How Morgan Stanley Analysts Are Reacting To Yahoo's Earnings

In a report published Wednesday, Morgan Stanley analysts maintained an Overweight rating on

, while raising the price target from $55 to $56. The company reported its 1Q ex-TAC revenue at $1.04bn, about 2 percent short of the consensus. Despite a 6 percent beat on Display, Yahoo's revenue was short of expectations on account of a 6 percent miss on Search (due to higher Mozilla TAC). The company's EBITDA came in-line with the Morgan Stanley estimate, on account of lower opex, while missing the consensus figure by 2 percent. The midpoint of Yahoo's 2Q ex-TAC rev and EBITDA guidance was short of the expectations, again on account of higher TAC. "The core turnaround continues, but YHOO remains focused on monetizing its assets, as it announced it has retained advisors to "determine the most promising opportunities to maximize value" around its 35.5% Yahoo Japan (YJ) stake," the analysts said. In the report Morgan Stanley noted, "The good news is we do not believe there is any reason YHOO couldn't spin out YJ similar to BABA. As such, we reduce the tax/liquidity discount we place on YJ to ~11% (in-line with BABA) from 20%, which adds ~$1 to our PT." Yahoo indicated that it intends to "look for sensible ways to realize the value" of its patent and intellectual property portfolio. The analysts believe that headcount reduction is a "material source" of core EBITDA upside. Yahoo made good progress on this front in 1Q, reducing headcount by about 9 percent. The company also indicated that it is "tightly managing headcount and overall cost structure" and that cash opex is expected to decline from $811mn in 1Q to $770mn- $790mn in 2Q. "There is more room to cut, as even after 1Q reductions, YHOO still has the 10th lowest revenue per employee in the group and another 11% of headcount reduction would drive flat '15 EBITDA or 21% upside to our current estimate," the report mentioned. The analysts expect Mozilla to continue to be a "tailwind to GAAP and (less so) net revenue growth" this year.