Yahoo: Microsoft deal contributes nearly a third of revenue

Ever since Yahoo signed a deal to let Microsoft power its online search services, the agreement has been an important source of revenue for the Sunnyvale Internet company. Now we know how important:

Yahoo, which previously reported the deal contributed more than 10 percent of its revenue, recently disclosed – under prodding from the SEC – that it was actually responsible for 31 percent of its revenue in the third quarter of 2013, and 30 percent of its revenue for the first nine months of the year. (The SEC’s prodding was revealed in regulatory filings released this week, which Bloomberg’s Brian Womack first deciphered.)

The disclosure (see page 27 of this filing) means that Yahoo, which has been struggling to revive its ailing online ad business, is heavily dependent on the deal, in which Microsoft provides the underlying algorithms for Yahoo searches and shares the revenue from Yahoo’s search-related advertising.

When it was signed in 2009, the deal was viewed as good for Yahoo because Microsoft agreed to provide a guaranteed level of revenue. But in recent months, there have been signs that Yahoo CEO Marissa Mayer has chafed at the arrangement, apparently feeling the terms could be better. The deal is set to run through 2020, although there are some provisions for ending it sooner.

While some might view Yahoo’s heavy reliance on Microsoft for revenue as a weakness, Wall Street doesn’t seem worried. Yahoo’s stock was approaching $40 on Tuesday, a high it hasn’t seen since 2006, largely because investors expect a big return on Yahoo’s investment in the Chinese e-commerce firm Alibaba, which is preparing for its own IPO.

RBC analyst Mark Mahaney raised his price target for Yahoo to $44 on Tuesday, citing Alibaba’s latest sales reports.

(Image of Yahoo CEO Marissa Mayer and CFO Ken Goldman from July 16 earnings webcast)

Brandon Bailey Brandon Bailey (281 Posts)

Brandon Bailey covers Google, Facebook and Yahoo for the San Jose Mercury News, reporting on the business and culture of the Internet.