Yahoo, Microsoft Extend Search Deal

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Yahoo Inc. (YHOO) and Microsoft Corp. (MSFT) have renewed their search deal that guarantees revenue for each search made by a Yahoo user using Microsoft’s search engine, Bing. Following the news, shares of Yahoo rose more than 3.00%.

The U.S. revenue-per-search guarantee (:RPS) agreement was initially struck in late 2009, renewed in 2011 and expired on Mar 31 this year. Effective Apr 1, the deal has been extended for another year, according to recent SEC filings made by Yahoo. According to the latest agreement, Microsoft will pay Yahoo a minimum amount per search on Yahoo's website.

The partnership is intended to create a competitive front versus Google Inc. (GOOG), the world’s leading search engine. But the partnership did not turn out as well as expected and resulted in market share losses for Yahoo. The company's revenues declined for three consecutive years before registering a small gain last year.

The deal is Yahoo's first agreement with Microsoft since Marissa Mayer took over as the CEO of the company in July. The extended deal could help the company improve its search revenues going forward. Last quarter, the company’s search revenues were up sequentially due to improvements in the quality of ads, better user experience and new ad products.

Recently, Yahoo signed a global contextual advertising deal with Google, according to which Google ads will appear on various Yahoo properties and certain co-branded sites. This will further help the company improve its search ad revenues.

However, Yahoo still has much to prove, given the growing success of archrival Google and Facebook (FB). Facebook has become extremely popular with users, so much so that it is already the most popular social networking platform.

The extended deal could have some positive impact and help Yahoo to generate additional dollars as Mayer’s efforts indicate possible improvements in Yahoo’s search and Display business.

Currently, Yahoo has a Zacks Rank #1 (Strong Buy) while Microsoft carries a Zacks Rank #4 (Sell).

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