Make No Mistake, Mozilla's Search Partnership Is a Big Deal for Yahoo!
By Eric Jackson - 11/20/14 - 2:57 PM EST
NEW YORK (TheStreet) -- Most people have yawned about the search partnership announced last night between Yahoo! and Mozilla, the maker of the Firefox browser. But it could be a big deal for Yahoo! investors and might lead to an increase of $11 per share in value over the next few months. Here's why.
According to one report, Google had been paying Mozilla (a non-profit) $300 million a year for the prior search partnership. When Google launched its own Chrome browser a few years ago, it's clear this upset Mozilla and this gave Yahoo! CEO Marissa Mayer her opportunity to go after this partnership.
But in hindsight, Google's decision to push Chrome has been the right one. In the desktop browser world, Chrome has grown from 15% in 2011 to 45% today. Over that time, Firefox's browser share has dropped from 30% to 19%, via StatCountet.
Mayer was able to sell Mozilla that Yahoo! won't compete with it as a browser and that she'll promote its products on Yahoo!.
The critics will say Firefox is yesterday's browser and it has no presence in mobile while Yahoo! is just picking up the scraps that have fallen off Google's table.
My response is that for Yahoo! -- and for Yahoo!'s stock price -- this still could be a real positive thing.
Firefox still has 19% share among desktop browsers. Yes, its share has dropped in recent years at the expense of Chrome but it's declining at a much slower rate than Microsoft's Internet Explorer. In fact, it's possible that Firefox might pass IE in share next year. Next year, Firefox still should hold close to that share.
U.S. desktop search is shrinking but not that much. For example, Google desktop search revenue topped out at $11 billion last year but it will still be $10.85 billion this year.
So how much Google desktop search revenue could Firefox have been responsible for this year? If you assume that it falls along browser share lines, $3 billion worth of search queries probably originated within a Firefox browser. That's meaningful.
Now that doesn't mean that Yahoo! is going to generate that kind of revenue from this new deal.
Today, Yahoo! has a 10% share of the U.S. desktop search market. That means it generates about $1.67 billion a year from U.S. search or $417 million a quarter. In the third quarter, Yahoo! generated $450 million in search revenue, which would suggest that more than 90% of its search revenue come from the U.S.
Search revenue is extremely important because it's highly profitable revenue.
We know that Yahoo! likely is paying at least $300 million a year to Mozilla, as Google did. They probably are paying even more. We also know that the financial terms of the deal are revenue sharing with certain revenue guarantees, according to a Reuters report. Revenue sharing does not seem to have been part of the old Google deal, according to past tax records for the Mozilla Foundation.
My guess is Yahoo! is paying something similar to the Google minimum with revenue sharing on the revenue generated from the relationship. I am also guessing that Yahoo! will promote Mozilla products on its Web sites. And Microsoft will be entitled to 12%-13% of the revenue from the searches as per its 2009 agreement with Yahoo!.
Assuming Firefox can get something like 17% desktop market share next year and that Yahoo! is paying Mozilla $400 million a year in revenue guarantees, Yahoo! should be able to generate $2 billion in incremental search revenue next year from this deal. The company might have agreed to share some of this with Mozilla, but the deal should still be very favorable to Yahoo! financially. (It will also help Yahoo! from the perspective of improving its search capabilities if it wants to go it alone in search next year as it will get a bunch of new search queries.)
All of Yahoo! search did $1.7 billion in revenue last year. It's possible this deal could double the size of this search business. This revenue is highly profitable so there's a chance this deal might add $1 billion in earnings before interest, taxes, depreciation and amortization next year to Yahoo! since the deal begins in December.
If it did, it would take Yahoo!'s Ebitda from $1.2 billion to $2.2 billion. At the moment, many Wall Street analysts assign a dirt cheap enterprise value to Ebitda ratio of five to six times for Yahoo!'s core business, or about $6.5 billion. At a much higher Ebitda like $2.2 billion -- and after a spinoff of the core business from the Asian equity stakes in a Reverse Morris Trust -- Wall Street might give a still discounted but more normalized multiple of eight times.
This means that Yahoo! would likely be valued at $17.6 billion instead of $6.5 billion. That means this partnership may, over the next year, add an additional $11/share in value to Yahoo!'s stock price.
It's not getting reflected in the Yahoo! stock price today, with shares up 28% for the year to date. Yahoo! is up only because Alibaba is also up today. However, make no mistake: This is a big deal for Yahoo