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What to Expect from Yahoo! (YHOO) this Earnings Season?


Yahoo! Inc. YHOO is set to report third-quarter fiscal 2016 results on Oct 18. Last quarter, the company posted a negative earnings surprise of 350%. The company has posted an average negative surprise of 50.72% in the preceding four quarters.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Yahoo is in the process of selling its core assets to Verizon for $4.8 billion, a move that can be considered as CEO Marissa Mayer's final effort to revive the company’s ailing fortunes. But the nightmare doesn’t seem to end as it continues to get embroiled in legal issues.

The company’s late admission of the massive 2014 cyber-attack is likely to affect the Verizon deal, especially since the disclosure triggered a number of notable incidents. Following the news, Yahoo was not only sued but also faced senators’ ire for the late confirmation.

The news that Yahoo developed a custom software program to scan all of its users’ incoming emails for particular information demanded by the FBI caused further uproar and fueled privacy concerns. A bipartisan group of 48 U.S. lawmakers have demanded a detailed explanation of the matter from Attorney General Loretta Lynch and Director of National Intelligence James Clapper.

Verizon's general counsel Craig Silliman confirmed in a statement that the company has received preliminary briefings but is pressing Yahoo for a demonstration of the full impact. Till that time, Verizon will keep its final decision on hold.

If the deal materializes, it will improve Yahoo’s cost structure. In the wake of all these troubles, the company has cancelled its conference call.

Yahoo provided limited guidance for the third quarter of 2016. Revenues are expected to be down in line with normal seasonality to $1.275-1.325 billion. The company expects TAC of $440 million, revenue on an ex-TAC basis of $840-880 million, depreciation and amortization of $125 million and SBC of $130 million. Management did not provide guidance for adjusted EBITDA and operating income because of difficulties in predicting certain items.

YAHOO! INC Price and EPS Surprise

Earnings Whispers

Our proven model does not conclusively show that Yahoo will beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 5 cents. Hence, the difference is 0.00%.

Zacks Rank: Yahoo has a Zacks Rank #3, which increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks, which you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

NVIDIA Corporation NVDA, with an Earnings ESP of +8.93% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Barracuda Networks, Inc. CUDA with an Earnings ESP of +25.00% and Zacks Rank #1.

Veeco Instruments Inc. VECO with an Earnings ESP of +17.86% and Zacks Rank #1.

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