Why Yahoo's 2016 EBITDA Has 10% Upside

In a report published Tuesday, analysts at Morgan Stanley maintained their Overweight rating on

. The amended search agreement with

is expected to add 2.5 percent to Yahoo's net revenue growth and 10 percent to its EBITDA growth in 2016. After market close on April 20, the company filed an 8-K, which revealed details regarding its global search partnership with Microsoft. "Most importantly, the search revenue share YHOO receives from Microsoft will increase to 93% from 88% previously," the analysts said. According to Morgan Stanley the newly amended agreement is likely to lead incremental net search revenue of $68 million in 2015 and $103 million in 2016. "Assuming this revenue flows through at a 100% incremental EBITDA margin, it implies an additional $68mn EBITDA in 2015 (6.5% upside to our current estimates) and $103mn EBITDA in 2016 (10% upside to our current estimates)," the analysts added. There also is potential for cuts in the company's workforce with the termination of the sales exclusivity for Bing on July 1, 2015. So far Yahoo has been responsible for selling paid search ads on both Bing and Yahoo. The company now plans to transition premium advertisers for Bing to Microsoft, which should be completed by January 31, 2016. According to Morgan Stanley, "This potentially presents some opportunities for headcount reductions, which would also be positive for core earnings power."