deal is expected to close in the first quarter of 2017, subject to approval by Yahoo shareholders and regulators.

But an extensive data breach at the company could have a material impact on the deal, Verizon's general counsel told Reuters last week. A source told CNBC that Verizon is anxious to get more information so it knows what asset it is buying. Verizon did not immediately respond to a request for comment.

Yahoo revealed in September that the information of 500 million user accounts was stolen in late 2014, likely by a state actor. But the company showed that the number of messages sent and received on Yahoo mail actually ticked up after the notification of the breach.

Chart from Yahoo filings

"We take deep responsibility in protecting our users and the security of their information," Mayer said in Tuesday's earnings release. "We're working hard to retain their trust and are heartened by their continued loyalty as seen in our user engagement trends."

The internet technology and media company posted third-quarter earnings per share of 20 cents, adjusted, on revenue of $1.31 billion. Analysts polled by Thomson Reuters expected Yahoo to report earnings of about 14 cents a share on $1.31 billion in revenue. The results were up slightly from 15 cents per share on $1.27 billion in revenue in the year-ago period.

The company said in July it was expecting third-quarter revenue of $1.275 billion to $1.325 billion on a generally accepted accounting principles (GAAP) basis.

It comes as more details come to light about Yahoo's data breach, which built upon an August investigation of 200 million breached accounts.

After the revelations, numerous media outlets, includingThe New York Times and Reuters, probed Yahoo's attitude about cybersecurity and its compliance with government surveillance. A report from the New York Post, unconfirmed by CNBC, indicated that Verizon may demand a price negotiation on their deal.

"That is just total speculation — we still see a real value to the asset there," Lowell McAdam, CEO of Verizon, said earlier this month at the Internet Association's Virtuous Circle conference in Menlo Park, California. "But in fairness, we're still understanding what was going on, to define whether it's a material impact to the business or not. But the industrial logic of doing this merger still makes a lot of sense ... I'm hoping we can get through all this stuff and get to the close [of the deal]."

On Tuesday, Bloomberg reported that the lack of progress on Yahoo's hacking probe has "dismayed" Verizon. Yahoo reiterated to CNBC that it was continuing to work toward integration with Verizon.

"I think it would be very frightening if this deal fell apart, both for Yahoo and anybody else that wants to be picked up for a sum of its parts," Danielle Hughes, CEO of financial service firm Divine Capital Markets, told CNBC's "Closing Bell" on Tuesday. "But I don't think ... there's any indication of that. So it's just, 'Let's see what happens.'"

Despite a large user base, Yahoo has failed to cling to its share of digital ad revenue as rivals like Facebook and Alphabet continue to grow rapidly. Yahoo will capture 1.5 percent in total worldwide digital ad sales this year, down from 2.1 percent last year, eMarketer estimates.

The company's "Mavens" revenue, meant to measure forward-looking technologies like mobile, video, native and social, hit $524 million for the quarter, up from $422 million a year ago, the company said.

Search revenue was $703 million for the third quarter, up from $516 million on a GAAP basis from this time last year, and beating FactSet consensus estimates for $682.2 million. But the number of paid clicks decreased 22 percent year over year.

Display revenue was $476 million for the third quarter, a 7 percent year-over-year decline and below the $496.2 million expected by analysts surveyed by FactSet, as fewer ads were sold.

Looking ahead to the fourth quarter, the company expects revenue of $1.36 billion to $1.4 billion on a GAAP basis.

— Reporting by CNBC's Julia Boorstin.