Yahoo beat third quarter earnings expectations--but that may not be enough to help the company close its proposed sale to Verizon.

Industry watchers have speculated that the deal could face trouble because of news in recent weeks that Yahoo user credentials had been hacked and that the company had scanned emails for U.S. intelligence.

The company posted earnings of 20 cents a share when analysts had predicted earnings of 14 cents a share.

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

Recode's Kara Swisher expressed skepticism the earnings reflected improved performance. "Wow, right? Well, no. While it looks like a big beat, this result is primarily due to cost cuts and not massive growth in its businesses. Adjusted Ebitda, which is a real measure of performance, was down to $229.2 million from $244.2 million. (Kudos to CFO Ken Goldman for making it look better than it is at Yahoo via cost cuts and creative accounting!)" she wrote in a post about Yahoo's earnings.

Besides, Forrester Research analyst Shar VanBoskirk said Yahoo's third quarter financial performance was irrelevant to the company's planned sale of its core assets for $4.8 billion to Verizon. The communications company's interest in Yahoo was for the assets and the brand of the struggling tech giant.

Both assets and brand, said VanBoskirk, are tarnished following a hack that exposed credentials of 500 million users and reports Yahoo had been scanning emails on behalf of U.S. intelligence. "The reason it matters so much for Yahoo is there's so much good will associated with the Yahoo brand," even despite five years of poor business performance, she said.

She said the company should have done more to address the hack and surveillance in its earnings report, or should have held an earnings call assuming that did not violate a quiet period around the planned sale.

Yahoo announced last week it would not hold an earnings call as part of reporting financial results, citing the pending sale of the company's core assets to Verizon as its reason for scrapping the call.

Aside from Mayer's assertion that Yahoo takes "deep responsibility in protecting our users," the company addressed questions around security with a slide showing relative consistency of user engagement in the mail feature and other areas before and after Yahoo notified users of the hack.

VanBoskirk said that if she were in Verizon's position, she would try to abandon the deal. Customer data Verizon could have used to better target users has already been compromised in the hack, she said. And regardless, an upcoming Federal Communications Commission (FCC) decision impacting Verizon could complicate the company's relationship with user data, she said.

The FCC is slated to vote Oct. 27 on new broadband privacy rules that according to Ars Technica, "will put broadband providers under a stricter privacy regime than the one imposed on websites like Google and Facebook, which are regulated separately by the Federal Trade Commission. The rules will require ISPs to get opt-in consent from consumers before sharing Web browsing data and other private information with advertisers and other third parties."

If Verizon did back out, it could precipitate a sale of the entirety of Yahoo--not just its core assets, according to the Forrester analyst. Most likely such a sale would be to a private equity company that would then divide up the assets, she said. To be sure, VanBoskirk said she does not know how likely it is Verizon would actually back out.

Verizon has reportedly sought a $1 billion discount on its planned purchase of Yahoo due to the cybersecurity breach.

Published on: Oct 18, 2016