SunTrust's Peck Has Increased Conviction About Yahoo! (YHOO) Proprietary Search Ambitions

SunTrust Robinson Humphrey analyst Robert Peck notes that details in a recent regulatory filing underscores Yahoo! (NASDAQ: YHOO) proprietary search ambitions.

Peck highlighted 3 points that adds to their conviction that Yahoo! may choose to invest in and operate both algorithmic and paid search on mobile and desktop going forward:

1) deal can be terminated after October 1, 2015;

2) Yahoo will only serve Microsoft (MSFT, $42,91, NR) algorithmic and paid search on 51% of results, freeing 49% for its own efforts (or partners); and

3) Microsoft will hire its own search sales force – while Yahoo maintains its own existing force. This appears to us a possible precursor to a split product.

Commenting on the implications, Peck said: "We and others in the investment community have long pointed to the fact that Yahoo! under-earns on a revenue per employee basis. Yahoo! earns 30% less per employee compared to AOL (AOL, $39.91, Neutral), and 70% less vs. Google (GOOGL, $544, Buy). We estimate a headcount reduction of ~15%, or 2,000 could save ~$250M, or 23% lift to EBITDA. If Ms. Mayer pursues the path of Yahoo! owned search, the potential impacts of any cuts would be muted. Yahoo!'s core has been weak over the past several years, and while the strength in MaVeNS is a positive, investments in search would likely suppress near term margin potential. That said, a partnership with Google would likely boost near term results."

He continued, "Yahoo!’s CEO Mayer has publicly stated on many occasions the importance of search for Yahoo – in fact, at the time of the announcement she stated "We firmly believe that search is still in its infancy… Search has, and will continue to be, an incredibly important part of Yahoo, and this new partnership represents a major step forward in our renaissance." As we discussed in our preview note yesterday, we believe Yahoo! may actively pursue its own search interests, which may be accretive in the long run, but will likely cost several hundred million dollars we estimate to run. Other key points not part of the announcement that investors should consider are 1) Mobile has been always been non-exclusive, enabling Yahoo! to be active; and 2) Yahoo! was still running algo search in Hong Kong and Taiwan until December 2013 (per 201310-K) – so the technology may be more updated than many realize."

The firm maintained a Buy rating and price target of $59 on YHOO.

For an analyst ratings summary and ratings history on Yahoo! click here. For more ratings news on Yahoo! click here.

Shares of Yahoo! closed at $44.66 yesterday.

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