e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-28018
YAHOO! INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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77-0398689
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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701 First Avenue
Sunnyvale, California 94089
(Address of principal executive
offices, including zip code)
Registrants telephone number, including area code:
(408) 349-3300
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o (Do
not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at April 30,
2008
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Common Stock, $0.001 par value
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1,375,835,884
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YAHOO!
INC.
Table of Contents
2
PART I
FINANCIAL INFORMATION
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Item 1.
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Condensed
Consolidated Financial Statements (unaudited)
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YAHOO!
INC.
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Three Months Ended
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March 31,
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March 31,
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2007
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2008
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(Unaudited, in thousands except per share amounts)
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Revenues
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$
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1,671,850
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$
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1,817,602
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Cost of revenues
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713,637
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755,083
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Gross profit
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958,213
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1,062,519
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Operating expenses:
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Sales and marketing
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367,419
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424,591
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Product development
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239,500
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305,606
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General and administrative
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155,165
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171,080
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Amortization of intangibles
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27,102
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23,740
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Strategic workforce realignment costs, net
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16,885
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Total operating expenses
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789,186
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941,902
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Income from operations
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169,027
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120,617
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Other income, net
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35,451
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23,662
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Income before income taxes, earnings in equity interests, and
minority interests
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204,478
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144,279
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Provision for income taxes
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(92,358
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)
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(56,973
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)
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Earnings in equity interests
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29,149
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454,782
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Minority interests in operations of consolidated subsidiaries
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1,155
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75
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Net income
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$
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142,424
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$
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542,163
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Net income per share basic
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$
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0.11
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$
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0.41
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Net income per share diluted
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$
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0.10
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$
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0.37
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Shares used in per share calculation basic
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1,352,476
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1,333,730
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Shares used in per share calculation diluted
(Note 2)
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1,418,225
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1,395,416
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Stock-based compensation expense by function:
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Cost of revenues
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$
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2,007
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$
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3,280
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Sales and marketing
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50,268
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65,538
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Product development
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48,300
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48,082
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General and administrative
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39,431
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20,389
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Strategic workforce realignment expense reversals
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(12,284
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)
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Total stock-based compensation expense
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$
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140,006
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$
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125,005
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
YAHOO!
INC.
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December 31,
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March 31,
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2007
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2008
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(Unaudited, in thousands
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except par values)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,513,930
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$
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2,341,205
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Short-term marketable debt securities
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487,544
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267,129
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Accounts receivable, net
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1,055,532
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1,039,957
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Prepaid expenses and other current assets
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180,716
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190,878
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Total current assets
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3,237,722
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3,839,169
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Long-term marketable debt securities
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361,998
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239,428
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Property and equipment, net
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1,331,632
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1,363,475
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Goodwill
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4,002,030
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4,156,598
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Intangible assets, net
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611,497
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651,774
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Other long-term assets
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503,945
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221,594
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Investments in equity interests
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2,180,917
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2,953,765
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Total assets
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$
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12,229,741
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$
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13,425,803
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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176,162
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$
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134,133
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Accrued expenses and other current liabilities
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1,006,188
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1,053,271
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Deferred revenue
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368,470
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495,999
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Short-term debt
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749,628
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Total current liabilities
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2,300,448
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1,683,403
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Long-term deferred revenue
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95,129
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307,191
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Long-term debt
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582,954
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Other long-term liabilities
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28,086
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25,693
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Deferred and other long-term tax liabilities, net
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260,993
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314,415
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Commitments and contingencies (Note 12)
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Minority interests in consolidated subsidiaries
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12,254
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12,179
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Stockholders equity:
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Preferred stock, $0.001 par value; 10,000 shares
authorized; none issued or outstanding
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Common stock, $0.001 par value; 5,000,000 shares
authorized; 1,534,893 and 1,554,569 shares issued,
respectively, and 1,330,828 and 1,346,477 shares
outstanding, respectively
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1,527
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1,548
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Additional paid-in capital
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9,937,010
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10,329,985
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Treasury stock at cost, 204,065 and 208,092 shares,
respectively
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(5,160,772
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)
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(5,257,864
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)
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Retained earnings
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4,423,864
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4,966,027
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Accumulated other comprehensive income
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331,202
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460,272
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Total stockholders equity
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9,532,831
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10,499,968
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Total liabilities and stockholders equity
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$
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12,229,741
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$
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13,425,803
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
YAHOO!
INC.
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Three Months Ended
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March 31,
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March 31,
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2007
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2008
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(Unaudited, in thousands)
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income
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$
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142,424
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$
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542,163
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation
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94,509
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117,557
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Amortization of intangible assets
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56,493
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69,954
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Stock-based compensation expense
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140,006
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137,289
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Stock-based strategic workforce realignment expense reversals
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(12,284
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)
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Tax benefits from stock-based awards
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67,691
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Excess tax benefits from stock-based awards
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(52,069
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)
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Deferred income taxes
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(42,300
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)
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29,636
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Earnings in equity interests
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(29,149
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)
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(454,782
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)
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Minority interests in operations of consolidated subsidiaries
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(1,155
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)
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(75
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)
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Gains from sales of investments, assets, and other, net
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(2,857
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)
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(3,307
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)
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Changes in assets and liabilities, net of effects of
acquisitions:
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Accounts receivable, net
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40,214
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27,180
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Prepaid expenses and other
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13,358
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(4,446
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)
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Accounts payable
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30,980
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(44,343
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)
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Accrued expenses and other liabilities
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(34,722
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)
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46,235
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Deferred revenue
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11,277
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335,528
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Net cash provided by operating activities
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434,700
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786,305
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Acquisition of property and equipment, net
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(118,019
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)
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(139,793
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)
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Purchases of marketable debt securities
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(570,287
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)
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(32,757
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)
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Proceeds from sales and maturities of marketable debt securities
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727,996
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376,542
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Acquisitions, net of cash acquired
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(11,579
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)
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(166,289
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)
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Purchases of intangible assets
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(6,570
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)
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(8,858
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)
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Other investing activities, net
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(10,435
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)
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Net cash provided by investing activities
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21,541
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18,410
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from issuance of common stock
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71,922
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126,570
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Repurchases of common stock
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(595,006
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)
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(79,236
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)
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Structured stock repurchases, net
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(250,000
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)
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Excess tax benefits from stock-based awards
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52,069
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Tax withholdings related to net share settlements of restricted
stock awards and restricted stock units
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(52,493
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)
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|
|
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Net cash used in financing activities
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(721,015
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)
|
|
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(5,159
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)
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|
|
|
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Effect of exchange rate changes on cash and cash equivalents
|
|
|
3,981
|
|
|
|
27,719
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Net change in cash and cash equivalents
|
|
|
(260,793
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)
|
|
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827,275
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|
Cash and cash equivalents at beginning of period
|
|
|
1,569,871
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|
|
|
1,513,930
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|
|
|
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Cash and cash equivalents at end of period
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$
|
1,309,078
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|
|
$
|
2,341,205
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
YAHOO!
INC.
Condensed Consolidated Statements of Cash
Flows (Continued)
Supplemental
cash flow disclosures:
During the three months ended March 31, 2008, the holders
of the Companys zero coupon senior convertible notes (the
Notes) converted $167 million of the Notes into
8.1 million shares of Yahoo! common stock. See
Note 9 Long-Term Debt and
Note 17 Subsequent Events for
additional information.
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|
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|
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|
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Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
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|
|
2007
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Acquisition-related activities:
|
|
|
|
|
|
|
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|
Cash paid for acquisitions
|
|
$
|
15,873
|
|
|
$
|
166,546
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|
Cash acquired in acquisitions
|
|
|
(4,294
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,579
|
|
|
$
|
166,289
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock and vested stock-based awards issued
in connection with acquisitions
|
|
$
|
35,004
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See Note 3 Acquisitions for
additional information.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
YAHOO!
INC.
(unaudited)
|
|
Note 1
|
THE
COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The Company. Yahoo! Inc., together with
its consolidated subsidiaries (Yahoo! or the
Company), is a leading global Internet brand and one
of the most trafficked Internet destinations worldwide. Yahoo!
is focused on powering its communities of users, advertisers,
publishers, and developers by creating indispensable experiences
built on trust. To users, Yahoo! provides owned and operated
online properties and services (Yahoo! Properties,
Offerings, or Owned and Operated
sites). Yahoo! also extends its marketing platform and
access to Internet users beyond Yahoo! Properties through its
distribution network of third-party entities (referred to as
Affiliates) who have integrated the Companys
advertising offerings into their Websites (referred to as
Affiliate sites) or their other offerings. To
advertisers and publishers, Yahoo! provides a range of marketing
solutions and tools that enable businesses to reach users who
visit Yahoo! Properties and its Affiliate sites. Publishers,
such as eBay Inc., WebMD, Cars.com, Forbes.com, and the
Newspaper Consortium (the Companys strategic partnership
with a consortium of more than 20 leading United States
(U.S.) newspaper publishing companies), are a subset
of its Affiliates and are primarily Websites and search engines
that attract users by providing content of interest, presented
on Web pages that have space for advertisements. To developers,
Yahoo! provides an innovative and easily accessible array of Web
Services and Application Programming Interfaces
(APIs), technical resources, tools, and channels to
market.
Basis of Presentation. The condensed
consolidated financial statements include the accounts of Yahoo!
Inc. and its majority-owned or otherwise controlled
subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in entities in
which the Company can exercise significant influence, but does
not own a majority equity interest or otherwise control, are
accounted for using the equity method and are included as
investments in equity interests on the condensed consolidated
balance sheets. The Company has included the results of
operations of acquired companies from the closing date of the
acquisition. Certain prior period amounts have been
reclassified to conform to the current period presentation.
The accompanying unaudited condensed consolidated interim
financial statements reflect all adjustments, consisting of only
normal recurring items, which, in the opinion of management, are
necessary for a fair statement of the results of operations for
the periods shown. The results of operations for such periods
are not necessarily indicative of the results expected for the
full year or for any future periods.
The preparation of condensed consolidated financial statements
in conformity with generally accepted accounting principles in
the United States (GAAP) requires management to make
estimates, judgments, and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses and
related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including
those related to uncollectible receivables, the useful lives of
long-lived assets including property and equipment, investment
fair values, goodwill and other intangible assets, investments
in equity interests, income taxes, and contingencies. In
addition, the Company uses assumptions when employing the
Black-Scholes option valuation model to calculate the fair value
of stock-based awards granted. The Company bases its estimates
of the carrying value of certain assets and liabilities on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, when these
carrying values are not readily available from other sources.
Actual results may differ from these estimates.
These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and
related notes included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2007. Certain information
and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed
or omitted pursuant to such rules and regulations. The
condensed consolidated balance sheet as of December 31,
2007 was derived from the Companys audited financial
statements for the year ended December 31, 2007, but does
not include all disclosures required by GAAP. However, the
Company believes the disclosures are adequate to make the
information presented not misleading.
7
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
Recent
Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP)
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
FAS 157-2),
which delays the effective date of Statement of Financial
Accounting Standards (SFAS) No. 157, Fair
Value Measurements (SFAS 157) for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) for fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of
this FSP. The Company is currently evaluating the impact of
adopting FSP
FAS 157-2
for non-financial assets and non-financial liabilities on its
consolidated financial position, cash flows, and results of
operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141R) and SFAS No. 160,
Accounting and Reporting of Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB 51
(SFAS 160), which will change the accounting
for and reporting of business combination transactions and
noncontrolling interests in consolidated financial statements.
SFAS 141R and SFAS 160 will be effective for the
Company on January 1, 2009. The Company is currently
evaluating the impact of adopting SFAS 141R and
SFAS 160 on its consolidated financial position, cash
flows, and results of operations.
|
|
Note 2
|
BASIC AND
DILUTED NET INCOME PER SHARE
|
Basic net income per share is computed using the weighted
average number of common shares outstanding during the period,
excluding any unvested restricted stock that is subject to
repurchase. Diluted net income per share is computed using the
weighted average number of common shares and, if dilutive,
potential common shares outstanding during the period.
Potential common shares consist of unvested restricted stock and
restricted stock units, collectively referred to as
restricted stock awards (using the treasury stock
method), the incremental common shares issuable upon the
exercise of stock options (using the treasury stock method) and
the conversion of the Companys Notes (using the
if-converted method). Potentially dilutive securities
representing approximately 132 million and 136 million
shares of common stock for the three months ended March 31,
2007 and 2008, respectively, were excluded from the computation
of diluted earnings per share for these periods because their
effect would have been anti-dilutive. Potentially dilutive
securities for the three months ended March 31, 2007 and
2008 consist of outstanding stock options, shares to be issued
under the employee stock purchase plan, and restricted stock
awards. The Company also takes into account the effect on
consolidated net income per share of potentially dilutive
securities of entities in which the Company holds equity
interests that are accounted for using the equity method.
See Note 9 Long-Term Debt for
additional information related to the Companys Notes.
8
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
The following table sets forth the computation of basic and
diluted net income per share (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income for basic calculation
|
|
$
|
142,424
|
|
|
$
|
542,163
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
1,356,406
|
|
|
|
1,335,986
|
|
Weighted average unvested restricted stock subject to repurchase
|
|
|
(3,930
|
)
|
|
|
(2,256
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
1,352,476
|
|
|
|
1,333,730
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.11
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income for basic calculation
|
|
$
|
142,424
|
|
|
$
|
542,163
|
|
Effect of dilutive securities issued by equity investees
|
|
|
|
|
|
|
(26,447
|
)
|
|
|
|
|
|
|
|
|
|
Net income for diluted calculation
|
|
$
|
142,424
|
|
|
$
|
515,716
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
1,352,476
|
|
|
|
1,333,730
|
|
Weighted average effect of Yahoo! dilutive securities:
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
4,883
|
|
|
|
10,774
|
|
Stock options
|
|
|
24,291
|
|
|
|
14,792
|
|
Convertible notes
|
|
|
36,575
|
|
|
|
36,120
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
1,418,225
|
|
|
|
1,395,416
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
0.10
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
Transactions
completed in 2007
Right Media. On July 11, 2007, the
Company acquired Right Media Inc. (Right Media), an
online advertising exchange. The Company believes the
acquisition of Right Media is an integral piece of the
Companys strategy to build the industrys leading
advertising and publishing network and is a key step in
executing the Companys long-term strategy to change how
online advertisers and publishers connect to their audiences in
one open advertising community. The purchase price exceeded the
fair value of net tangible and intangible assets acquired from
Right Media and as a result, the Company recorded goodwill in
connection with this transaction. Under the terms of the
agreement, the Company acquired all of the remaining equity
interests (including all outstanding options and restricted
stock units) in Right Media not already owned by the Company.
Right Media stockholders were paid in approximately equal parts
cash and shares of Yahoo! common stock (approximately
8 million shares) and outstanding Right Media options and
restricted stock units were assumed. Assumed Right Media
options and restricted stock units are exercisable for, or will
settle in, shares of Yahoo! common stock. The acquisition
followed the Companys 20 percent investment in Right
Media in October 2006.
9
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
The total purchase price of $526 million consisted of
$246 million in cash consideration, $237 million in
equity consideration, $40 million for the initial
20 percent investment, and $3 million of direct
transaction costs. The $246 million of total cash
consideration less cash acquired of $16 million resulted in
a net cash outlay of $230 million. In connection with the
acquisition, the Company issued stock-based awards valued at
$177 million which will be recognized as stock-based
compensation expense as the awards vest over a period of up to
four years.
The preliminary allocation of the purchase price of the assets
acquired and liabilities assumed based on their fair values was
as follows (in thousands):
|
|
|
|
|
Cash acquired
|
|
$
|
15,508
|
|
Other tangible assets acquired
|
|
|
26,762
|
|
Deferred tax assets
|
|
|
8,422
|
|
Amortizable intangible assets:
|
|
|
|
|
Customer contracts and related relationships
|
|
|
42,300
|
|
Developed technology and patents
|
|
|
42,400
|
|
Trade name, trademark, and domain name
|
|
|
19,200
|
|
Goodwill
|
|
|
440,218
|
|
|
|
|
|
|
Total assets acquired
|
|
|
594,810
|
|
Liabilities assumed
|
|
|
(27,678
|
)
|
Deferred income taxes
|
|
|
(41,560
|
)
|
|
|
|
|
|
Total
|
|
$
|
525,572
|
|
|
|
|
|
|
The amortizable intangible assets have useful lives not
exceeding seven years and a weighted average useful life of six
years. No amounts have been allocated to in-process research
and development and $440 million has been allocated to
goodwill. Goodwill represents the excess of the purchase price
over the fair value of the net tangible and intangible assets
acquired and is not deductible for tax purposes. The goodwill
recorded in connection with this acquisition is included in the
U.S. segment. The Company may make additional adjustments
to the purchase price allocation related to goodwill and
tangible assets acquired.
Zimbra. On October 4, 2007, the
Company acquired Zimbra, Inc. (Zimbra), a provider
of e-mail
and collaboration software. The Company believes the
acquisition of Zimbra will further strengthen its position in
Web mail and expand the Companys presence in universities,
small and medium-sized businesses, and service provider
partners. The purchase price exceeded the fair value of net
tangible and intangible assets acquired from Zimbra and as a
result, the Company recorded goodwill in connection with this
transaction. Under the terms of the agreement, the Company
acquired all of the equity interests (including all outstanding
options and restricted stock units) in Zimbra. Zimbra
stockholders were paid in cash. Outstanding Zimbra options and
restricted stock units were assumed and are exercisable for, or
will settle in, shares of Yahoo! common stock.
The total purchase price of $302 million consisted of
$290 million in cash consideration, $11 million in
equity assumed, and $1 million of direct transaction
costs. The $290 million of total cash consideration less
cash acquired of $11 million resulted in a net cash outlay
of $279 million. In connection with the acquisition, the
Company issued stock-based awards valued at $38 million
which is being recognized as stock-based compensation expense as
the awards vest over a period of up to four years.
10
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
The preliminary allocation of the purchase price of the assets
acquired and liabilities assumed based on their fair values was
as follows (in thousands):
|
|
|
|
|
Cash acquired
|
|
$
|
10,663
|
|
Other tangible assets acquired
|
|
|
18,526
|
|
Amortizable intangible assets:
|
|
|
|
|
Customer contracts and related relationships
|
|
|
13,200
|
|
Developed technology and patents
|
|
|
65,400
|
|
Trade name, trademark, and domain name
|
|
|
700
|
|
Goodwill
|
|
|
244,687
|
|
|
|
|
|
|
Total assets acquired
|
|
|
353,176
|
|
Liabilities assumed
|
|
|
(19,003
|
)
|
Deferred income taxes
|
|
|
(31,720
|
)
|
|
|
|
|
|
Total
|
|
$
|
302,453
|
|
|
|
|
|
|
The amortizable intangible assets have useful lives not
exceeding seven years and a weighted average useful life of four
years. No amounts have been allocated to in-process research
and development and $245 million has been allocated to
goodwill. Goodwill represents the excess of the purchase price
over the fair value of the net tangible and intangible assets
acquired and is not deductible for tax purposes. The goodwill
recorded in connection with this acquisition is included in the
U.S. segment. The Company may make additional adjustments
to the purchase price allocation related to goodwill and
tangible assets acquired.
BlueLithium. On October 15, 2007,
the Company acquired BlueLithium, Inc.
(BlueLithium), an online global ad network. The
Company believes that BlueLithium complements the Companys
leading advertising tools and capabilities. The purchase price
exceeded the fair value of the net tangible and intangible
assets acquired from BlueLithium and as a result, the Company
recorded goodwill in connection with this transaction. Under
the terms of the agreement, the Company acquired all of the
equity interests (including all outstanding options and
restricted stock units) in BlueLithium. BlueLithium
stockholders were paid in cash. Outstanding BlueLithium options
and restricted stock units were assumed and will be exercisable
for, or will settle in, shares of Yahoo! common stock.
The total purchase price of $255 million consisted of
$245 million in cash consideration, $8 million in
equity assumed and $2 million of direct transaction costs.
The $245 million of total cash consideration less cash
acquired of $10 million resulted in a net cash outlay of
$235 million. In connection with the acquisition, the
Company issued stock-based awards valued at $47 million
which is being recognized as stock-based compensation expense as
the awards vest over a period of up to four years.
11
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
The preliminary allocation of the purchase price of the assets
acquired and liabilities assumed based on their fair values was
as follows (in thousands):
|
|
|
|
|
Cash acquired
|
|
$
|
10,235
|
|
Other tangible assets acquired
|
|
|
14,212
|
|
Amortizable intangible assets:
|
|
|
|
|
Customer contracts and related relationships
|
|
|
30,300
|
|
Developed technology and patents
|
|
|
11,000
|
|
Trade name, trademark, and domain name
|
|
|
100
|
|
In-process research and development
|
|
|
200
|
|
Goodwill
|
|
|
224,540
|
|
|
|
|
|
|
Total assets acquired
|
|
|
290,587
|
|
Liabilities assumed
|
|
|
(18,824
|
)
|
Deferred income taxes
|
|
|
(16,640
|
)
|
|
|
|
|
|
Total
|
|
$
|
255,123
|
|
|
|
|
|
|
The amortizable intangible assets have useful lives not
exceeding six years and a weighted average useful life of five
years. $225 million has been allocated to goodwill.
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and intangible assets acquired
and is not deductible for tax purposes. The goodwill recorded
in connection with this acquisition is included in the U.S.
($143 million) and International ($82 million)
segments. The Company may make additional adjustments to the
purchase price allocation related to goodwill and tangible
assets acquired.
Other Acquisitions Business
Combinations. During the year ended
December 31, 2007, the Company acquired two other companies
which were accounted for as business combinations. The total
purchase price for these two acquisitions was $108 million
and consisted of $106 million in cash consideration and
$2 million of direct transaction costs. The total cash
consideration of $106 million less cash acquired of
$5 million resulted in net cash outlay of
$101 million. Of the purchase price, $74 million was
allocated to goodwill, $33 million to amortizable
intangible assets, $5 million to tangible assets,
$5 million to cash acquired, and $9 million to net
assumed liabilities. Goodwill represents the excess of the
purchase price over the fair value of the net tangible and
intangible assets acquired and is not deductible for tax
purposes.
Other Acquisitions Asset
Acquisitions. During the year ended
December 31, 2007, the Company acquired five companies
which were accounted for as asset acquisitions. The total
purchase price for these acquisitions was $61 million and
consisted of $23 million in cash consideration,
$35 million in equity consideration, $2 million of
assumed liabilities, and $1 million of direct transaction
costs. The total cash consideration of $23 million less
cash acquired of $3 million resulted in a net cash outlay
of $20 million. For accounting purposes, approximately
$85 million was allocated to amortizable intangible assets,
$29 million to net assumed liabilities, primarily deferred
income tax liabilities, $2 million to tangible assets, and
$3 million to cash acquired. In connection with these
acquisitions, the Company also issued stock-based awards valued
at $19 million that will be recognized as stock-based
compensation expense over the next three years.
Transactions
completed in 2008
Maven. On February 11, 2008, the
Company acquired Maven Networks, Inc. (Maven), a
leading online video platform provider. The Company believes
that Maven will assist the Company in expanding state-of-the-art
consumer video and advertising experiences on Yahoo! and the
Companys network of leading premium video publishers
across the Web. The purchase price exceeded the fair value of
the net tangible and intangible assets acquired from Maven and
as a result, the Company recorded goodwill in connection with
this transaction. Under
12
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
the terms of the agreement, the Company acquired all of the
equity interests (including all outstanding options and
restricted stock units) in Maven. Maven stockholders were paid
in cash. Outstanding unvested Maven options and restricted
stock units were assumed and will be exercisable for, or will
settle in, shares of Yahoo! common stock.
The total purchase price of $143 million consisted of
$141 million in cash consideration and $2 million of
direct transaction costs. In connection with the acquisition,
the Company issued stock-based awards valued at $21 million
which is being recognized as stock-based compensation expense as
the awards vest over a period of up to four years.
The preliminary allocation of the purchase price of the assets
acquired and liabilities assumed based on their fair values was
as follows (in thousands):
|
|
|
|
|
Cash acquired
|
|
$
|
257
|
|
Other tangible assets acquired
|
|
|
16,869
|
|
Amortizable intangible assets:
|
|
|
|
|
Customer contracts and related relationships
|
|
|
7,100
|
|
Developed technology and patents
|
|
|
57,100
|
|
Trade name, trademark, and domain name
|
|
|
1,200
|
|
Goodwill
|
|
|
87,551
|
|
|
|
|
|
|
Total assets acquired
|
|
|
170,077
|
|
Liabilities assumed
|
|
|
(3,802
|
)
|
Deferred income taxes
|
|
|
(23,485
|
)
|
|
|
|
|
|
Total
|
|
$
|
142,790
|
|
|
|
|
|
|
The amortizable intangible assets have useful lives not
exceeding six years and a weighted average useful life of five
years. No amounts have been allocated to in-process research
and development and $88 million has been allocated to
goodwill. Goodwill represents the excess of the purchase price
over the fair value of the net tangible and intangible assets
acquired and is not deductible for tax purposes. The goodwill
recorded in connection with this acquisition is included in the
U.S. segment. The Company may make additional adjustments
to the purchase price allocation related to goodwill and
tangible assets acquired.
During the three months ended March 31, 2008, the Company
also completed immaterial asset acquisitions that did not
qualify as business combinations.
The results of operations for Right Media, Zimbra, BlueLithium,
and certain other business combinations have been included in
the Companys condensed consolidated statements of
operations since the completion of the acquisitions in 2007.
The following unaudited pro forma financial information presents
the combined results of the Company and the 2007 acquisitions as
if the acquisitions had occurred at the beginning of 2007 (in
thousands, except per share amounts):
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2007
|
|
Net revenues
|
|
$
|
1,705,014
|
|
Net income
|
|
$
|
100,497
|
|
Net income per share basic
|
|
$
|
0.07
|
|
Net income per share diluted
|
|
$
|
0.07
|
|
The above unaudited pro forma financial information includes
adjustments for interest income on cash disbursed for the
acquisitions, amortization of identifiable intangible assets,
stock-based compensation expense, and related tax effects. Pro
forma disclosures for the Companys 2008 business
combinations were not significant.
13
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
|
|
Note 4
|
INVESTMENTS
IN EQUITY INTERESTS
|
The following table summarizes the Companys investments in
equity interests (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Ownership
|
|
|
Alibaba Group
|
|
$
|
1,440,278
|
|
|
$
|
2,139,584
|
|
|
|
44
|
%
|
Alibaba.com
|
|
|
100,804
|
|
|
|
101,706
|
|
|
|
1
|
%
|
Yahoo! Japan
|
|
|
636,164
|
|
|
|
708,480
|
|
|
|
33
|
%
|
Other
|
|
|
3,671
|
|
|
|
3,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,180,917
|
|
|
$
|
2,953,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Investment in Alibaba Group. As
of March 31, 2008, the Companys ownership interest in
Alibaba Group Holding Limited (Alibaba Group) was
44 percent compared to 43 percent as of
December 31, 2007. The 1 percent increase in
ownership interest is due to a net increase in ownership
interest resulting from the exchange of certain Alibaba Group
shares previously held by employees for shares in Alibaba.com
Limited, the business-to-business e-commerce subsidiary of
Alibaba Group (Alibaba.com), as further described
below, offset by a decrease in ownership interest resulting from
the exercise of Alibaba Groups employee stock options.
In the initial public offering (IPO) of Alibaba.com,
Alibaba Group sold an approximate 27 percent interest in
Alibaba.com through the issuance of new Alibaba.com shares, the
sale of previously held shares in Alibaba.com, and the exchange
of certain Alibaba Group shares previously held by Alibaba Group
employees for shares in Alibaba.com, resulting in a gain on
disposal of interests in Alibaba.com. Accordingly, in the first
quarter of 2008, the Company recorded a net non-cash gain of
$401 million, net of tax, within earnings in equity
interests.
As of March 31, 2008, the difference between the
Companys carrying value of its 44 percent investment
in Alibaba Group and its proportionate share of the net assets
is summarized as follows (in thousands):
|
|
|
|
|
Carrying value of investment
|
|
$
|
2,139,584
|
|
Proportionate share of net assets
|
|
|
1,591,577
|
|
|
|
|
|
|
Excess of carrying value of investment over proportionate share
of net assets
|
|
$
|
548,007
|
|
|
|
|
|
|
The excess carrying value has been primarily assigned to:
|
|
|
|
|
Goodwill
|
|
$
|
502,662
|
|
Amortizable intangible assets
|
|
|
46,558
|
|
Deferred income taxes
|
|
|
(1,213
|
)
|
|
|
|
|
|
Total
|
|
$
|
548,007
|
|
|
|
|
|
|
The amortizable intangible assets have useful lives not
exceeding seven years and a weighted average useful life of
approximately five years. No amount has been allocated to
in-process research and development. Goodwill is not deductible
for tax purposes.
14
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
The following table presents Alibaba Groups financial
information, as derived from the Alibaba Group condensed
consolidated financial statements, which includes summary
operating information for the three months ended
December 31, 2006 and 2007 and summary balance sheet
information as of September 30, 2007 and December 31,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2006
|
|
2007
|
|
Operating
data:(1)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
60,998
|
|
|
$
|
97,648
|
|
Gross profit
|
|
$
|
40,288
|
|
|
$
|
62,421
|
|
Loss from operations
|
|
$
|
(32,074
|
)
|
|
$
|
(27,419
|
)
|
Net
(loss)/income(2)
|
|
$
|
(26,898
|
)
|
|
$
|
1,883,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2007
|
|
2007
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
723,609
|
|
|
$
|
2,519,488
|
|
Long-term assets
|
|
$
|
1,943,425
|
|
|
$
|
1,803,660
|
|
Current liabilities
|
|
$
|
452,413
|
|
|
$
|
594,637
|
|
Long-term liabilities
|
|
$
|
15,369
|
|
|
$
|
14,972
|
|
|
|
|
(1)
|
|
The Company records its share of the results of Alibaba Group
one quarter in arrears within earnings in equity interests in
its condensed consolidated statements of income. |
|
(2)
|
|
The net income of $1.9 billion for the three months ended
December 31, 2007 is primarily due to Alibaba Groups
sale of an approximate 27 percent ownership interest in
Alibaba.com in Alibaba.coms IPO. |
The Company also has commercial arrangements with Alibaba Group
to provide technical, development, and advertising services.
For the three months ended March 31, 2007 and 2008, these
transactions were not material.
Equity Investment in Alibaba.com
Limited. As part of the November 6, 2007
IPO on the Hong Kong Stock Exchange of Alibaba.com, the Company
purchased an approximate 1 percent direct interest in
Alibaba.com for a total purchase price of approximately
$101 million, including $1 million of transaction
costs. The investment in Alibaba.com is being accounted for
using the equity method due to the Companys investment in
Alibaba Group, which has a controlling interest in Alibaba.com.
The total investment is classified as part of the investment in
equity interests balance in the condensed consolidated balance
sheet. The Company records its share of the results of
Alibaba.com one quarter in arrears within earnings in equity
interests in the condensed consolidated statements of income.
As of March 31, 2008, the difference between the
Companys carrying value of its investment in Alibaba.com
of $102 million and its proportionate share of the net
assets of Alibaba.com is $96 million. This excess carrying
value has been primarily assigned to goodwill and amortizable
intangible assets. The fair value of the Companys
approximate 1 percent ownership in Alibaba.com, based upon
the quoted stock price as of March 31, 2008 was
approximately $119 million. The differences between
generally accepted accounting principles in the U.S. and
International Financial Reporting Standards did not materially
impact the amounts reflected in the Companys condensed
consolidated financial statements.
Equity Investment in Yahoo! Japan. The
investment in Yahoo! Japan Corporation (Yahoo!
Japan) is being accounted for using the equity method and
the total investment is classified as a part of the investments
in equity interests balance on the condensed consolidated
balance sheets. The fair value of the Companys
approximate 33 percent ownership interest in Yahoo! Japan,
based upon the quoted stock price as of March 31, 2008 was
approximately $11 billion.
15
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
On September 1, 2007, the Company commenced a commercial
arrangement with Yahoo! Japan in which the Company provides
advertising and search marketing services to Yahoo! Japan for a
service fee and exited the pre-existing Affiliate arrangement.
The Company no longer recognizes marketing services revenue and
traffic acquisition costs (TAC) for the delivery of
sponsored search results and payments to Affiliates in Japan as
Yahoo! Japan is responsible for the fulfillment of all
advertiser and Affiliate services. Under this arrangement, the
Company records marketing services revenue from Yahoo! Japan for
the provision of search marketing services based on a percentage
of advertising revenues earned by Yahoo! Japan for the delivery
of sponsored search results. These arrangements resulted in a
net cost of approximately $78 million for the three months
ended March 31, 2007 and revenues of approximately
$73 million for the three months ended March 31,
2008. As of December 31, 2007 and March 31, 2008, the
Company had a net receivable balance from Yahoo! Japan of
approximately $62 million and $22 million,
respectively.
The following table presents Yahoo! Japans condensed
financial information, as derived from the Yahoo! Japan
financial statements for the three months ended
December 31, 2006 and 2007, respectively, and as of
September 30, 2007 and December 31, 2007, respectively
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2006
|
|
2007
|
|
Operating data:(*)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
462,993
|
|
|
$
|
618,748
|
|
Gross profit
|
|
$
|
445,168
|
|
|
$
|
530,687
|
|
Income from operations
|
|
$
|
235,216
|
|
|
$
|
276,316
|
|
Net income
|
|
$
|
128,838
|
|
|
$
|
151,687
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2007
|
|
2007
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,131,234
|
|
|
$
|
1,163,575
|
|
Long-term assets
|
|
$
|
1,783,430
|
|
|
$
|
1,853,245
|
|
Current liabilities
|
|
$
|
692,337
|
|
|
$
|
656,154
|
|
Long-term liabilities
|
|
$
|
347,995
|
|
|
$
|
268,642
|
|
|
|
|
(*) |
|
The Company records its share of the results of Yahoo! Japan one
quarter in arrears in earnings in equity interests in the
condensed consolidated statements of income. |
The differences between generally accepted accounting principles
in the U.S. and Japan did not materially impact the amounts
reflected in the Companys condensed consolidated financial
statements.
The changes in the carrying amount of goodwill for the three
months ended March 31, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
International
|
|
|
Total
|
|
|
Balance as of January 1, 2008
|
|
$
|
2,518,848
|
|
|
$
|
1,483,182
|
|
|
$
|
4,002,030
|
|
Acquisitions and other(*)
|
|
|
89,623
|
|
|
|
3,248
|
|
|
|
92,871
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
61,697
|
|
|
|
61,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2008
|
|
$
|
2,608,471
|
|
|
$
|
1,548,127
|
|
|
$
|
4,156,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Other primarily includes certain purchase price adjustments that
affect existing goodwill. |
16
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
|
|
Note 6
|
INTANGIBLE
ASSETS, NET
|
The following table summarizes the Companys intangible
assets, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
March 31, 2008
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization(1)
|
|
|
Net(2)
|
|
|
Customer, affiliate, and advertiser related relationships
|
|
$
|
143,195
|
|
|
$
|
236,584
|
|
|
$
|
(97,281
|
)
|
|
$
|
139,303
|
|
Developed and acquired technology and intellectual property
rights
|
|
|
384,041
|
|
|
|
760,302
|
|
|
|
(324,745
|
)
|
|
|
435,557
|
|
Trademark, trade name, and domain name
|
|
|
84,261
|
|
|
|
208,965
|
|
|
|
(132,051
|
)
|
|
|
76,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
611,497
|
|
|
$
|
1,205,851
|
|
|
$
|
(554,077
|
)
|
|
$
|
651,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Since the acquisition of these intangible assets, foreign
currency translation adjustments, reflecting movement in the
currencies of the underlying entities, totaled approximately
$29 million as of March 31, 2008. |
|
(2) |
|
As of December 31, 2007 and March 31, 2008,
$506 million and $557 million, respectively, of the
net intangibles balance were related to the U.S. segment. As
of December 31, 2007 and March 31, 2008,
$105 million and $95 million, respectively, of the net
intangibles balance were related to the International segment. |
For the three months ended March 31, 2007 and 2008, the
Company recognized amortization expense for intangible assets of
$56 million and $70 million, respectively, including
$29 million in cost of revenues for the three months ended
March 31, 2007 and $46 million in cost of revenues for
the three months ended March 31, 2008. Based on the
current amount of intangibles subject to amortization, the
estimated amortization expense for the remainder of 2008 and
each of the succeeding years is as follows: nine months ending
December 31, 2008: $200 million; 2009:
$159 million; 2010: $128 million; 2011:
$81 million; 2012: $53 million; 2013:
$21 million; and cumulatively thereafter: $10 million.
During the three months ended March 31, 2007 and 2008, the
Company acquired $7 million and $9 million,
respectively, of patents and intellectual property rights,
included in the Developed and acquired technology and
intellectual property rights category of the intangible
assets balances as of March 31, 2007 and 2008, respectively.
Other income, net is comprised of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Interest and investment income
|
|
$
|
38,137
|
|
|
$
|
23,167
|
|
Investment gains (losses), net
|
|
|
449
|
|
|
|
(2,210
|
)
|
Other
|
|
|
(3,135
|
)
|
|
|
2,705
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
35,451
|
|
|
$
|
23,662
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses), net includes realized investment
gains and realized investment losses related to declines in
values of investments in publicly traded and privately held
companies judged to be other than temporary.
17
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
|
|
Note 8
|
COMPREHENSIVE
INCOME
|
Comprehensive income, net of taxes, is comprised of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Net income
|
|
$
|
142,424
|
|
|
$
|
542,163
|
|
Change in net unrealized losses, net on available-for-sale
securities, net of tax and reclassification adjustments
|
|
|
(8,877
|
)
|
|
|
(2,362
|
)
|
Foreign currency translation adjustment
|
|
|
22,308
|
|
|
|
131,432
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
13,431
|
|
|
|
129,070
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
155,855
|
|
|
$
|
671,233
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of accumulated
other comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Unrealized gains on available-for-sale securities, net of tax
|
|
$
|
26,874
|
|
|
$
|
24,512
|
|
Foreign currency translation, net of tax
|
|
|
304,328
|
|
|
|
435,760
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
331,202
|
|
|
$
|
460,272
|
|
|
|
|
|
|
|
|
|
|
In April 2003, the Company issued $750 million of the Notes
due April 1, 2008, resulting in net proceeds to the Company
of approximately $733 million after transaction fees of
$17 million, which had been deferred and were included on
the condensed consolidated balance sheets in prepaid expense and
other current assets. As of March 31, 2008, the
transaction fees were fully amortized. The Notes were issued at
par and bear no interest. The Notes were convertible into
Yahoo! common stock at a conversion price of $20.50 per share,
which would result in the issuance of an aggregate of
approximately 37 million shares, subject to adjustment upon
the occurrence of specified events. Each $1,000 principal
amount of the Notes would initially be convertible into
48.78 shares of Yahoo! common stock.
The Notes were convertible on or prior to the final maturity
date (1) during any fiscal quarter if the closing sale
price of the Companys common stock for at least 20 trading
days in the 30
trading-day
period ending on the last trading day of the immediately
preceding fiscal quarter exceeded 110 percent of the
conversion price on that 30th trading day, (2) during
the period beginning January 1, 2008 through the maturity
date, if the closing sale price of the Companys common
stock on the previous trading day was 110 percent or more
of the then current conversion price and (3) upon specified
corporate transactions. Upon conversion, the Company had the
right to deliver cash in lieu of common stock. The Company may
be required to repurchase all of the Notes following a
fundamental change of the Company, such as a change of control,
prior to maturity at face value. The Company could not redeem
the Notes prior to their maturity.
Each $1,000 principal amount of the Notes was convertible on or
prior to April 1, 2008 if the market price of the
Companys common stock reaches a specified threshold
($22.55) for a defined period of time or specified corporate
transactions occur. As of March 31, 2008, the market price
condition for convertibility of the Notes was satisfied with
respect to the fiscal quarters beginning on January 1, 2008
and April 1, 2008. On or before April 1, 2008, the
holders of the Notes were able to convert their Notes into
shares of Yahoo! common stock at the rate of 48.78 shares
of Yahoo! common stock for each Note. The Company would be
required to pay the outstanding principal amount of any Notes
not converted by the holders on or before April 1, 2008 in
cash.
18
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
As of March 31, 2008, $167 million of the Notes were
converted and 8.1 million shares of Yahoo! common stock
were issued to the holders of the Notes. The $583 million
remaining debt outstanding as of March 31, 2008 was
classified as long-term debt as the debt was converted into
issued common stock of the Company in April 2008. Since the
quarter beginning April 1, 2007, the Notes had been
classified as short-term debt as the Company would have had to
settle the Notes in cash at maturity, unless conversion was
requested by the holders of the Notes.
As of March 31, 2008, the fair value of the Notes was
approximately $0.8 billion based on quoted market prices.
The shares issuable upon conversion of the Notes have been
included in the computation of diluted net income per share
since the Notes were issued.
See Note 17 Subsequent Events for
additional information.
|
|
Note 10
|
STOCK-BASED
COMPENSATION
|
Stock Options. The Companys
Amended and Restated 1995 Stock Plan and other stock-based award
plans assumed through acquisitions are collectively referred to
as the Plans. Stock option activity under the
Companys Plans and the Amended and Restated
1996 Directors Stock Plan for the three months ended
March 31, 2008 is summarized as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Exercise Price per
|
|
|
|
Shares
|
|
|
Share
|
|
|
Outstanding at December 31, 2007
|
|
|
180,397
|
|
|
$
|
29.36
|
|
Options granted
|
|
|
2,266
|
|
|
$
|
28.32
|
|
Options assumed
|
|
|
216
|
|
|
$
|
25.78
|
|
Options exercised(*)
|
|
|
(9,531
|
)
|
|
$
|
13.32
|
|
Options cancelled, forfeited, or expired
|
|
|
(7,239
|
)
|
|
$
|
31.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
166,109
|
|
|
$
|
30.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
The Companys current practice is to issue new shares to
satisfy stock option exercises. |
As of March 31, 2008, there was $393 million of
unrecognized stock-based compensation cost related to unvested
stock options which is expected to be recognized over a weighted
average period of 2.95 years.
The fair value of option grants was estimated using the
Black-Scholes option pricing model with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Purchase Plan
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
March 31,
|
|
March 31,
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
Expected dividend yield
|
|
|
0
|
.0%
|
|
|
0
|
.0%
|
|
|
0
|
.0%
|
|
|
0
|
.0%
|
Risk-free interest rate
|
|
|
4
|
.7%
|
|
|
2
|
.4%
|
|
|
4
|
.8%
|
|
|
4
|
.4%
|
Expected volatility
|
|
|
30
|
.7%
|
|
|
31
|
.2%
|
|
|
33
|
.0%
|
|
|
32
|
.0%
|
Expected life (in years)
|
|
|
3
|
.75
|
|
|
3
|
.89
|
|
|
0
|
.90
|
|
|
0
|
.90
|
19
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
Restricted stock awards and restricted stock units activity for
the three months ended March 31, 2008 is summarized as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Unvested at December 31, 2007
|
|
|
30,227
|
|
|
$
|
29.34
|
|
Granted
|
|
|
817
|
|
|
$
|
28.32
|
|
Assumed
|
|
|
686
|
|
|
$
|
28.63
|
|
Vested
|
|
|
(5,307
|
)
|
|
$
|
30.10
|
|
Forfeited
|
|
|
(1,947
|
)
|
|
$
|
23.54
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2008
|
|
|
24,476
|
|
|
$
|
29.58
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008,
5.3 million previously granted restricted stock awards and
restricted stock units vested. A majority of these vested
restricted stock awards and restricted stock units were net
share settled such that the Company withheld shares with value
equivalent to the employees minimum statutory obligation
for the applicable income and other employment taxes, and
remitted the cash to the appropriate taxing authorities. The
total shares withheld of approximately 1.8 million was
based on the value of the restricted stock awards on their
vesting date as determined by the Companys closing stock
price. Total payments for the employees tax obligations
to the relevant taxing authorities were $52 million for the
three months ended March 31, 2008 and are reflected as a
financing activity within the condensed consolidated statements
of cash flows. Upon the vesting of shares of certain restricted
stock awards, 605,000 shares were reacquired by the Company
to satisfy the tax withholding obligations and $18 million
was recorded as treasury stock. Payments of $34 million
related to net share settlements of restricted stock units had
the effect of share repurchases by the Company as they reduced
the number of shares that would have otherwise been issued as a
result of the vesting and were recorded as a reduction of
additional
paid-in-capital.
As of March 31, 2008, there was $370 million of
unrecognized stock-based compensation cost related to unvested
restricted stock awards and restricted stock units which is
expected to be recognized over a weighted average period of
2.32 years.
The excess tax benefits from stock-based awards of
$52 million as reported on the condensed consolidated
statement of cash flows in financing activities for the three
months ended March 31, 2007 represents the reduction, in
income taxes otherwise payable during the period, attributable
to the gross tax benefits in excess of the expected tax benefits
for options exercised in current and prior periods. The
reduction in income taxes otherwise payable during the three
months ended March 31, 2008 is attributable entirely to the
exercise of stock options for which deferred income tax assets
were recorded in prior periods. The income tax benefit of such
stock option exercises was recorded as a reduction to deferred
income tax assets and is reflected in the deferred income taxes
line of the cash flows from operating activities section of the
condensed consolidated statement of cash flows.
Executive Retention Compensation
Arrangement. During 2006, the Compensation
Committee of the Companys Board of Directors approved a
three year performance and retention compensation arrangement
with Terry Semel, the Companys then Chief Executive
Officer (CEO). Under this arrangement, for each of
the years 2006 to 2008, as the CEO, Mr. Semel was eligible
to receive a discretionary annual bonus payable in the form of a
fully vested non-qualified stock option for up to 1 million
shares with an exercise price equal to the closing trading price
of the Companys common stock on the date of the grant.
On June 18, 2007, the executive retention arrangement was
terminated due to Mr. Semels resignation as the CEO
of the Company. During the second quarter of 2007,
$16 million of stock-based compensation expense recorded
through March 31, 2007 under this arrangement was reversed
due to the forfeitures of equity awards. No similar arrangement
exists for the current CEO.
20
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
|
|
Note 11
|
STOCK
REPURCHASE PROGRAMS
|
In October 2006, the Companys Board of Directors
authorized a new stock repurchase program allowing it to
repurchase up to $3.0 billion of its outstanding shares of
common stock from time to time over the next five years,
depending on market conditions, share price, and other factors.
Repurchases may take place in the open market or in privately
negotiated transactions, including derivative transactions, and
may be made under a
Rule 10b5-1
plan.
In the three months ended March 31, 2008, the Company
repurchased 3.4 million shares of common stock directly at
an average price of $23.39 per share. Total cash consideration
for the repurchased stock was $79 million.
Upon the vesting of certain restricted stock awards during the
three months ended March 31, 2008, 605,000 shares of
such vested stock were reacquired by the Company to satisfy tax
withholding obligations. These repurchased shares were recorded
as $18 million of treasury stock and accordingly reduced
the number of common shares outstanding by 605,000.
These repurchased shares are recorded as part of treasury
stock. Treasury stock is accounted for under the cost method.
|
|
Note 12
|
COMMITMENTS
AND CONTINGENCIES
|
Operating Lease Commitments. The
Company leases office space and data centers under operating
lease agreements with original lease periods of up to
23 years, expiring between 2008 and 2027.
A summary of gross and net lease commitments as of
March 31, 2008 follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Lease
|
|
|
Sublease
|
|
|
Net Lease
|
|
|
|
Commitments
|
|
|
Income
|
|
|
Commitments
|
|
|
Nine months ending December 31, 2008
|
|
$
|
107
|
|
|
$
|
(3
|
)
|
|
$
|
104
|
|
Years ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
141
|
|
|
|
(3
|
)
|
|
|
138
|
|
2010
|
|
|
122
|
|
|
|
(2
|
)
|
|
|
120
|
|
2011
|
|
|
101
|
|
|
|
(1
|
)
|
|
|
100
|
|
2012
|
|
|
90
|
|
|
|
(1
|
)
|
|
|
89
|
|
2013
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
Due after 5 years
|
|
|
343
|
|
|
|
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross and net lease commitments
|
|
$
|
988
|
|
|
$
|
(10
|
)
|
|
$
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Commitments. In connection
with contracts to provide advertising services to Affiliates,
the Company is obligated to make payments, which represent TAC,
to its Affiliates. As of March 31, 2008, these commitments
totaled $275 million, of which $71 million will be
payable in the remainder of 2008, $111 million will be
payable in 2009, and $93 million will be payable in 2010.
Intellectual Property Rights. In
connection with the licensing of certain intellectual property,
the Company is obligated to invest up to $84 million
through July 2008. To the extent the licensed intellectual
property will benefit future periods, the Company will
capitalize such payments and amortize them over the useful life
of the related intellectual property.
Other Commitments. In the ordinary
course of business, the Company may provide indemnifications of
varying scope and terms to customers, vendors, lessors, business
partners, and other parties with respect to certain matters,
including, but not limited to, losses arising out of the
Companys breach of agreements, services to be provided by
the Company, or from intellectual property claims made by third
parties. In addition, the Company has entered into
indemnification agreements with its directors and certain of its
officers that will require the Company, among other things, to
indemnify them against certain liabilities that may arise by
reason of their status or service as
21
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
directors or officers. The Company has also agreed to indemnify
certain former officers, directors, and employees of acquired
companies in connection with the acquisition of such companies.
The Company maintains director and officer insurance, which may
cover certain liabilities arising from its obligation to
indemnify its directors and officers, and former directors and
officers of acquired companies, in certain circumstances. It is
not possible to determine the aggregate maximum potential loss
under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement. Such
indemnification agreements may not be subject to maximum loss
clauses. Historically, the Company has not incurred material
costs as a result of obligations under these agreements and it
has not accrued any liabilities related to such indemnification
obligations in its condensed consolidated financial statements.
As of March 31, 2008, the Company did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
As such, the Company is not exposed to any financing, liquidity,
market, or credit risk that could arise if the Company had
engaged in such relationships. In addition, the Company
identified no variable interests currently held in entities for
which it is the primary beneficiary.
Contingencies. From time to time,
third-parties assert patent infringement claims against Yahoo!.
Currently, the Company is engaged in lawsuits regarding patent
issues and has been notified of other potential patent
disputes. In addition, from time to time, the Company is
subject to other legal proceedings and claims in the ordinary
course of business, including claims of alleged infringement of
trademarks, copyrights, trade secrets, and other intellectual
property rights, claims related to employment matters, and a
variety of other claims, including claims alleging defamation,
invasion of privacy, or similar claims arising in connection
with the Companys
e-mail,
message boards, auction sites, shopping services, and other
communications and community features.
On May 24, 2001, Arista Records, Inc., Bad Boy Records, BMG
Music d/b/a The RCA Records Label, Capitol Records, Inc., Virgin
Records America, Inc., Sony Music Entertainment, Inc., UMG
Recordings, Inc., Interscope Records, Motown Record Company,
L.P., and Zomba Recording Corporation filed a lawsuit alleging
copyright infringement against LAUNCH Media, Inc.
(LAUNCH) in the United States District Court for the
Southern District of New York. The plaintiffs alleged, among
other things, that the consumer-influenced portion of
LAUNCHs LAUNCHcast service is interactive
within the meaning of Section 114 of the Copyright Act and
therefore does not qualify for the compulsory license provided
for by the Copyright Act. The complaint sought declaratory and
injunctive relief and damages for the alleged infringement.
After the lawsuit was commenced, Yahoo! entered into an
agreement to acquire LAUNCH, which closed in August 2001, and
since that time LAUNCH has been a wholly owned subsidiary of
Yahoo!. Because LAUNCH settled the LAUNCH litigation as to all
other plaintiffs, BMG Music d/b/a/The RCA Records Label was the
sole remaining plaintiff in this proceeding. On April 27,
2007, after a two week jury trial, the jury returned a unanimous
verdict in favor of LAUNCH finding no liability. The plaintiff
has filed a notice of appeal to the United States Court of
Appeals for the Second Circuit.
On July 12, 2001, the first of several purported securities
class action lawsuits was filed in the U.S. District Court,
Southern District of New York against certain underwriters
involved in Overture Services Inc.s (Overture)
IPO, Overture, and certain of Overtures current and former
officers and directors. The Court consolidated the cases
against Overture. Plaintiffs allege, among other things,
violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934 involving undisclosed compensation to the
underwriters, and improper practices by the underwriters, and
seek unspecified damages. Similar complaints were filed in the
same court against numerous public companies that conducted IPOs
of their common stock since the mid-1990s. All of these
lawsuits were consolidated for pretrial purposes before Judge
Shira Scheindlin. On April 19, 2002, plaintiffs filed an
amended complaint. On July 15, 2002, the issuers filed an
omnibus motion to dismiss for failure to comply with applicable
pleading standards. On October 8, 2002, the Court entered
an Order of Dismissal as to all of the individual defendants in
the Overture IPO litigation, without prejudice. On
February 19, 2003, the Court denied the motion to dismiss
the claims against certain defendants, including Overture. In
June 2004, a stipulation of settlement and
22
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
release of claims against the issuer defendants, including
Overture, was submitted to the Court for approval. While the
partial settlement was pending approval, the plaintiffs
continued to litigate against the underwriter defendants. The
district court directed that the litigation proceed within a
number of focus cases rather than in all of the
310 cases that had been consolidated. Overtures case
is not one of these focus cases. On October 13, 2004, the
district court certified these focus cases as class actions.
The underwriter defendants appealed that ruling, and on
December 5, 2006, the Court of Appeals for the Second
Circuit overturned the district courts class certification
decision. Since class certification, which was a condition of
the settlement, was not met, the parties stipulated to terminate
the settlement. On June 25, 2007, the Court entered an
order terminating the proposed settlement based upon this
stipulation. Plaintiffs amended complaints in the six cases.
On March 26, 2008, the district court denied the motions to
dismiss except as to Section 11 claims raised by some
plaintiffs who sold their securities for a price in excess of
the initial offering price and those who purchased outside the
previously certified class period. Initial briefing on the
class certification motion was completed in April 2008. The
Company intends to defend the case vigorously.
In May 2007, two purported class actions were commenced by
plaintiffs Ellen Brodsky and Manifred Hacker, asserting claims
arising under the federal securities laws against the Company
and certain individual defendants. These actions were ordered
consolidated in the U.S. District Court for the Central
District of California and, on December 21, 2007, a
Consolidated Amended Complaint was filed against Yahoo! and
certain individual defendants, including current and former
officers and a former director and officer. Plaintiffs purport
to represent a class of persons who purchased the Companys
common stock between April 8, 2004 and July 18, 2006.
Plaintiffs allege that defendants engaged in a scheme to inflate
the Companys share price by making false and misleading
statements regarding the Companys operations, financial
results, and future business prospects in violation of
Section 10(b) of the Securities Exchange Act of 1934 and
SEC
Rule 10b-5.
Plaintiffs also allege that the individual defendants engaged in
insider trading in violation of Section 20(A) of the
Securities Exchange Act, and as control persons are subject to
liability under Section 20(A) of the Securities Exchange
Act. The Consolidated Amended Complaint seeks compensatory
damages, injunctive relief, disgorgement of alleged insider
trading proceeds, and other equitable relief. On March 10,
2008, the Court granted defendants motion to transfer the
action to the U.S. District Court for the Northern District
of California.
On May 15, 2007, a stockholder derivative complaint was
filed in the California Superior Court, Santa Clara County,
by Greg Brockwell against members of the Companys Board of
Directors and selected officers. Brockwell seeks to prosecute
the action on behalf of the Company, which is named as a
nominal defendant, and to obtain relief on behalf of
the Company. The complaint alleges breaches of state law,
including breaches of fiduciary duties, waste of corporate
assets, unjust enrichment and violations of the California
Corporations Code between April 2004 and the present. The
derivative complaint alleges facts substantially similar to the
Consolidated Amended Complaint in the federal class action
litigation, and seeks, on behalf of the Company, treble damages
under California law, equitable and injunctive relief,
restitution, and reimbursement of costs. Discovery has been
initiated, and a status conference is set for May 16,
2008. On June 14, 2007, a second stockholder derivative
action was filed in the U.S. District Court for the Central
District of California by Jill Watkins against members of the
Board of Directors and selected officers. The complaint filed
by Plaintiff Watkins is substantially similar to the complaint
filed by Plaintiff Brockwell, with the addition of a claim for
relief for alleged violation of Section 10(b) of the
Securities Exchange Act of 1934. The federal derivative
plaintiff (Watkins) has agreed to coordinate her action with the
consolidated federal class action litigation. On April 15,
2008, defendants filed a motion to transfer the Watkins federal
derivative action to accompany the previously transferred
Consolidated Amended Complaint in the Brodsky federal class
action litigation. On April 21, 2008, defendants also
opposed plaintiffs motion to further amend the complaint
to assert allegations relating to Microsoft Corporations
February 1, 2008 unsolicited proposal to acquire Yahoo!
Inc. On April 29, 2008, the Watkins action was transferred
to the U.S. District Court for the Northern District of
California, and a motion to amend the complaint was denied by
the transferring court.
Since February 1, 2008, five separate stockholder lawsuits
were filed in the California Superior Court, Santa Clara
County, against Yahoo! Inc., members of the Board of Directors
and selected former officers by
23
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
plaintiffs Edward Fritsche, the Thomas Stone Trust, Tom Turberg,
Congregation Beth Aaron, and the Louisiana Municipal Police
Employees Retirement System (the California
Lawsuits). The California Lawsuits were consolidated, and
on March 12, 2008, a Consolidated Amended Class Action
and Derivative Complaint was filed, captioned, In re Yahoo! Inc.
Shareholder Litigation, in Santa Clara County Superior
Court. The Consolidated Amended Class and Derivative Complaint
alleges that the Yahoo! Board of Directors breached fiduciary
duties in connection with Microsoft Corporations
unsolicited proposal to acquire Yahoo!. The Consolidated
Amended Class and Derivative Complaint seeks declaratory and
injunctive relief, as well as an award of plaintiffs
attorneys fees and costs. On March 28, 2008, the
Santa Clara County Superior Court granted defendants
motion to stay the Consolidated Amended Class Action and
Derivative Complaint pending resolution of similar proceedings
pending in Delaware Court of Chancery described below.
Since February 11, 2008, five separate stockholder lawsuits
were filed in Delaware Court of Chancery against Yahoo! Inc. and
members of the Board of Directors by plaintiffs The Wayne County
Employees Retirement System, Ronald Dicke, and The Police
and Fire Retirement System of the City of Detroit along with The
General Retirement System of the City of Detroit, Plumbers and
Pipefitters Local Union No. 630 Pension-Annuity
Trust Fund and Vernon A. Mercier (the Delaware
Lawsuits). Two of the Delaware Lawsuits (by plaintiff
Wayne County and by plaintiff Plumbers and Pipefitters Local
Union) were voluntarily dismissed. All of the remaining
Delaware Lawsuits were consolidated (lead plaintiff is the
Police and Fire Retirement System of the City of Detroit) and
lead counsel was appointed. The plaintiffs in the Delaware
Lawsuits purport to assert class claims on behalf of all Yahoo!
stockholders, except defendants and their affiliates and
generally allege that defendants breached fiduciary duties by
rejecting Microsofts February 1, 2008 unsolicited
proposal to acquire Yahoo! Inc. without fully informing
themselves whether Microsoft would offer additional
consideration and alleging that defendants are not acting in the
best interests of stockholders and are seeking to entrench
themselves through a series of defensive initiatives. The
complaints in the Delaware Court of Chancery seek unspecified
damages, declaratory relief and injunctive relief, as well as an
award of plaintiffs attorneys fees and costs.
Pursuant to a case management order, defendants are responding
to expedited discovery. On March 24, 2008, the Court
denied plaintiffs motion to set an expedited trial date in
May 2008.
The Company may incur substantial expenses in defending against
such claims, and it is not presently possible to accurately
forecast their outcome. The Company does not believe, based on
current knowledge, that any of the foregoing legal proceedings
or claims are likely to have a material adverse effect on its
financial position, results of operations, or cash flows. In
the event of a determination adverse to Yahoo!, its
subsidiaries, directors, or officers, the Company may incur
substantial monetary liability, and be required to change its
business practices. Either of these could have a material
adverse effect on the Companys financial position, results
of operations, or cash flows.
Change in Control Severance Plans. On
February 12, 2008, the Compensation Committee of the Board
of Directors of the Company approved two change in control
severance plans (the Severance Plans) that,
together, cover all full-time employees of the Company,
including the Companys Chief Executive Officer, Chief
Financial Officer, and the executive officers currently employed
by the Company. The Severance Plans are designed to help retain
the employees, help maintain a stable work environment and
provide certain economic benefits to the employees in the event
their employment is terminated. Benefits under the Severance
Plans generally include (1) continuation of the
employees annual base salary, as severance pay for a
designated number of months following the employees
severance date; (2) reimbursement for outplacement
services; (3) continued medical group health and dental
plan coverage for the period the employee receives severance
pay; and (4) accelerated vesting of all stock options,
restricted stock units, and any other equity-based awards
previously granted or assumed by the Company and outstanding as
of the severance date.
The Company manages its business geographically. The primary
areas of measurement and decision-making are the U.S. and
International. Management relies on an internal management
reporting process that provides
24
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
revenue and segment operating income before depreciation,
amortization, and stock-based compensation expense for making
financial decisions and allocating resources. Segment operating
income before depreciation, amortization, and stock-based
compensation expense includes income from operations before
depreciation, amortization, and stock-based compensation
expense. Management believes that segment operating income
before depreciation, amortization, and stock-based compensation
expense is an appropriate measure of evaluating the operational
performance of the Companys segments. However, this
measure should be considered in addition to, not as a substitute
for, or superior to, income from operations or other measures of
financial performance prepared in accordance with GAAP.
The following tables present summarized information by segment
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Revenues by segment:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,100,757
|
|
|
$
|
1,307,410
|
|
International
|
|
|
571,093
|
|
|
|
510,192
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,671,850
|
|
|
$
|
1,817,602
|
|
|
|
|
|
|
|
|
|
|
Segment operating income before depreciation, amortization, and
stock-based compensation expense:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
341,518
|
|
|
$
|
315,163
|
|
International
|
|
|
118,517
|
|
|
|
117,970
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income before depreciation,
amortization, and stock-based compensation expense
|
|
|
460,035
|
|
|
|
433,133
|
|
Depreciation and amortization
|
|
|
(151,002
|
)
|
|
|
(187,511
|
)
|
Stock-based compensation expense
|
|
|
(140,006
|
)
|
|
|
(125,005
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
169,027
|
|
|
$
|
120,617
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
100,325
|
|
|
$
|
123,468
|
|
International
|
|
|
17,694
|
|
|
|
16,325
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures, net
|
|
$
|
118,019
|
|
|
$
|
139,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,182,212
|
|
|
$
|
1,213,334
|
|
International
|
|
|
149,420
|
|
|
|
150,141
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
1,331,632
|
|
|
$
|
1,363,475
|
|
|
|
|
|
|
|
|
|
|
Revenue is attributed to individual countries according to the
international online property that generated the revenue. No
single foreign country accounted for more than 10 percent
of revenues in the three months ended March 31, 2007 and
2008.
25
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
The following table presents revenues for groups of similar
services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Marketing services:
|
|
|
|
|
|
|
|
|
Owned and Operated sites
|
|
$
|
819,544
|
|
|
$
|
965,739
|
|
Affiliate sites
|
|
|
649,075
|
|
|
|
606,705
|
|
|
|
|
|
|
|
|
|
|
Marketing services
|
|
|
1,468,619
|
|
|
|
1,572,444
|
|
Fees
|
|
|
203,231
|
|
|
|
245,158
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,671,850
|
|
|
$
|
1,817,602
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the three months ended March 31,
2008 was 39.5 percent, compared to 45.2 percent for
the same period in 2007. The effective tax rate of
39.5 percent for the three months ended March 31, 2008
differs from the statutory rate of 35.0 percent primarily
due to state taxes, the effect of
non-U.S. operations,
and non-deductible stock-based compensation expense. The
effective tax rate for the three months ended March 31,
2008 was lower than the rate for the same period in 2007
primarily due to the effect of items recorded in the quarter
ended March 31, 2008 related to
non-U.S. operations.
In the quarter ended March 31, 2008, the Company recorded a
deferred tax liability of $276 million related to its
investment in the Alibaba Group. The deferred tax liability
resulted primarily from the non-cash gain recorded in the
quarter in connection with the IPO of Alibaba.com. See
Note 4 Investments in Equity
Interests for additional information.
During the three months ended March 31, 2008, the Company
recorded an increase in its total unrecognized tax benefits of
approximately $5 million bringing the balance to
$691 million. Over the next twelve months, the
Companys existing tax positions are expected to generate
an increase in total unrecognized tax benefits.
The Companys federal income tax returns for the years
ended December 31, 2003 and December 31, 2004 are
under examination by the Internal Revenue Service.
|
|
Note 15
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The Companys marketable debt and equity securities are
classified as available-for-sale and are reported at fair value,
with unrealized gains and losses, net of tax, recorded in
accumulated other comprehensive income (loss). Realized gains or
losses and declines in value judged to be other than temporary,
if any, on available-for-sale securities are reported in other
income, net. The Company evaluates the investments periodically
for possible other-than-temporary impairment and reviews factors
such as the length of time and extent to which fair value has
been below cost basis, the financial condition of the issuer and
the Companys ability and intent to hold the investment for
a period of time which may be sufficient for anticipated
recovery in market value. The Company records impairment
charges equal to the amount that the carrying value of its
available-for-sale securities exceeds the estimated fair market
value of the securities as of the evaluation date, if
appropriate. The fair value for securities is determined based
on quoted market prices as of the valuation date. In computing
realized gains and losses on available-for-sale securities, the
Company determines cost based on amounts paid, including direct
costs such as commissions, to acquire the security using the
specific identification method.
All highly liquid investments with an original maturity of three
months or less are considered cash equivalents. Investments with
effective maturities of less than 12 months from the
balance sheet date are classified as current
26
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
assets. Investments with effective maturities greater than
12 months from the balance sheet date are classified as
long-term assets.
Effective January 1, 2008, the Company adopted
SFAS 157 for financial assets and liabilities.
SFAS 157 establishes a framework for measuring fair value
and expands disclosures about fair value measurements by
establishing a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities
(level 1 measurements) and lowest priority to unobservable
inputs (level 3 measurements). The three levels of the
fair value hierarchy under SFAS 157 are described below:
Basis of
Fair Value Measurement
|
|
|
Level 1 |
|
Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets. |
|
Level 2 |
|
Inputs reflect quoted prices for identical assets or liabilities
in markets that are not active; quoted prices for similar assets
or liabilities in active markets; inputs other than quoted
prices that are observable for the asset or the liability; or
inputs that are derived principally from or corroborated by
observable market data by correlation or other means. |
|
Level 3 |
|
Unobservable inputs reflecting the Companys own
assumptions incorporated in valuation techniques used to
determine fair value. These assumptions are required to be
consistent with market participant assumptions that are
reasonably available. |
The following table set forth the financial assets, measured at
fair value, by level within the fair value hierarchy as of
March 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
Money market
funds(1)
|
|
$
|
765,098
|
|
|
$
|
|
|
|
$
|
765,098
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency
securities(1)
|
|
|
|
|
|
|
219,674
|
|
|
|
219,674
|
|
Municipal
bonds(1)
|
|
|
|
|
|
|
4,646
|
|
|
|
4,646
|
|
Asset
backed-securities(1)
|
|
|
|
|
|
|
32,066
|
|
|
|
32,066
|
|
Commercial
paper(1)
|
|
|
|
|
|
|
739,178
|
|
|
|
739,178
|
|
Corporate debt
securities(1)
|
|
|
|
|
|
|
336,834
|
|
|
|
336,834
|
|
Corporate equity
securities(2)
|
|
|
107,571
|
|
|
|
|
|
|
|
107,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
872,669
|
|
|
$
|
1,332,398
|
|
|
$
|
2,205,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The money market funds, U.S. government and agency securities,
municipal bonds, asset backed securities, commercial paper and
corporate debt securities are classified as part of either cash
equivalents or investments in marketable debt securities in the
condensed consolidated balance sheet. |
|
(2)
|
|
The corporate equity securities are classified as part of the
other long-term assets in the condensed consolidated balance
sheet. |
The amount of cash and cash equivalents as of March 31,
2008 includes $750 million in cash.
The fair value of the Companys Level 1 financial
assets are based on quoted market prices of the identical
underlying security. The fair value of the Companys
Level 2 financial assets are obtained from
readily-available pricing sources for the identical underlying
security that may not be actively traded. As of March 31,
2008, the Company did not have any significant Level 3
financial assets or liabilities.
27
YAHOO!
INC.
Notes to
Condensed Consolidated Financial
Statements (Continued)
The Company has investments in equity interests that are
accounted for using the equity method and are classified as part
of the investment in equity interests balance in the condensed
consolidated balance sheet. See Note 4
Investments in Equity Interests for additional
information.
See Note 9 Long-Term Debt for fair
value disclosures related to the Companys Notes.
|
|
Note 16
|
STRATEGIC
WORKFORCE REALIGNMENT
|
During the three months ended March 31, 2008, the Company
implemented a strategic workforce realignment to more
appropriately allocate resources to the Companys key
strategic initiatives. The strategic realignment involves
investing resources in some areas, reducing resources in others,
and eliminating some areas of the Companys business that
do not support the Companys strategic priorities.
As of March 31, 2008, the Company incurred total pre-tax
cash charges of approximately $29 million in severance pay
expenses and related cash expenses in connection with the
workforce realignment. The pre-tax cash charges were offset by
a $12 million credit related to non-cash stock-based
compensation expense reversals for forfeited unvested awards,
resulting in a net estimated total strategic workforce
realignment pre-tax expense of approximately $17 million.
Of the $17 million strategic workforce realignment pre-tax
expense, $13 million was related to the U.S. segment
and $4 million was related to the International segment.
As of March 31, 2008, the remaining accrual related to the
strategic workforce realignment was approximately
$15 million, which the Company expects to be substantially
paid by the end of the second quarter of 2008.
Note
17 SUBSEQUENT EVENTS
Long-Term Debt. In April 2008, the
$583 million of long-term debt outstanding as of
March 31, 2008 was converted by the holders of the Notes
and 28.4 million shares of Yahoo! common stock were issued.
28
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
In addition to current and historical information, this
Quarterly Report on
Form 10-Q
(Report) contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. These statements relate to our future operations,
prospects, potential products, services, developments, and
business strategies. These statements can, in some cases, be
identified by the use of terms such as may,
will, should, could,
would, intend, expect,
plan, anticipate, believe,
estimate, predict, project,
potential, or continue or the negative
of such terms or other comparable terminology. This Report
includes, among others, forward-looking statements regarding our:
|
|
|
|
|
expectations about revenues for marketing services and fees;
|
|
|
|
expectations about growth in users;
|
|
|
|
expectations about cost of revenues and operating expenses;
|
|
|
|
expectations about our effective tax rate and the amount of
unrecognized tax benefits;
|
|
|
|
expectations about our on-going strategic initiatives;
|
|
|
|
anticipated capital expenditures;
|
|
|
|
impact of recent acquisitions on our business and evaluation of,
and expectations for, possible acquisitions of, or investments
in, businesses, products, and technologies; and
|
|
|
|
expectations about positive cash flow generation and existing
cash, cash equivalents, and investments being sufficient to meet
normal operating requirements.
|
These statements involve certain known and unknown risks and
uncertainties that could cause our actual results to differ
materially from those expressed or implied in our
forward-looking statements. Such risks and uncertainties
include, among others, those listed in Part II,
Item 1A, Risk Factors of this Report. We do
not intend, and undertake no obligation, to update any of our
forward-looking statements after the date of this Report to
reflect actual results or future events or circumstances.
Overview
We are a leading global Internet brand and one of the most
trafficked Internet destinations worldwide. We are focused on
powering our communities of users, advertisers, publishers, and
developers by creating indispensable experiences built on
trust. We seek to provide Internet services that are essential
and relevant to these communities of users, advertisers,
publishers, and developers. Publishers, such as eBay Inc.,
WebMD, Cars.com, Forbes.com, and the Newspaper Consortium (our
strategic partnership with a consortium of more than 20 leading
United States (U.S.) newspaper publishing
companies), are a subset of our Affiliates and are primarily
Websites and search engines that attract users by providing
content of interest, presented on Web pages that have space for
advertisements.
To users, we provide owned and operated online properties and
services (Yahoo! Properties or Offerings
or Owned and Operated sites). We also extend our
marketing platform and access to Internet users beyond Yahoo!
Properties through our distribution network of third-party
entities (referred to as Affiliates) who have
integrated our advertising offerings into their Websites
(referred to as Affiliate sites) or their other
offerings.
We focus on expanding our communities of users and deepening
their engagement on Yahoo! Properties to enhance the value of
our users to advertisers and publishers and thereby increase the
spending of advertisers and publishers with us. We believe that
we can expand our communities of users by offering compelling
Internet services and effectively integrating search, community,
personalization, and content to create a powerful user
experience. We leverage our user relationships and the social
community the users create to enhance our online advertising
potential, as well as our fee-based services.
29
To advertisers and publishers, we provide a range of marketing
solutions and tools that enable businesses to reach users who
visit Yahoo! Properties and our Affiliate sites.
To developers, we provide an innovative and easily accessible
array of Web Services and Application Programming Interfaces
(APIs), technical resources, tools, and channels to
market.
We generate revenues by providing marketing services to
advertisers across a majority of Yahoo! Properties and Affiliate
sites. Additionally, although many of our user services are
free, we do charge for a range of premium services that we
offer. We classify these revenues as either marketing services
or fees revenues. The majority of our offerings are available
globally in more than 20 languages. We manage and measure
our business geographically. Our principal geographies are the
United States and International.
As used below, Page Views is defined as our
internal estimate of the total number of Web pages viewed by
users on Owned and Operated sites. Searches is
defined as online search queries that may yield Internet search
results ranked and sorted based on relevance to the users
search query. Sponsored search results are a subset
of the overall search results and provide links to paying
advertisers Web pages. A click-through occurs
when a user clicks on an advertisers language.
First
Quarter Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
2007-2008
|
Operating Highlights
|
|
2007
|
|
2008
|
|
Change
|
|
|
(In thousands)
|
|
Revenues
|
|
$
|
1,671,850
|
|
|
$
|
1,817,602
|
|
|
$
|
145,752
|
|
Income from operations
|
|
$
|
169,027
|
|
|
$
|
120,617
|
|
|
$
|
(48,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
2007-2008
|
Cash Flow Highlights
|
|
2007
|
|
2008
|
|
Change
|
|
|
|
|
(In thousands)
|
|
|
|
Net cash provided by operating activities
|
|
$
|
434,700
|
|
|
$
|
786,305
|
|
|
$
|
351,605
|
|
Net cash provided by investing activities
|
|
$
|
21,541
|
|
|
$
|
18,410
|
|
|
$
|
(3,131
|
)
|
Net cash used in financing activities
|
|
$
|
(721,015
|
)
|
|
$
|
(5,159
|
)
|
|
$
|
715,856
|
|
Our revenue growth for the three months ended March 31,
2008, compared to the prior year, can be attributed to growth in
our marketing services business. Marketing services and fees
revenues experienced 7 percent and 21 percent year
over year growth, respectively.
Our revenues for the three months ended March 31, 2008
increased 9 percent year over year to approximately
$1.8 billion, with fee paying users up 5 percent year
over year, and Page Views up 19 percent year over
year. Operating income for the three months ended
March 31, 2008 declined by $48 million. The decline
reflects year over year increases in operating expenses of
$153 million offset by the impact of additional margin
related to year over year revenue growth.
We believe the searches, Page Views, click-throughs, and
the related marketing services and fees revenues that we
generate correlate to the number and activity level of users
across our offerings on Yahoo! Properties and the activity level
on our Affiliate sites. By providing a platform for our users
that brings together our search technology, content, and
community while allowing for personalization and integration
across devices, we seek to become more essential to, increase
our share of, and deepen the engagement of, our users with our
products and services. We believe this deeper engagement of new
and existing users and our enhanced algorithmic search
technology, coupled with the growth of the Internet as an
advertising medium may enable us to increase our revenues during
2008.
During the three months ended March 31, 2008, we
implemented a strategic workforce realignment to more
appropriately allocate resources to our key strategic
initiatives. As of March 31, 2008, we incurred a net
estimated total strategic workforce realignment pre-tax expense
of $17 million.
30
Net cash provided by operating activities includes a
$350 million one-time payment related to a commercial
arrangement entered into with AT&T Inc.
Results
of Operations
The following table sets forth selected information on our
results of operations as a percentage of revenues for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
43
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57
|
|
|
|
58
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
22
|
|
|
|
23
|
|
Product development
|
|
|
14
|
|
|
|
17
|
|
General and administrative
|
|
|
9
|
|
|
|
9
|
|
Amortization of intangibles
|
|
|
2
|
|
|
|
1
|
|
Strategic workforce realignment costs, net
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
47
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10
|
|
|
|
7
|
|
Other income, net
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, earnings in equity interests, and
minority interests
|
|
|
12
|
|
|
|
8
|
|
Provision for income taxes
|
|
|
(5
|
)
|
|
|
(3
|
)
|
Earnings in equity interests
|
|
|
2
|
|
|
|
25
|
|
Minority interests in operations of consolidated subsidiaries
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues by groups of similar
services were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Percent
|
|
|
|
2007
|
|
|
(*)
|
|
|
2008
|
|
|
(*)
|
|
|
Change
|
|
|
Marketing services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and Operated sites
|
|
$
|
819,544
|
|
|
|
49
|
%
|
|
$
|
965,739
|
|
|
|
53
|
%
|
|
|
18
|
%
|
Affiliate sites
|
|
|
649,075
|
|
|
|
39
|
%
|
|
|
606,705
|
|
|
|
34
|
%
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing services
|
|
|
1,468,619
|
|
|
|
88
|
%
|
|
|
1,572,444
|
|
|
|
87
|
%
|
|
|
7
|
%
|
Fees
|
|
|
203,231
|
|
|
|
12
|
%
|
|
|
245,158
|
|
|
|
13
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,671,850
|
|
|
|
100
|
%
|
|
$
|
1,817,602
|
|
|
|
100
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Percent of total revenues.
We currently generate marketing services revenues principally
from display advertising on Owned and Operated sites and from
sponsored search results generated from searches on Owned and
Operated and Affiliate sites. In addition, we receive revenues
for Content Match links (advertising on Yahoo! Properties and
Affiliate sites which include contextually relevant advertiser
links to their respective Websites) on Owned and Operated and
Affiliate sites and display advertising on Affiliate sites. The
net revenues and related volume metrics from Content Match links
and display advertising on Affiliate sites are not currently
material and are excluded from the discussion and calculation of
average revenue per Page View on Owned and Operated sites
and average revenue per search on Affiliate sites that follows.
31
Marketing Services Revenues from Owned and Operated
Sites. Marketing services revenues from Owned
and Operated sites for the three months ended March 31,
2008 increased by $146 million, or 18 percent, as
compared to the same period in 2007. Factors leading to growth
in overall marketing services revenues included an increase in
user activity levels on Yahoo! Properties, which contributed to
a higher volume of searches, Page Views, click-throughs,
and ad impression displays. Also, our growing audience of users
makes Yahoo! Properties more attractive to advertisers and
increases their spending on marketing services. We expect
marketing services revenues from our Owned and Operated sites to
continue growing at a rate faster than total revenues.
We periodically review and refine our methodology for
monitoring, gathering, and counting Page Views to more
accurately reflect the total number of Web pages viewed by users
on Yahoo! Properties. Based on this process, from time to time
we update our methodology to exclude from the count of
Page Views interactions with our servers that we determine
or believe are not the result of user visits to our Owned and
Operated sites. Using our updated methodology, for the three
months ended March 31, 2008 as compared to the same period
in 2007, Page Views increased 19 percent and revenue
per Page View decreased 1 percent.
Underlying our marketing services revenues from Owned and
Operated sites for the three months ended March 31, 2008 is
growth in Display and Search advertising. During the three
months ended March 31, 2008, revenues from display
advertising on Owned and Operated sites grew 17 percent, as
compared to the same period in 2007. During the three months
ended March 31, 2008, revenues from search advertising on
Owned and Operated sites grew 21 percent, as compared to
the same period in 2007.
We believe our growing number of users, advertisers, publishers,
and inventory, both on and off our network, over recent years
has been driving the increases in our marketing services
revenues. We also believe our expanding offerings, including
our enhanced algorithmic search technology, contribute to our
growing number of users. As our user base increases, we process
a higher number of searches and generate a higher number of
Page Views. We also believe that our growing audience of
users make Yahoo! Properties more attractive to advertisers and
increases their spending on marketing services. Further, we
believe the growth in users on Yahoo! Properties and on the
Internet overall reflects the increasing acceptance, importance,
and dependence of users on the Internet. As a result of this
growth in the online audience, we believe advertisers are
shifting a greater percentage of their spending from traditional
media to the Internet to reach this growing audience.
Marketing Services Revenues from Affiliate
sites. Marketing services revenues from
Affiliate sites for the three months ended March 31, 2008
decreased $42 million, or 7 percent, as compared to
the same period in 2007. As more inventory becomes available on
the Web, it has, and will continue to make, the Affiliate
business more competitive; consequently, our portion of revenue
share from Affiliate sites is declining. We expect this trend
to continue in 2008. However, we also expect to experience some
favorable impact from our
off-network
display initiatives. While this display business is still
relatively small, we expect continued growth as our major
partnerships gain momentum. The sale of Overture Japan to
Yahoo! Japan in the third quarter of 2007 negatively impacted
the Affiliate revenues during the three months ended
March 31, 2008 by approximately $120 million on a year
over year basis.
The number of searches on Affiliate sites increased by
approximately 18 percent in the three months ended
March 31, 2008, as compared to the same period in 2007.
The increase in the volume of searches is primarily attributed
to the net increase in the number of Affiliates, as well as
increases in searches per Affiliate.
The average revenue per search on our Affiliate sites decreased
by 23 percent in the three months ended March 31,
2008, as compared to the same period in 2007, primarily as a
result of a change in traffic mix, as well as due to traffic
quality initiatives, and the impact of the aforementioned sale
of Overture Japan to Yahoo! Japan.
Fees Revenues. Fees revenues for the
three months ended March 31, 2008 increased
$42 million, or 21 percent, as compared to the same
period in 2007. The year over year growth is associated with an
increase in the number of paying users for our fee-based
services, which numbered 17.4 million as of March 31,
2008, compared to 16.5 million as of March 31, 2007,
an increase of 5 percent. As we renew contracts with
broadband partners and our relationships move from being fee
paying user based to an advertising revenue sharing model, our
number of fee paying users will decrease. Adjusting the number
of fee paying users as of March 31, 2007 to remove the
impact of renewed broadband relationships, our fee paying users
would have been 15.3 million, compared to 17.4 million
as
32
of March 31, 2008, an increase of 14 percent. Our
increased base of paying users grew across most of our
Offerings. Our fee-based services include Internet broadband
services, sports, music, games, personals, and premium mail
offerings, as well as our services for small businesses.
Average monthly revenues per paying user remained consistent at
approximately $3 for both the three months ended March 31,
2008 and 2007, respectively. Recently, we have been working
with our broadband Internet access partners
(partners) to renew and extend our relationships.
As we renew these access relationships, we are seeking to add
new opportunities to improve on our historic strengths in
portal, search, and mail. The market has moved to an
environment in which advertising revenue sharing is the
prevailing model. We are evolving our partnerships accordingly
and our partners are re-signing with us due to the strategic
importance of our relationships and the products we offer. This
will result in a reduction in fees revenues associated with
these partnerships, but is expected to be offset by increased
marketing services revenues associated with the display
advertising and sponsored search revenue share arrangements.
Costs and Expenses. Operating costs and
expenses were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Percent
|
|
|
2007
|
|
(*)
|
|
2008
|
|
(*)
|
|
Change
|
|
Cost of revenues
|
|
$
|
713,637
|
|
|
|
43%
|
|
|
$
|
755,083
|
|
|
|
42
|
%
|
|
|
6
|
%
|
Sales and marketing
|
|
$
|
367,419
|
|
|
|
22%
|
|
|
$
|
424,591
|
|
|
|
23
|
%
|
|
|
16
|
%
|
Product development
|
|
$
|
239,500
|
|
|
|
14%
|
|
|
$
|
305,606
|
|
|
|
17
|
%
|
|
|
28
|
%
|
General and administrative
|
|
$
|
155,165
|
|
|
|
9%
|
|
|
$
|
171,080
|
|
|
|
9
|
%
|
|
|
10
|
%
|
Amortization of intangibles
|
|
$
|
27,102
|
|
|
|
2%
|
|
|
$
|
23,740
|
|
|
|
1
|
%
|
|
|
(12
|
)%
|
Strategic workforce realignment costs, net
|
|
|
|
|
|
|
|
|
|
$
|
16,885
|
|
|
|
1
|
%
|
|
|
N/A
|
|
|
|
|
(*) |
|
Percent of total revenues. |
Stock-based compensation expense was allocated as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Cost of revenues
|
|
$
|
2,007
|
|
|
$
|
3,280
|
|
Sales and marketing
|
|
|
50,268
|
|
|
|
65,538
|
|
Product development
|
|
|
48,300
|
|
|
|
48,082
|
|
General and administrative
|
|
|
39,431
|
|
|
|
20,389
|
|
Strategic workforce realignment expense reversals
|
|
|
|
|
|
|
(12,284
|
)
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
140,006
|
|
|
$
|
125,005
|
|
|
|
|
|
|
|
|
|
|
See Note 10 Stock-Based
Compensation in the Notes to the condensed consolidated
financial statements as well as our Critical Accounting
Policies, Judgments, and Estimates for additional information
about stock-based compensation.
Cost of Revenues. Cost of revenues
consists of traffic acquisition costs and other expenses
associated with the production and usage of Yahoo! Properties,
including amortization of acquired intellectual property rights
and developed technology.
Traffic Acquisition Costs
(TAC). TAC consist of payments
made to Affiliates and payments made to companies that direct
consumer and business traffic to Yahoo! Properties. We enter
into agreements of varying duration that involve TAC. There are
generally three economic structures of the Affiliate agreements:
fixed payments based on a guaranteed minimum amount of traffic
delivered, which often carry reciprocal performance guarantees
from the Affiliate; variable payments based on a percentage of
our revenues or based on a certain metric, such as number of
searches or paid clicks; or a combination of the two. We
expense TAC under two different methods. Agreements with fixed
payments are expensed ratably over the term the fixed payment
covers, and agreements based on a percentage of revenues, number
of paid introductions, number of searches, or other metrics are
expensed based on the volume of the underlying activity or
revenues multiplied by the
agreed-upon
price or rate.
33
Other Cost of Revenues. Other cost of
revenues consists of fees paid to third parties for content,
Internet connection charges, data center costs, server equipment
depreciation, technology license fees, amortization of acquired
intellectual property rights and developed technology, and
compensation related expenses (including stock-based
compensation expense).
Cost of revenues was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Percent
|
|
|
|
2007
|
|
|
(*)
|
|
|
2008
|
|
|
(*)
|
|
|
Change
|
|
|
TAC
|
|
$
|
488,774
|
|
|
|
29
|
%
|
|
$
|
465,544
|
|
|
|
26
|
%
|
|
|
(5
|
)%
|
Other cost of revenues
|
|
|
224,863
|
|
|
|
14
|
%
|
|
|
289,539
|
|
|
|
16
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
713,637
|
|
|
|
43
|
%
|
|
$
|
755,083
|
|
|
|
42
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percent of total revenues. |
Cost of revenues for the three months ended March 31, 2008
increased $41 million, or 6 percent, as compared to
the same period in 2007. The increase included $65 million
in other costs of revenues offset by a $23 million decrease
in TAC. The year over year decrease in TAC of $23 million,
or 5 percent for the three months ended March 31,
2008, was mainly due to the sale of Overture Japan to Yahoo!
Japan offset by an increase in average TAC rates related to new
contracts and the changes in partner mix. The year over year
increase of $65 million for the three months ended
March 31, 2008 in other cost of revenues included increases
of $20 million in amortization of technology, developed
technology, and intellectual property rights acquired through
acquisitions and $13 million in Internet and telecom
connection charges, increased usage, and data center costs. We
also experienced increases in the depreciation of server
equipment, information technology assets, and maintenance costs
of $15 million, as well as an increase of $12 million
due to increased compensation expense related to additional
headcount and increased content costs related to our media
offerings. The increase in the amortization of technology,
developed technology, and intellectual property rights acquired
resulted from our continued investments in, and acquisitions of,
businesses and technology. Increased Internet connection
charges, telecom usage, and data center costs supported our
growing audience of users, traffic, and new offerings on Yahoo!
Properties. The increase in the depreciation of server
equipment, information technology assets, and maintenance costs
resulted from our continued investments in information
technology assets and server equipment.
Sales and Marketing. Sales and
marketing expenses consist primarily of advertising and other
marketing related expenses, compensation related expenses
(including stock-based compensation expense), sales commissions,
and travel costs.
Sales and marketing expenses for the three months ended
March 31, 2008 increased $57 million, or
16 percent, as compared to the same period in 2007. The
year over year increase in sales and marketing expenses for the
three months ended March 31, 2008 was mainly due to
increased compensation expense. Compensation expense increased
approximately $51 million for the three months ended
March 31, 2008, including an additional $15 million of
stock-based compensation expense due to a net increase in our
sales and marketing headcount.
Sales and marketing expenses as a percentage of revenues were
23 percent (including 4 percent related to stock-based
compensation expense) and 22 percent (including
3 percent related to stock-based compensation expense) for
the first quarter of 2008 and 2007, respectively.
Product Development. Product
development expenses consist primarily of compensation related
expenses (including stock-based compensation expense) incurred
for the development of, enhancements to, and maintenance of
Yahoo! Properties and internally used software, classification
and organization of listings within Yahoo! Properties, research
and development, Yahoo!s technology platforms and
infrastructure, and facilities related expenses. Depreciation
expense and other operating costs are also included in product
development.
Product development expenses for the three months ended
March 31, 2008 increased $66 million, or
28 percent, as compared to the same period in 2007.
Approximately $56 million of the increase for the three
months ended March 31, 2008 was related to compensation
expense. The increased compensation expense reflected our
continued net hiring of engineering talent to further develop
and enhance new and existing offerings
34
and services on Yahoo! Properties. Other product and
development expenses increased approximately $11 million
primarily due to increased outsourced services, increased
depreciation expense due to our continued investments in
information technology assets and server equipment, and expenses
related to new and expanded facilities.
Product development expenses as a percentage of revenues were
17 percent (including 3 percent related to stock-based
compensation expense) and 14 percent (including
3 percent related to stock-based compensation expense) for
the first quarter of 2008 and 2007, respectively.
General and Administrative. General and
administrative expenses consist primarily of compensation
related expenses (including stock-based compensation expense)
related to our legal, finance, and human resource organizations
and fees for professional services.
General and administrative expenses for the three months ended
March 31, 2008 increased $16 million, or
10 percent, as compared to the same period in 2007. The
increase was mainly due to an additional $25 million in
outsourced service provider expenses. Of the $25 million
increase, we incurred incremental costs of $14 million
primarily for outside advisors related to Microsoft
Corporations (Microsoft) unsolicited proposal,
other strategic alternatives, and related litigation defense
costs. We expect to continue incurring outside advisor costs
related to Microsofts unsolicited proposal, other
strategic alternatives, and related litigation defense costs.
We also incurred $6 million in legal settlement expenses.
Compensation expense increased approximately $9 million due
to a net increase in our general and administrative headcount.
These increases were offset by a $19 million decrease in
stock-based compensation expense as a result of expense included
during the three months ended March 31, 2007 for certain
executives who have since left the Company, in which no similar
expense was recorded in the current period.
General and administrative expenses as a percentage of revenues
were 9 percent (including 1 percent related to
stock-based compensation expense) and 9 percent (including
2 percent related to stock-based compensation expense) for
the first quarter of 2008 and 2007, respectively.
Amortization of Intangibles. We have
purchased, and expect to continue purchasing, assets
and/or
businesses, which may include the purchase of intangible
assets. Amortization of developed technology and acquired
intellectual property rights is included in cost of revenues and
not in amortization of intangibles.
Amortization of intangibles was approximately $24 million
for the three months ended March 31, 2008, compared to
$27 million for the same period in 2007. Amortization of
intangibles was 1 percent and 2 percent of revenues
for the first quarters of 2008 and 2007, respectively. The year
over year decrease in amortization of intangibles was primarily
the result of more intangible assets being fully amortized as of
March 31, 2008 compared to March 31, 2007.
During the three months ended March 31, 2008 and 2007, we
acquired $9 million and $7 million, respectively, of
patents and intellectual property rights, included in the
Developed and acquired technology and intellectual
property rights category of the intangible assets balance
as of March 31, 2008 and 2007.
Strategic Workforce Realignment Costs,
Net. During the three months ended
March 31, 2008, we implemented a strategic workforce
realignment to more appropriately allocate resources to our key
strategic initiatives. The strategic realignment involves
investing resources in some areas, reducing resources in others,
and eliminating some areas of our business that do not support
our strategic priorities.
As of March 31, 2008, we incurred total pre-tax cash
charges of approximately $29 million in severance pay
expenses and related cash expense in connection with the
workforce realignment. The pre-tax cash charges were offset by
a $12 million credit related to non-cash stock-based
compensation expense reversals for forfeited unvested awards,
resulting in a net estimated total strategic workforce
realignment pre-tax expense of approximately $17 million.
Of the $17 million strategic workforce realignment pre-tax
expense, $13 million was related to the United States
segment and $4 million was related to the International
segment. As of March 31, 2008, the remaining accrual
related to the strategic workforce realignment was approximately
$15 million, which we expect to be substantially paid by
the end of the second quarter of 2008.
35
Other Income, Net. Other income, net
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Interest and investment income
|
|
$
|
38,137
|
|
|
$
|
23,167
|
|
Investment gains (losses), net
|
|
|
449
|
|
|
|
(2,210
|
)
|
Other
|
|
|
(3,135
|
)
|
|
|
2,705
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
35,451
|
|
|
$
|
23,662
|
|
|
|
|
|
|
|
|
|
|
Other income, net was $24 million for the three months
ended March 31, 2008, a decrease of $12 million, as
compared to the same period in 2007. Interest and investment
income for the first quarter of 2008 decreased mainly from lower
average invested balances as well as lower average interest
rates, compared to the same period in 2007. Average interest
rates were approximately 3.6 percent in the first quarter
of 2008, compared to 4.6 percent in the same period in 2007.
Other income, net may fluctuate in future periods due to
realized gains and losses on investments, impairments of
investments, changes in our average investment balances, and
changes in interest and foreign exchange rates.
Income Taxes. The effective tax rate
for the three months ended March 31, 2008 was
39.5 percent, compared to 45.2 percent for the same
period in 2007. These effective tax rates differ from the
amounts computed by applying the federal statutory income tax
rate primarily due to state taxes, the effect of
non-U.S. operations,
and non-deductible stock-based compensation expense. The
effective tax rate in 2008 was lower than the rate for the same
period in 2007 primarily due to the effect of items recorded in
the quarter ended March 31, 2008 related to
non-U.S. operations.
We currently expect the effective tax rate for fiscal year 2008
to be 44 percent to 46 percent.
During the three months ended March 31, 2008, we recorded
an increase in our total unrecognized tax benefits of
approximately $5 million bringing the balance to
$691 million. Over the next twelve months, our existing
tax positions are expected to generate an increase in total
unrecognized tax benefits.
Earnings in Equity Interests. Earnings
in equity interests for the three months ended March 31,
2008 was $455 million (including a $401 million net
non-cash gain related to Alibaba Group Holding Limiteds
(Alibaba Group) initial public offering
(IPO) of Alibaba.com Limited
(Alibaba.com), net of tax), as compared to
$29 million for the same period in 2007. Earnings in
equity interests consists of our share of the net income or loss
of our equity investments in Yahoo! Japan and Alibaba Group.
See Note 4 Investments in Equity
Interests in the Notes to the condensed consolidated
financial statements for additional information.
Minority Interests in Operations of Consolidated
Subsidiaries. Minority interests in
operations of consolidated subsidiaries represents the minority
holders percentage share of income or losses from the
subsidiaries in which we hold a majority, but less than
100 percent, ownership interest and consolidate the
subsidiaries results in our condensed consolidated
financial statements. Minority interests in operations of
consolidated subsidiaries were less than $0.1 million for
the three months ended March 31, 2008 and $1 million
for the three months ended March 31, 2007. Minority
interests recorded for the three months ended March 31,
2008 and 2007 were related to our Yahoo! 7 joint venture
arrangement which was completed in the first quarter of 2006.
Business
Segment Results
We manage our business geographically. Our primary areas of
measurement and decision-making are the United States and
International. Management relies on an internal management
reporting process that provides revenue and segment operating
income before depreciation, amortization, and stock-based
compensation expense for making financial decisions and
allocating resources. Segment operating income before
depreciation, amortization, and stock-based compensation expense
includes income from operations before depreciation,
amortization, and stock-based compensation expense. Management
believes that segment operating income before depreciation,
amortization, and stock-based compensation expense is an
appropriate measure for evaluating the operational performance
of our segments. However, this measure should be considered in
addition to, not as a
36
substitute for, or superior to, income from operations or other
measures of financial performance prepared in accordance with
generally accepted accounting principles in the United States
(GAAP).
Summarized information by segment was as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Percent
|
|
|
|
2007
|
|
|
(*)
|
|
|
2008
|
|
|
(*)
|
|
|
Change
|
|
|
Revenues by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,100,757
|
|
|
|
66
|
%
|
|
$
|
1,307,410
|
|
|
|
72
|
%
|
|
|
19
|
%
|
International
|
|
|
571,093
|
|
|
|
34
|
%
|
|
|
510,192
|
|
|
|
28
|
%
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,671,850
|
|
|
|
100
|
%
|
|
$
|
1,817,602
|
|
|
|
100
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Percent of total revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
Segment operating income before depreciation, amortization, and
stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
341,518
|
|
|
$
|
315,163
|
|
|
|
(8
|
)%
|
International
|
|
|
118,517
|
|
|
|
117,970
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income before depreciation,
amortization, and stock-based compensation expense
|
|
|
460,035
|
|
|
|
433,133
|
|
|
|
(6
|
)%
|
Depreciation and amortization
|
|
|
(151,002
|
)
|
|
|
(187,511
|
)
|
|
|
24
|
%
|
Stock-based compensation expense
|
|
|
(140,006
|
)
|
|
|
(125,005
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
169,027
|
|
|
$
|
120,617
|
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is attributed to individual countries according to the
international online property that generated the revenue. No
single foreign country accounted for more than 10 percent
of revenues for the three months ended March 31, 2008 or
2007, respectively.
United States. United States revenues
for the three months ended March 31, 2008 increased
$207 million, or 19 percent, as compared to the same
period in 2007. Our year over year increases in revenues were a
result of growth in advertising across the majority of Yahoo!
Properties and in our fee-based services. Our expanding user
base which has been attracting more advertisers has been
contributing to our growth in our advertising revenues. The
growth in our fee-based services is due to the increase in our
paying users for both existing and new offerings. United States
operating income before depreciation, amortization, and
stock-based compensation expense for the three months ended
March 31, 2008 decreased $26 million, or
8 percent compared to the same period in 2007.
International. International revenues
for the three months ended March 31, 2008 decreased
$61 million, or 11 percent, as compared to the same
period in 2007. Most of the international revenues decrease is
the result of the sale of Overture Japan to Yahoo! Japan for the
three months ended March 31, 2008. International operating
income before depreciation, amortization, and stock-based
compensation expense for the three months ended March 31,
2008 decreased less than $1 million, or less than
1 percent compared to the same period in 2007.
International revenues accounted for approximately
28 percent of total revenues in the three months ended
March 31, 2008, compared to 34 percent in the same
period in 2007.
The performance of our international operations has increased
our exposure to foreign currency fluctuations. Revenues and
related expenses generated by our international subsidiaries are
generally denominated in the currencies of the local countries.
Primary currencies include British Pounds, Korean Won, Euros,
Japanese Yen, Taiwan Dollars, Australian Dollars, and Canadian
Dollars. The statements of income of our international
operations are translated into United States Dollars at the
average exchange rates in each applicable period. To the extent
the United States Dollar strengthens against foreign currencies,
the translation of these foreign currency denominated
transactions results in reduced revenues, operating expenses,
and net income for our
37
International segment. Similarly, our revenues, operating
expenses, and net income will increase for our International
segment if the United States dollar weakens against foreign
currencies. Using the average foreign currency exchange rates
for the three months ended March 31, 2007, our
international revenues for the three months ended March 31,
2008 would have been lower than we reported by approximately
$26 million.
Critical
Accounting Policies, Judgments, and Estimates
Our discussion and analysis of our financial condition and
results of operations is based upon our condensed consolidated
financial statements, which have been prepared in accordance
with GAAP. The preparation of these condensed consolidated
financial statements requires us to make estimates, judgments
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure
of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates.
An accounting policy is considered to be critical if it requires
an accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is
made, and if different estimates that reasonably could have been
used, or changes in the accounting estimate that are reasonably
likely to occur, could materially impact the condensed
consolidated financial statements. We believe that the
following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of
the condensed consolidated financial statements.
Revenue Recognition. Our revenues are
generated from marketing services and fees. Marketing services
revenues is generated from several offerings including: the
display of textual, rich media advertisements, display of text
based links to advertisers websites, listing based
services, and commerce based transactions. Fees revenues
include revenues from a variety of consumer and business
fee-based services. While the majority of our revenue
transactions contain standard business terms and conditions,
there are certain transactions that contain non-standard
business terms and conditions. In addition, we may enter into
certain sales transactions that involve multiple element
arrangements (arrangements with more than one deliverable). We
also enter into arrangements to purchase goods
and/or
services from certain customers. As a result, significant
contract interpretation is sometimes required to determine the
appropriate accounting for these transactions including:
(1) whether an arrangement exists; (2) how the
arrangement consideration should be allocated among potential
multiple elements; (3) when to recognize revenue on the
deliverables; (4) whether all elements of the arrangement
have been delivered; (5) whether the arrangements should be
reported gross as a principal versus net as an agent; and
(6) whether we receive a separately identifiable benefit
from purchase arrangements with our customers for which we can
reasonably estimate fair value; and (7) whether the
arrangement should be characterized as revenue or a
reimbursement of costs incurred. In addition, our revenue
recognition policy requires an assessment as to whether
collection is reasonably assured, which inherently requires us
to evaluate the creditworthiness of our customers. Changes in
judgments on these assumptions and estimates could materially
impact the timing or amount of revenue recognition.
Deferred Income Tax Asset Valuation
Allowance. We record a valuation allowance to
reduce our deferred income tax assets to the amount that is more
likely than not to be realized. In evaluating our ability to
recover our deferred income tax assets, we consider all
available positive and negative evidence, including our
operating results, on-going tax planning and forecasts of future
taxable income on a jurisdiction by jurisdiction basis. In the
event that we were to determine that we would be able to realize
our deferred income tax assets in the future in excess of their
net recorded amount, we would make an adjustment to the
valuation allowance which would reduce the provision for income
taxes. Conversely, in the event that all or part of the net
deferred tax assets are determined not to be realizable in the
future, an adjustment to the valuation allowance would be
charged to earnings in the period such determination is made.
We establish reserves for tax-related uncertainties based on
estimates of whether, and the extent to which, additional taxes
will be due. These reserves are established when we believe
that certain positions might be challenged despite our belief
that our tax return positions are supportable.
38
Goodwill and Other Intangible
Assets. Goodwill is tested for impairment at
the reporting unit level (operating segment or one level below
an operating segment) on an annual basis and between annual
tests in certain circumstances. Application of the goodwill
impairment test requires judgment, including the identification
of reporting units, assigning assets and liabilities to
reporting units, assigning goodwill to reporting units, and
determining the fair value of each reporting unit. Significant
judgments required to estimate the fair value of reporting units
include estimating future cash flows, and determining
appropriate discount rates, growth rates, and other
assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value for each
reporting unit which could trigger impairment. See
Note 5 Goodwill in the Notes to the
condensed consolidated financial statements for additional
information. Based on our 2007 impairment test, there would
have to be a significant unfavorable change to our assumptions
used in such calculations for an impairment to exist.
We amortize other intangible assets over their estimated useful
lives. We record an impairment charge on these assets when we
determine that their carrying value may not be recoverable. The
carrying value is not recoverable if it exceeds the undiscounted
future cash flows resulting from the use of the asset and its
eventual disposition. When there is existence of one or more
indicators of impairment, we measure any impairment of
intangible assets based on a projected discounted cash flow
method using a discount rate determined by our management to be
commensurate with the risk inherent in our business model. Our
estimates of future cash flows attributable to our other
intangible assets require significant judgment based on our
historical and anticipated results and are subject to many
factors. Different assumptions and judgments could materially
affect the calculation of the fair value of our other intangible
assets which could trigger impairment.
Investments in Equity Interests. We
account for investments in entities in which we can exercise
significant influence but do not own a majority equity interest
or otherwise control using the equity method. In accounting for
these investments, we record our proportionate share of these
entities net income or loss, one quarter in arrears.
We review all of our investments in equity interests for
impairment whenever events or changes in business circumstances
indicate that the carrying amount of the investment may not be
fully recoverable. The impairment review requires significant
judgment to identify events or circumstances that would likely
have a significant adverse effect on the fair value of the
investment. Investments identified as having an indication of
impairment are subject to further analysis to determine if the
impairment is other-than-temporary and this analysis requires
estimating the fair value of the investment. The determination
of the fair value of the investment involves considering factors
such as the following: the stock prices of public companies in
which we have an equity investment, current economic and market
conditions, the operating performance of the companies including
current earnings trends and undiscounted cash flows, quoted
stock prices of comparable public companies, and other company
specific information including recent financing rounds. The
fair value determination, particularly for investments in
privately-held companies, requires significant judgment to
determine appropriate estimates and assumptions. Changes in
these estimates and assumptions could affect the calculation of
the fair value of the investments and the determination of
whether any identified impairment is other-than-temporary.
Stock-Based Compensation Expense. We
recognize stock-based compensation expense net of an estimated
forfeiture rate and therefore only recognize compensation cost
for those shares expected to vest over the service period of the
award.
Calculating stock-based compensation expense requires the input
of highly subjective assumptions, including the expected term of
the stock-based awards, stock price volatility, and the expected
pre-vesting forfeiture rate. We estimate the expected life of
options granted based on historical exercise patterns, which we
believe are representative of future behavior. We estimate the
volatility of our common stock on the date of grant based on the
implied volatility of publicly traded options on our common
stock, with a term of one year or greater. We believe that
implied volatility calculated based on actively traded options
on our common stock is a better indicator of expected volatility
and future stock price trends than historical volatility.
Therefore, expected volatility for the three months ended
March 31, 2008 and 2007 was based on a market-based implied
volatility. The assumptions used in calculating the fair value
of stock-based awards represent our best estimates, but these
estimates involve inherent uncertainties and the application of
management judgment. As a result, if factors change and we use
different assumptions, our stock-based compensation expense
could be materially different in the future. In addition, we
are
39
required to estimate the expected forfeiture rate, as well as
the probability that performance conditions that affect the
vesting of certain awards will be achieved, and only recognize
expense for those shares expected to vest. We estimate the
forfeiture rate based on historical experience of our
stock-based awards that are granted and subsequently forfeited
since they are unvested at the time of termination. If our
actual forfeiture rate is materially different from our
estimate, the stock-based compensation expense could be
significantly different from what we have recorded in the
current period. See Note 10 Stock-Based
Compensation in the Notes to the condensed consolidated
financial statements for additional information.
Recent
Accounting Pronouncements
In February 2008, the FASB issued FASB Staff Position
(FSP)
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
FAS 157-2),
which delays the effective date of Statement of Financial
Accounting Standards (SFAS) No. 157, Fair
Value Measurements (SFAS 157) for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) for fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of
this FSP. We are currently evaluating the impact of adopting
FSP
FAS 157-2
for non-financial assets and non-financial liabilities on our
consolidated financial position, cash flows, and results of
operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141R) and SFAS No. 160,
Accounting and Reporting of Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB 51
(SFAS 160), which will change the accounting
for and reporting of business combination transactions and
noncontrolling interests in consolidated financial statements.
SFAS 141R and SFAS 160 will be effective for us on
January 1, 2009. We are currently evaluating the impact of
adopting SFAS 141R and SFAS 160 on our consolidated
financial position, cash flows, and results of operations.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
1,513,930
|
|
|
$
|
2,341,205
|
|
Short-term marketable debt securities
|
|
|
487,544
|
|
|
|
267,129
|
|
Long-term marketable debt securities
|
|
|
361,998
|
|
|
|
239,428
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable debt securities
|
|
$
|
2,363,472
|
|
|
$
|
2,847,762
|
|
|
|
|
|
|
|
|
|
|
Percentage of total assets
|
|
|
19
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
Cash Flow Highlights
|
|
2007
|
|
2008
|
|
|
(In thousands)
|
|
Net cash provided by operating activities
|
|
$
|
434,700
|
|
|
$
|
786,305
|
|
Net cash provided by investing activities
|
|
$
|
21,541
|
|
|
$
|
18,410
|
|
Net cash used in financing activities
|
|
$
|
(721,015
|
)
|
|
$
|
(5,159
|
)
|
Our operating activities for the three months ended
March 31, 2008 and 2007 generated adequate cash to meet our
operating needs. As of March 31, 2008, we had cash, cash
equivalents, and marketable debt securities totaling
$2.8 billion, compared to $2.4 billion at
December 31, 2007. During the three months ended
March 31, 2008, we used $79 million in direct stock
repurchases and $52 million for tax withholdings related to
net share settlements of restricted stock awards and restricted
stock units. Additionally, we invested $140 million in net
capital expenditures and $166 million in net acquisitions.
The cash used for these investments was offset by
$786 million of cash generated from operating activities
(including a $350 million one-time payment from AT&T
Inc. recorded in deferred revenue), and $127 million from
the issuance of common stock as a result of the exercise of
stock options.
40
We expect to continue to generate positive cash flows from
operations for the remainder of 2008. We use cash generated by
operations as our primary source of liquidity, since we believe
that internally generated cash flows are sufficient to support
our business operations and capital expenditures. We believe
that existing cash, cash equivalents, and investments in
marketable debt securities, together with any cash generated
from operations will be sufficient to meet normal operating
requirements including capital expenditures for the next twelve
months. However, we may sell additional equity or debt
securities or obtain credit facilities to further enhance our
liquidity position, and the sale of additional equity securities
could result in dilution to our stockholders.
Effective January 1, 2008, we adopted SFAS 157 for
financial assets and liabilities. SFAS 157 establishes a
fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements)
and lowest priority to unobservable inputs (level 3
measurements). See Note 15 Fair Value of
Financial Instruments in the Notes to the condensed
consolidated financial statements for additional information.
Cash
flow changes
Cash provided by operating activities is driven by our net
income, adjusted for non-cash items, and non-operating gains and
losses from sales of investments. Non-cash adjustments include
depreciation, amortization, stock-based compensation expense,
tax benefits from stock-based awards, deferred income taxes, and
earnings in equity interests. Cash provided by operating
activities was greater than net income in the three months ended
March 31, 2008 mainly due to the net impact of non-cash
adjustments to income. In the three months ended March 31,
2008 and 2007, operating cash flows were positively impacted by
changes in working capital balances including a one-time payment
from AT&T Inc., which is recorded in deferred revenue.
Cash used in investing activities was primarily attributable to
capital expenditures, purchases of intangible assets, as well as
acquisitions including our strategic investments. In the three
months ended March 31, 2008, we invested $140 million
in net capital expenditures, $9 million to purchase
intangible assets, a net $166 million in acquisitions, and
a net $10 million in other investing activities. In the
three months ended March 31, 2007, we invested
$118 million in net capital expenditures and a net
$12 million in acquisitions.
Cash used in financing activities is driven by our financing
activities relating to stock repurchases and employee option
exercises. During the three months ended March 31, 2008,
we used $79 million in the direct repurchase of
3.4 million shares of our common stock at an average price
of $23.39 per share. In addition, $52 million was used for
tax withholdings related to net share settlements of restricted
stock awards and restricted stock units ($18 million of
which relates to reacquired shares in treasury stock related to
restricted stock awards). See Note 11
Stock Repurchase Programs in the Notes to the
condensed consolidated financial statements for additional
information. During the three months ended March 31, 2007,
we used $595 million in the direct repurchase of
19.9 million shares of our common stock at an average price
of $29.91 per share. We also entered into a structured stock
repurchase transaction, which settles in cash or stock depending
on the market price of our common stock on the date of maturity,
resulting in a total cash outlay of $250 million.
Additionally, we had cash proceeds from employee option
exercises of $127 million for the three months ended
March 31, 2008, as compared to $72 million for the
same period in 2007.
The excess tax benefits from stock-based awards of
$52 million as reported on the condensed consolidated
statement of cash flows in financing activities for the three
months ended March 31, 2007 represents the reduction, in
income taxes otherwise payable during the period, attributable
to the gross tax benefits in excess of the expected tax benefits
for options exercised in current and prior periods. The
reduction in income taxes otherwise payable during the three
months ended March 31, 2008 is attributable entirely to the
exercise of stock options for which deferred income tax assets
were recorded in prior periods. The income tax benefit of such
stock option exercises was recorded as a reduction to deferred
income tax assets and is reflected in the deferred income taxes
line of the cash flows from operating activities section of the
condensed consolidated statement of cash flows.
41
Financing
In April 2003, we issued $750 million of zero coupon senior
convertible notes (the Notes) which mature on
April 1, 2008. These Notes were convertible into Yahoo!
common stock at a conversion price of $20.50 per share, subject
to adjustment upon the occurrence of certain events. Each
$1,000 principal amount of the Notes was convertible on or prior
to April 1, 2008 if the market price of our common stock
reaches a specified threshold ($22.55) for a defined period of
time or specified corporate transactions occur. As of
March 31, 2008, the market price condition for
convertibility of the Notes was satisfied with respect to the
fiscal quarters beginning on January 1, 2008 and
April 1, 2008. On or before April 1, 2008, holders of
the Notes were able to convert their Notes into shares of Yahoo!
common stock at the rate of 48.78 shares of Yahoo! common
stock for each Note.
As of March 31, 2008, $167 million of the Notes were
converted and 8.1 million shares of Yahoo! common stock
were issued to holders of the Notes. The $583 million
remaining debt outstanding as of March 31, 2008 was
classified as long-term debt as the debt was subsequently
exchanged for long-term equity. Since the quarter beginning
April 1, 2007, the debt had been classified as short-term
debt as we would have had to settle the Notes in cash at
maturity, unless conversion was requested by the holders of the
Notes. This price threshold expired on March 31, 2008.
See Note 9 Long-Term Debt in the
Notes to the condensed consolidated financial statements for
additional information. In April 2008, the remaining
$583 million of long-term debt was converted by holders of
the Notes and an additional 28.4 million shares of our
common stock were issued. See Note 17
Subsequent Events in the Notes to the condensed
consolidated financial statements.
Stock
repurchases
In October 2006, following the completion of the
$3.0 billion share repurchase program that was authorized
in March 2005, our Board of Directors authorized a new stock
repurchase program for us to repurchase up to $3.0 billion
of our outstanding shares of common stock from time to time over
the next five years, depending on market conditions, share
price, and other factors. Repurchases may take place in the
open market or in privately negotiated transactions, including
derivative transactions, and may be made under a
Rule 10b5-1
plan.
In the three months ended March 31, 2008, we repurchased
3.4 million shares of common stock directly at an average
price of $23.39 per share. Total cash consideration for the
repurchased stock was $79 million. See
Note 11 Stock Repurchase Programs
in the Notes to the condensed consolidated financial statements
for additional information.
In addition, upon the vesting of certain restricted stock awards
during the three months ended March 31, 2008, we reacquired
605,000 shares of such vested stock to satisfy tax
withholding obligations. These repurchased shares were recorded
as $18 million of treasury stock and reduced the number of
common shares outstanding by 605,000 accordingly.
Treasury stock is accounted for under the cost method.
Capital
expenditures
Capital expenditures have generally comprised purchases of
computer hardware, software, server equipment, furniture and
fixtures, and real estate. Capital expenditures, net were
$140 million for the three months ended March 31,
2008, compared to $118 million in the same period in 2007.
Our capital expenditures in 2008 are expected to be consistent
with 2007 levels as we continue to invest in the expansion of
Yahoo! Properties and our offerings. This level of expenditure,
together with the increase in operating lease commitments, is
consistent with our increased headcount and operational
expansion, and we anticipate that this will continue in the
future as business conditions merit.
Contractual
obligations and commitments
Operating Leases. We have entered into
various non-cancelable operating lease agreements for office
space and data centers globally for original lease periods up to
23 years, expiring between 2008 and 2027.
42
A summary of gross lease commitments as of March 31, 2008
is as follows (in millions):
|
|
|
|
|
|
|
Gross Lease
|
|
|
|
Commitments
|
|
|
Nine months ending December 31, 2008
|
|
$
|
107
|
|
Years ending December 31,
|
|
|
|
|
2009
|
|
|
141
|
|
2010
|
|
|
122
|
|
2011
|
|
|
101
|
|
2012
|
|
|
90
|
|
2013
|
|
|
84
|
|
Due after 5 years
|
|
|
343
|
|
|
|
|
|
|
Total gross lease commitments
|
|
$
|
988
|
|
|
|
|
|
|
Affiliate Commitments. In connection
with our contracts to provide sponsored search
and/or
display advertising services to Affiliates, we are obligated to
make payments, which represent TAC, to our Affiliates. As of
March 31, 2008, these commitments totaled
$275 million, of which $71 million will be payable in
the remainder of 2008, $111 million will be payable in
2009, and $93 million will be payable in 2010.
Intellectual Property Rights. In
connection with the licensing of certain intellectual property,
we are obligated to invest up to $84 million through July
2008. To the extent the licensed intellectual property will
benefit future periods, we will capitalize such payments and
amortize them over the useful life of the related intellectual
property.
Income Taxes. As of March 31,
2008, the unrecognized tax benefits that resulted in an accrued
liability amounted to $252 million and are classified as
deferred and other long-term tax liabilities on our
condensed consolidated balance sheets. As of March 31,
2008, the settlement period for our income tax liabilities
cannot be determined. However, no significant liabilities are
expected to become due within the next twelve months.
Other Commitments. In the ordinary
course of business, we may provide indemnifications of varying
scope and terms to customers, vendors, lessors, business
partners and other parties with respect to certain matters,
including, but not limited to, losses arising out of our breach
of agreements, services to be provided by us, or from
intellectual property claims made by third parties. In
addition, we have entered into indemnification agreements with
our directors and certain of our officers that will require us,
among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service
as directors or officers. We have also agreed to indemnify
certain former officers, directors and employees of acquired
companies in connection with the acquisition of such companies.
We maintain director and officer insurance, which may cover
certain liabilities arising from our obligation to indemnify our
directors and officers. It is not possible to determine the
maximum potential loss under these indemnification agreements
due to the limited history of prior indemnification claims and
the unique facts and circumstances involved in each particular
agreement. Such indemnification agreements may not be subject
to maximum loss clauses. Historically, we have not incurred
material costs as a result of obligations under these agreements
and we have not accrued any liabilities related to such
indemnification obligations in our condensed consolidated
financial statements.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We are exposed to the impact of interest rate changes, foreign
currency fluctuations, and changes in the market values of our
investments.
Interest Rate Risk. Our exposure to
market rate risk for changes in interest rates relates primarily
to our investment portfolio. We invest excess cash in
marketable debt instruments of the United States Government and
its agencies, in high-quality corporate issuers, and by policy,
limit the amount of credit exposure to any one issuer. We
protect and preserve invested funds by limiting default, market
and reinvestment risk.
43
Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in
interest rates. As of March 31, 2008 and December 31,
2007, we had investments in short-term marketable debt
securities of approximately $267 million and
$488 million, respectively. Such investments had a
weighted-average yield of approximately 4.5 percent for
both periods. As of March 31, 2008 and December 31,
2007, we had investments in long-term marketable debt securities
of approximately $239 million and $362 million,
respectively. Such investments had a weighted average yield of
approximately 4.8 percent and 5.0 percent,
respectively. A hypothetical 100 basis point increase in
interest rates would result in an approximate $2 million
and $4 million decrease, in the fair value of our
available-for-sale debt securities as of March 31, 2008 and
December 31, 2007, respectively.
The fair market value of the Notes issued by Yahoo! and due on
April 1, 2008 is subject to interest rate risk and market
risk due to the convertible feature of the Notes. Generally,
the fair market value of fixed interest rate debt will increase
as interest rates fall and decrease as interest rates rise. The
fair market value of the Notes will also increase as the market
price of the Yahoo! stock increases and decrease as the market
price falls. The interest and market value changes affect the
fair market value of the Notes but do not impact our financial
position, cash flows, or results of operations. As of
March 31, 2008 and December 31, 2007, the fair value
of the Notes were approximately $0.8 billion and
$0.9 billion, respectively, based on quoted market prices.
See Note 9 Long-Term Debt in the
Notes to the condensed consolidated financial statements for
additional information.
Foreign Currency Risk. Revenues and
related expenses generated from our international subsidiaries
are generally denominated in the currencies of the local
countries. Primary currencies include British Pounds, Korean
Won, Euros, Japanese Yen, Taiwan Dollars, Australian Dollars,
and Canadian Dollars. The statements of income of our
international operations are translated into U.S. Dollars
at the average exchange rates in each applicable period. Using
the average foreign currency exchange rates for the three months
ended March 31, 2007, our international revenues for the
three months ended March 31, 2008 would have been lower
than we reported by approximately $26 million and our
international segment operating income before depreciation,
amortization, and stock-based compensation expense would have
been lower than we reported by $8 million.
We are also exposed to foreign exchange rate fluctuations as we
convert the financial statements of our foreign subsidiaries and
our investments in equity interests into United States Dollars
in consolidation that will lead to a translation gain or loss
that is recorded in accumulated other comprehensive income which
is part of stockholders equity. Changes in the functional
currency value of these assets and liabilities create
fluctuations that will lead to a transaction gain or loss.
During the three months ended March 31, 2008 and 2007, our
net foreign currency transaction gains and losses, realized and
unrealized, were not material.
Investment Risk. The primary objective
of our investment activities is to preserve principal while at
the same time maximizing yields without significantly increasing
risk. To achieve this objective, we maintain our portfolio of
cash equivalents and current and long-term investments in a
variety of securities, including both government and corporate
obligations and money market funds. As of March 31, 2008
and 2007, net unrealized gains and losses on these investments
were not material.
We are exposed to market risk as it relates to changes in the
market value of our investments. We invest in equity
instruments of public companies for business and strategic
purposes and have classified these securities as
available-for-sale. These available-for-sale equity investments
are subject to significant fluctuations in fair value due to the
volatility of the stock market and the industries in which these
companies participate. We have realized gains and losses from
the sale of investments, which were not material as of
March 31, 2008 and 2007. Our objective in managing
exposure to stock market fluctuations is to minimize the impact
of stock market declines to earnings and cash flows. Using a
hypothetical reduction of 10 percent in the stock price of
these equity securities, the fair value of our equity
investments would decrease by approximately $11 million and
$10 million as of March 31, 2008 and 2007,
respectively.
44
|
|
Item 4.
|
Controls
and Procedures
|
Disclosure Controls and Procedures. The
Companys management, with the participation of the
Companys principal executive officer and principal
financial officer, has evaluated the effectiveness of the
Companys disclosure controls and procedures (as such term
is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this report. Based on such evaluation, the Companys
principal executive officer and principal financial officer have
concluded that, as of the end of such period, the Companys
disclosure controls and procedures were effective.
Internal Control Over Financial
Reporting. There have not been any changes in
the Companys internal control over financial reporting (as
such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting.
45
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
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From time to time, third-parties assert patent infringement
claims against Yahoo!. Currently, we are engaged in lawsuits
regarding patent issues and have been notified of other
potential patent disputes. In addition, from time to time we
are subject to other legal proceedings and claims in the
ordinary course of business, including claims of alleged
infringement of trademarks, copyrights, trade secrets and other
intellectual property rights, claims related to employment
matters, and a variety of other claims, including claims
alleging defamation, invasion of privacy, or similar claims
arising in connection with our
e-mail,
message boards, auction sites, shopping services, and other
communications and community features.
On May 24, 2001, Arista Records, Inc., Bad Boy Records, BMG
Music d/b/a The RCA Records Label, Capitol Records, Inc., Virgin
Records America, Inc., Sony Music Entertainment, Inc., UMG
Recordings, Inc., Interscope Records, Motown Record Company,
L.P., and Zomba Recording Corporation filed a lawsuit alleging
copyright infringement against LAUNCH Media, Inc.
(LAUNCH) in the United States District Court for the
Southern District of New York. The plaintiffs alleged, among
other things, that the consumer-influenced portion of
LAUNCHs LAUNCHcast service is interactive
within the meaning of Section 114 of the Copyright Act and
therefore does not qualify for the compulsory license provided
for by the Copyright Act. The complaint sought declaratory and
injunctive relief and damages for the alleged infringement.
After the lawsuit was commenced, Yahoo! entered into an
agreement to acquire LAUNCH, which closed in August 2001, and
since that time LAUNCH has been a wholly owned subsidiary of
Yahoo!. Because LAUNCH settled the LAUNCH litigation as to all
other plaintiffs, BMG Music d/b/a/The RCA Records Label was the
sole remaining plaintiff in this proceeding. On April 27,
2007, after a two week jury trial, the jury returned a unanimous
verdict in favor of LAUNCH finding no liability. The plaintiff
has filed a notice of appeal to the United States Court of
Appeals for the Second Circuit.
On July 12, 2001, the first of several purported securities
class action lawsuits was filed in the U.S. District Court,
Southern District of New York against certain underwriters
involved in Overture Services Inc.s (Overture)
IPO, Overture, and certain of Overtures current and former
officers and directors. The Court consolidated the cases
against Overture. Plaintiffs allege, among other things,
violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934 involving undisclosed compensation to the
underwriters, and improper practices by the underwriters, and
seek unspecified damages. Similar complaints were filed in the
same court against numerous public companies that conducted IPOs
of their common stock since the mid-1990s. All of these
lawsuits were consolidated for pretrial purposes before Judge
Shira Scheindlin. On April 19, 2002, plaintiffs filed an
amended complaint. On July 15, 2002, the issuers filed an
omnibus motion to dismiss for failure to comply with applicable
pleading standards. On October 8, 2002, the Court entered
an Order of Dismissal as to all of the individual defendants in
the Overture IPO litigation, without prejudice. On
February 19, 2003, the Court denied the motion to dismiss
the claims against certain defendants, including Overture. In
June 2004, a stipulation of settlement and release of claims
against the issuer defendants, including Overture, was submitted
to the Court for approval. While the partial settlement was
pending approval, the plaintiffs continued to litigate against
the underwriter defendants. The district court directed that
the litigation proceed within a number of focus
cases rather than in all of the 310 cases that had been
consolidated. Overtures case is not one of these focus
cases. On October 13, 2004, the district court certified
these focus cases as class actions. The underwriter defendants
appealed that ruling, and on December 5, 2006, the Court of
Appeals for the Second Circuit overturned the district
courts class certification decision. Since class
certification, which was a condition of the settlement, was not
met, the parties stipulated to terminate the settlement. On
June 25, 2007, the Court entered an order terminating the
proposed settlement based upon this stipulation. Plaintiffs
amended complaints in the six cases. On March 26, 2008,
the district court denied the motions to dismiss except as to
Section 11 claims raised by some plaintiffs who sold their
securities for a price in excess of the initial offering price
and those who purchased outside the previously certified class
period. Initial briefing on the class certification motion was
completed in April 2008. We intend to defend the case
vigorously.
In May 2007, two purported class actions were commenced by
plaintiffs Ellen Brodsky and Manifred Hacker, asserting claims
arising under the federal securities laws against us and certain
individual defendants. These actions were ordered consolidated
in the U.S. District Court for the Central District of
California and, on December 21, 2007, a Consolidated
Amended Complaint was filed against Yahoo! and certain
individual defendants, including
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current and former officers and a former director and officer.
Plaintiffs purport to represent a class of persons who purchased
Yahoo!s common stock between April 8, 2004 and
July 18, 2006. Plaintiffs allege that defendants engaged
in a scheme to inflate Yahoo!s share price by making false
and misleading statements regarding Yahoo!s operations,
financial results, and future business prospects in violation of
Section 10(b) of the Securities Exchange Act of 1934 and
SEC
Rule 10b-5.
Plaintiffs also allege that the individual defendants engaged in
insider trading in violation of the Section 20(A) of the
Securities Exchange Act, and as control persons are subject to
liability under Section 20(A) of the Securities Exchange
Act. The Consolidated Amended Complaint seeks compensatory
damages, injunctive relief, disgorgement of alleged insider
trading proceeds, and other equitable relief. On March 10,
2008, the Court granted defendants motion to transfer the
action to the U.S. District Court for the Northern District
of California.
On May 15, 2007, a stockholder derivative complaint was
filed in the California Superior Court, Santa Clara County,
by Greg Brockwell against members of Yahoo!s Board of
Directors and selected officers. Brockwell seeks to prosecute
the action on behalf of Yahoo!, which is named as a
nominal defendant, and to obtain relief on behalf of
Yahoo!. The complaint alleges breaches of state law, including
breaches of fiduciary duties, waste of corporate assets, unjust
enrichment, and violations of the California Corporations Code
between April 2004 and the present. The derivative complaint
alleges facts substantially similar to the Consolidated Amended
Complaint in the federal class action litigation, and seeks, on
behalf of Yahoo!, treble damages under California law, equitable
and injunctive relief, restitution, and reimbursement of costs.
Discovery has been initiated, and a status conference is set for
May 16, 2008. On June 14, 2007, a second stockholder
derivative action was filed in the U.S. District Court for
the Central District of California by Jill Watkins against
members of the Board of Directors and selected officers. The
complaint filed by Plaintiff Watkins is substantially similar to
the complaint filed by Plaintiff Brockwell, with the addition of
a claim for relief for alleged violation of Section 10(b)
of the Securities Exchange Act of 1934. The federal derivative
plaintiff (Watkins) has agreed to coordinate her action with the
consolidated federal class action litigation. On April 15,
2008, defendants filed a motion to transfer the Watkins federal
derivative action to accompany the previously transferred
Consolidated Amended Complaint in the Brodsky federal class
action litigation. On April 21, 2008, defendants also
opposed plaintiffs motion to further amend the complaint
to assert allegations relating to Microsofts
February 1, 2008 unsolicited proposal to acquire Yahoo!
Inc. On April 29, 2008, the Watkins action was transferred
to the U.S. District Court for the Northern District of
California, and a motion to amend the complaint was denied by
the transferring court.
Since February 1, 2008, five separate stockholder lawsuits
were filed in the California Superior Court, Santa Clara
County, against Yahoo! Inc., members of the Board of Directors,
and selected former officers by plaintiffs Edward Fritsche, the
Thomas Stone Trust, Tom Turberg, Congregation Beth Aaron, and
the Louisiana Municipal Police Employees Retirement System
(the California Lawsuits). The California Lawsuits
were consolidated, and on March 12, 2008, a Consolidated
Amended Class Action and Derivative Complaint was filed,
captioned, In re Yahoo! Inc. Shareholder Litigation, in
Santa Clara County Superior Court. The Consolidated
Amended Class and Derivative Complaint alleges that the Yahoo!
Board of Directors breached fiduciary duties in connection with
Microsofts unsolicited proposal to acquire Yahoo!. The
Consolidated Amended Class and Derivative Complaint seeks
declaratory and injunctive relief, as well as an award of
plaintiffs attorneys fees and costs. On
March 28, 2008, the Santa Clara County Superior Court
granted defendants motion to stay the Consolidated Amended
Class Action and Derivative Complaint pending resolution of
similar proceedings pending in Delaware Court of Chancery
described below.
Since February 11, 2008, five separate stockholder lawsuits
were filed in Delaware Court of Chancery against Yahoo! Inc. and
members of the Board of Directors by plaintiffs The Wayne County
Employees Retirement System, Ronald Dicke, and The Police
and Fire Retirement System of the City of Detroit along with The
General Retirement System of the City of Detroit, Plumbers and
Pipefitters Local Union No. 630 Pension-Annuity
Trust Fund and Vernon A. Mercier (the Delaware
Lawsuits). Two of the Delaware Lawsuits (by plaintiff
Wayne County and by plaintiff Plumbers and Pipefitters Local
Union) were voluntarily dismissed. All of the remaining
Delaware Lawsuits were consolidated (lead plaintiff is the
Police and Fire Retirement System of the City of Detroit) and
lead counsel was appointed. The plaintiffs in the Delaware
Lawsuits purport to assert class claims on behalf of all Yahoo!
stockholders, except defendants and their affiliates and
generally allege that defendants breached fiduciary duties by
rejecting Microsofts February 1, 2008, unsolicited
proposal to acquire Yahoo! Inc. without fully
47
informing themselves whether Microsoft would offer additional
consideration and alleging that defendants are not acting in the
best interests of stockholders and are seeking to entrench
themselves through a series of defensive initiatives. The
complaints in the Delaware Court of Chancery seek unspecified
damages, declaratory relief and injunctive relief, as well as an
award of plaintiffs attorneys fees and costs.
Pursuant to a case management order, defendants are responding
to expedited discovery. On March 24, 2008, the Court
denied plaintiffs motion to set an expedited trial date in
May 2008.
We may incur substantial expenses in defending against such
claims, and it is not presently possible to accurately forecast
their outcome. We do not believe, based on current knowledge,
that any of the foregoing legal proceedings or claims are likely
to have a material adverse effect on our financial position,
results of operations, or cash flows. In the event of a
determination adverse to Yahoo! Inc. or its subsidiaries, we may
incur substantial monetary liability, and be required to change
our business practices. Either of these could have a material
adverse effect on our financial position, results of operations,
or cash flows.
We have updated the risk factors previously disclosed in
Part I Item 1A of our Annual Report on
Form 10-K
for the year ended December 31, 2007, which was filed with
the Securities and Exchange Commission on February 27,
2008, as set forth below. We do not believe any of the changes
constitute material changes from the risk factors previously
disclosed in the
10-K for the
year ended December 31, 2007.
We
face significant competition from large-scale Internet content,
product and service aggregators, principally Google, Microsoft
and AOL.
We face significant competition from companies, principally
Google, Microsoft, and AOL, that have aggregated a variety of
Internet products, services, technologies, and content in a
manner similar to Yahoo!. Googles Internet search service
directly competes with us for Affiliate and advertiser
arrangements, both of which are key to our business and
operating results. Microsofts Internet search service
also directly competes with us for Affiliate and advertiser
arrangements with paid search, and may release features that may
make Internet searching capabilities a more integrated part of
its Windows operating system. Additionally, Google and
Microsoft both offer many other services that directly compete
with our services, including Internet advertising solutions,
consumer
e-mail
services, desktop search, local search, instant messaging,
photos, maps, video sharing, content channels, mobile
applications, and shopping services. AOL has access to content
from Time Warners movie, television, music, book,
periodical, news, sports, and other media holdings; access to a
network of cable and other broadband users and delivery
technologies; advertising offerings; and considerable resources
for future growth and expansion. Some of the existing
competitors and possible additional entrants may have greater
operational, strategic, technological, financial, personnel, or
other resources than we do, as well as greater brand recognition
either overall or for certain products and services. We expect
these competitors increasingly to use their financial and
engineering resources to compete with us, individually and
potentially in combination with each other. In certain of these
cases, most notably AOL, our competition has a direct billing
relationship with a greater number of their users through
Internet access and other services than we have with our users
through our premium services. This relationship may permit such
competitors to be more effective than us in targeting services
and advertisements to the specific preferences of their users
thereby giving them a competitive advantage. If our competitors
are more successful than we are in developing compelling
products or attracting and retaining users, advertisers,
publishers, or developers, then our revenues and growth rates
could decline.
We
also face competition from other Internet service companies,
including Internet access providers, device manufacturers
offering online services, Internet advertising companies, and
destination Websites.
Our users must access our services through Internet access
providers, including wireless providers and providers of cable
and broadband Internet access. To the extent that an access
provider or device manufacturer offers online services
competitive with those of Yahoo!, the user may elect to use the
services or properties of that access provider or manufacturer.
In addition, the access provider or manufacturer may make it
difficult to access our services by not listing them in the
access providers or manufacturers own directory or
by providing Yahoo! with less prominent listings than the access
provider, manufacturer, or a competitors offerings. Such
access
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providers and manufacturers may prove better able to target
services and advertisements to the preferences of their users.
If such access providers and device manufacturers are more
successful than we are in developing compelling products or
attracting and retaining users or advertisers, then our revenues
could decline. Further, to the extent that Internet access
providers, mobile service providers, or network providers
increase the costs of service to users or restrict Yahoo!s
ability to deliver products, services, and content to
advertisers or end users or increase our costs of doing so, our
revenues could decline.
We also compete for users and advertisers with many other
providers of online services, including Internet advertising
companies, destination Websites and social media and networking
sites. Some of these competitors may have more expertise in a
particular segment of the market, and within such segment, have
longer operating histories, larger advertiser or user bases, and
more brand recognition or technological features than we offer.
In the future, competitors may acquire additional competitive
offerings, and if we are unable to complete strategic
acquisitions or investments, our business could become less
competitive. Further, competitors may consolidate with each
other to become more competitive, and new competitors may enter
the market. If our competitors are more successful than we are
in developing compelling products or attracting and retaining
users, advertisers, publishers, or developers, then our revenues
and growth rates could decline.
We
face significant competition from traditional media companies
which could adversely affect our future operating
results.
We also compete with traditional media companies for
advertising, both offline as well as increasingly with their
online assets as media companies offer more content directly
from their own Websites. Most advertisers currently spend only
a small portion of their advertising budgets on Internet
advertising. If we fail to persuade existing advertisers to
retain and increase their spending with us and if we fail to
persuade new advertisers to spend a portion of their budget on
advertising with us, our revenues could decline and our future
operating results could be adversely affected.
If we
are unable to provide search technologies and other services
which generate significant traffic to our Websites, or we are
unable to enter into or continue distribution relationships that
drive significant traffic to our Websites, our business could be
harmed, causing our revenues to decline.
We have deployed our own Internet search technology to provide
search results on our network. We have more limited experience
in operating our own search service than do some of our
competitors. Internet search is characterized by rapidly
changing technology, significant competition, evolving industry
standards, and frequent product and service enhancements. We
must continually invest in improving our users experience,
including search relevance, speed, and services responsive to
users needs and preferences, to continue to attract,
retain, and expand our user base. If we are unable to provide
search technologies and other services which generate
significant traffic to our Websites, or if we are unable to
enter into distribution relationships that continue to drive
significant traffic to our Websites, our business could be
harmed, causing our revenues to decline.
The
majority of our revenues are derived from marketing services,
and the reduction in spending by or loss of current or potential
advertisers would cause our revenues and operating results to
decline.
For the quarter ended March 31, 2008, 87 percent of
our total revenues came from marketing services. Our ability to
continue to retain and grow marketing services revenue depends
upon:
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maintaining our user base;
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maintaining our popularity as an Internet destination site;
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broadening our relationships with advertisers to small-and
medium-sized businesses;
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attracting advertisers to our user base;
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increasing demand for our services by advertisers, users,
businesses and Affiliates, including prices paid by advertisers,
the number of searches performed by users, the rate at which
users click-through to commercial search results and advertiser
perception of the quality of leads generated by our marketing
services;
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the successful implementation and acceptance of our advertising
exchange by advertisers, networks, Affiliates, and publishers;
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the successful development and deployment of technology
improvements to our advertising platform;
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maintaining our Affiliate program for our search marketing;
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deriving better demographic and other information from our
users; and
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driving acceptance of the Web in general and of Yahoo! in
particular by advertisers as an advertising medium.
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In many cases, our agreements with advertisers have terms of one
year or less, or, in the case of search marketing, may be
terminated at any time by the advertiser or Yahoo!. Search
marketing agreements often have payments dependent upon usage or
click-through levels. Accordingly, it is difficult to forecast
marketing services revenues accurately. In addition, our
expense levels are based in part on expectations of future
revenues, including occasional guaranteed minimum payments to
our Affiliates in connection with search
and/or
display advertising, and are fixed over the short-term with
respect to certain categories. Any reduction in spending by or
loss of existing or potential future advertisers would cause our
revenues to decline. Further, we may be unable to adjust
spending quickly enough to compensate for any unexpected revenue
shortfall.
In
certain markets, we depend on a limited number of sources to
direct a significant percentage of users and businesses to our
service to conduct searches and a loss of any of these sources
could harm our operating results.
A significant percentage of users and businesses that conduct
searches and access our search marketing listings come from a
limited number of sources in certain markets. In addition to
Yahoo! Properties, sources for users are members of our
Affiliate network, including portals, browsers, and other
Affiliates. Our agreements with Affiliates vary in duration,
and depending on the agreement, provide varying levels of
discretion to the Affiliate in the implementation of search
marketing, including the degree to which Affiliates can modify
the presentation of the search marketing listings on their
Websites or integrate search marketing with their own services.
The agreements may be terminable upon the occurrence of certain
events, including failure to meet certain service levels,
material breaches of agreement terms, changes in control, or, in
some instances, at will. We may not be successful in renewing
our Affiliate agreements on as favorable terms or at all. The
loss of Affiliates providing significant users or businesses or
an adverse change in implementation of search marketing by any
of these Affiliates could harm our ability to generate revenue,
our operating results, and cash flows from operations.
We may
not be able to generate substantial revenues from our alliances
with Internet access providers.
Through alliances with Internet access providers, we offer
access services that combine customized content and services
from Yahoo! (including browser and other communications
services) and Internet access from third-party access
providers. We may not be able to retain the alliances with our
existing Internet access providers or to obtain new alliances
with Internet access providers on terms that are reasonable. In
addition, these Internet access services compete with many large
companies such as AOL, Microsoft, Comcast Corporation, and other
established Internet access providers. In certain of these
cases, our competition has substantially greater market presence
(including an existing user base) and greater financial,
technical, marketing, or other resources. As a result of these
and other competitive factors, the Internet access providers
with which we have formed alliances may not be able to attract,
grow, or retain their user bases, which would negatively impact
our ability to sell customized content and services through this
channel and, in turn, reduce our anticipated revenues from our
alliances.
Some
of our shared revenue arrangements may not generate anticipated
revenues.
We typically receive co-branded revenue through revenue sharing
arrangements or a portion of transactions revenue. In some
cases, our revenue arrangements require that minimum levels of
user impressions be provided by
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us. These arrangements expose us to potentially significant
financial risks in the event our usage levels decrease,
including the following:
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the revenue we are entitled to receive may be adjusted downwards;
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we may be required to make good on our obligations
by providing additional advertising or alternative services;
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the partners of co-branded services may not renew the
arrangements or may renew at less advantageous terms for the
Company; and
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the arrangements may not generate anticipated levels of shared
transactions revenue, or partners may default on the payment
commitments in such agreements as has occurred in the past.
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Accordingly, any leveling off or decrease of our user base (or
usage by our existing base) or the failure to generate
anticipated levels of shared transactions revenue could result
in a significant decrease in our revenues.
Decreases
or delays in advertising spending by our advertisers due to
general economic conditions could harm our ability to generate
advertising revenues.
Expenditures by advertisers tend to be cyclical, reflecting
overall economic conditions and budgeting and buying patterns.
Since we derive most of our revenues from advertising, any
decreases in or delays in advertising spending due to general
economic conditions could reduce our revenues or negatively
impact our ability to grow our revenues.
Financial
results for any particular period do not predict results for
future periods.
There can be no assurance that the purchasing pattern of
advertisers on Yahoo! Properties will not fluctuate, that
advertisers will not make smaller and shorter-term purchases, or
that market prices for online advertising will not decrease due
to competitive or other factors. In addition, there can be no
assurance that the volume of searches conducted, the amounts bid
by advertisers for search marketing listings or the number of
advertisers that bid in our search marketing marketplace will
not vary widely from period to period. As revenues from new
sources increase, it may become more difficult to predict our
financial results based on historical performance. You should
not rely on the results for any period as an indication of
future performance.
We
estimate tax liabilities, the final determination of which is
subject to review by domestic and international taxation
authorities.
We are subject to income taxes and other taxes in both the
U.S. and the foreign jurisdictions in which we currently
operate or have historically operated. We are also subject to
review and audit by both domestic and foreign taxation
authorities. The determination of our worldwide provision for
income taxes and current and deferred tax assets and liabilities
requires judgment and estimation. In the ordinary course of our
business, there are many transactions and calculations where the
ultimate tax determination is uncertain. Although we believe
our tax estimates are reasonable, the ultimate tax outcome may
materially differ from the tax amounts recorded in our
consolidated financial statements and may materially affect our
income tax provision, net income, or cash flows in the period or
periods for which such determination is made.
We
rely on the value of our brands, and a failure to maintain or
enhance the Yahoo! brands in a cost-effective manner could harm
our operating results.
We believe that maintaining and enhancing our brands, including
those that contain the Yahoo! name as well as those that do not,
is an important aspect of our efforts to attract and expand our
user, advertiser, and Affiliate base. We also believe that the
importance of brand recognition will increase due to the
relatively low barriers to entry in the Internet market. We
have spent considerable money and resources to date on the
establishment and maintenance of our brands, and we anticipate
spending increasing amounts of money on, and devoting greater
resources to, advertising, marketing, and other brand-building
efforts to preserve and enhance consumer awareness of our
brands. We may not be able to successfully maintain or enhance
consumer awareness of our brands and, even if we are
51
successful in our branding efforts, these efforts may not be
cost-effective. If we are unable to maintain or enhance
customer awareness of our brands in a cost-effective manner, our
business, operating results, and financial condition could be
harmed.
If we
are unable to license or acquire compelling content at
reasonable cost or if we do not develop or commission compelling
content of our own, the number of users of our services may not
grow as anticipated, or may decline, or users level of
engagement with our services may decline, all or any of which
could harm our operating results.
Our future success depends in part upon our ability to aggregate
compelling content and deliver that content through our online
properties. We license much of the content on our online
properties, such as news items, stock quotes, weather reports,
maps and audio and video content from third-parties. We have
been providing increasing amounts of audio and video content to
our users, and we believe that users will increasingly demand
high-quality audio and video content, such as music, film,
speeches, news footage, concerts, and other special events.
Such content may require us to make substantial payments to
third-parties from whom we license or acquire such content. For
example, our music and entertainment properties rely on major
sports organizations, radio and television stations, record
labels, music publishers, cable networks, businesses, colleges
and universities, film producers and distributors, and other
organizations for a large portion of the content available on
our properties. Our ability to maintain and build relationships
with third-party content providers will be critical to our
success. In addition, as new methods for accessing the Internet
become available, including through alternative devices, we may
need to enter into amended content agreements with existing
third-party content providers to cover the new devices. Also,
to the extent that Yahoo! develops content of its own,
Yahoo!s current and potential third-party content
providers may view our services as competitive with their own,
and this may adversely affect their willingness to contract with
us. We may be unable to enter into new, or preserve existing,
relationships with the third-parties whose content we seek to
obtain. In addition, as competition for compelling content
increases both domestically and internationally, our content
providers may increase the prices at which they offer their
content to us, and potential content providers may not offer
their content to us at all, or may offer it on terms that are
not agreeable to us. An increase in the prices charged to us by
third-party content providers could harm our operating results
and financial condition. Further, many of our content licenses
with third-parties are non-exclusive. Accordingly, other
Webcasters and other media providers, such as radio or
television providers, may be able to offer similar or identical
content. This increases the importance of our ability to
deliver compelling editorial content and personalization of this
content for users in order to differentiate Yahoo! from other
businesses. If we are unable to license or acquire compelling
content at reasonable prices, if other companies broadcast
content that is similar to or the same as that provided by
Yahoo!, or if we do not develop compelling editorial content or
personalization services, the number of users of our services
may not grow as anticipated, or may decline, which could harm
our operating results.
Our
intellectual property rights are valuable, and any inability to
protect them could reduce the value of our brand image and harm
our business and our operating results.
We create, own and maintain a wide array of intellectual
property assets, including copyrights, patents, trademarks,
trade dress, trade secrets and rights to certain domain names,
which we believe are among our most valuable assets. We seek to
protect our intellectual property assets through patent,
copyright, trade secret, trademark, and other laws of the
U.S. and other countries of the world, and through
contractual provisions. The efforts we have taken to protect
our intellectual property and proprietary rights may not be
sufficient or effective at stopping unauthorized use of those
rights. In addition, effective trademark, patent, copyright, and
trade secret protection may not be available or cost-effective
in every country in which our products and media properties are
distributed or made available through the Internet. There may
be instances where we are not able to fully protect or utilize
our intellectual property assets in a manner to maximize
competitive advantages. Further, while we attempt to ensure
that the quality of our brand is maintained by our licensees,
our licensees may take actions that could impair the value of
our brand, our proprietary rights, or the reputation of our
products and media properties. We are aware that third-parties
have, from time to time, misused or exploited our brands without
permission or copied significant content available on Yahoo! for
use in competitive Internet services. Protection of the
distinctive elements of Yahoo! may not be available under
copyright law or trademark law. If we are unable to protect our
proprietary rights from unauthorized use, the value of our brand
image may be reduced. Any impairment of our
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brand could negatively impact our business. In addition,
protecting our intellectual property and other proprietary
rights is expensive and time consuming. Any increase in the
unauthorized use of our intellectual property could make it more
expensive to do business and consequently harm our operating
results.
We
are, and may in the future be, subject to intellectual property
infringement claims, which are costly to defend, could result in
significant damage awards, and could limit our ability to
provide certain content or use certain technologies in the
future.
Internet, technology, media companies, and patent holding
companies often possess a significant number of patents.
Further, many of these companies and other parties are actively
developing or purchasing search, indexing, electronic commerce,
and other Internet-related technologies, as well as a variety of
online business models and methods. We believe that these
parties will continue to take steps to protect these
technologies, including, but not limited to, seeking patent
protection. In addition, patent holding companies may continue
to seek to monetize patents they have purchased or otherwise
obtained. As a result, disputes regarding the ownership of
technologies and rights associated with online business are
likely to continue to arise in the future. From time to time,
parties assert patent infringement claims against us.
Currently, we are engaged in a number of lawsuits regarding
patent issues and have been notified of a number of other
potential disputes.
In addition to patent claims, third-parties have asserted, and
are likely in the future to assert, claims against us alleging
infringement of copyrights, trademark rights, trade secret
rights or other proprietary rights, or alleging unfair
competition or violations of privacy rights or failure to
maintain confidentiality of user data. In addition,
third-parties have made, and may continue to make, trademark
infringement and related claims against us over the display of
search results triggered by search terms that include trademark
terms.
As we expand our business and develop new technologies, products
and services, we may become increasingly subject to intellectual
property infringement claims. In the event that there is a
determination that we have infringed third-party proprietary
rights such as patents, copyrights, trademark rights, trade
secret rights, or other third-party rights such as publicity and
privacy rights, we could incur substantial monetary liability,
be required to enter into costly royalty or licensing agreements
or be prevented from using such rights, which could require us
to change our business practices in the future and limit our
ability to compete effectively. We may also incur substantial
expenses in defending against third-party infringement claims
regardless of the merit of such claims. In addition, many of
our agreements with our customers or Affiliates require us to
indemnify them for certain third-party intellectual property
infringement claims, which could increase our costs in defending
such claims and our damages. The occurrence of any of these
results could harm our brand and negatively impact our operating
results.
We are
subject to U.S. and foreign government regulation of Internet,
mobile, and Voice over Internet Protocol services which could
subject us to claims, judgments, and remedies including monetary
liabilities and limitations on our business
practices.
We are subject to regulations and laws directly applicable to
providers of Internet, mobile, and Voice over Internet Protocol
services both domestically and internationally. The application
of existing domestic and international laws and regulations to
Yahoo! relating to issues such as user privacy and data
protection, defamation, pricing, advertising, taxation,
gambling, sweepstakes, promotions, billing, real estate,
consumer protection, content regulation, quality of services,
telecommunications, mobile and intellectual property ownership
and infringement in many instances is unclear or unsettled. In
addition, we will also be subject to any new laws and
regulations directly applicable to our domestic and
international activities. Further, the application of existing
laws to Yahoo! or our subsidiaries regulating or requiring
licenses for certain businesses of our advertisers including,
for example, distribution of pharmaceuticals, alcohol, adult
content, tobacco, or firearms, as well as insurance and
securities brokerage and legal services, can be unclear.
Internationally, we may also be subject to laws regulating our
activities in foreign countries and to foreign laws and
regulations that are inconsistent from country to country.
Recently, plaintiffs have attempted to use U.S. statutes in
efforts to recover damages against corporations, including
Yahoo!, for alleged human rights abuses committed by foreign
governments. We may incur substantial liabilities for expenses
necessary to defend such litigation or to comply with these laws
and regulations, as well as potential substantial penalties for
any failure to comply. Compliance with these laws and
regulations may also cause us to change or limit our business
practices in a manner adverse to our business.
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A number of U.S. federal laws, including those referenced
below, impact our business. The Digital Millennium Copyright
Act (DMCA) is intended, in part, to limit the
liability of eligible online service providers for listing or
linking to third-party Websites that include materials that
infringe copyrights or other rights of others. Portions of the
Communications Decency Act (CDA) are intended to
provide statutory protections to online service providers who
distribute third-party content. Yahoo! relies on the
protections provided by both the DMCA and CDA in conducting its
business. Any changes in these laws or judicial interpretations
narrowing their protections will subject us to greater risk of
liability and may increase our costs of compliance with these
regulations or limit our ability to operate certain lines of
business. The Childrens Online Protection Act and the
Childrens Online Privacy Protection Act are intended to
restrict the distribution of certain materials deemed harmful to
children and impose additional restrictions on the ability of
online services to collect user information from minors. In
addition, the Protection of Children From Sexual Predators Act
of 1998 requires online service providers to report evidence of
violations of federal child pornography laws under certain
circumstances. The costs of compliance with these regulations
may increase in the future as a result of changes in the
regulations or the interpretation of them. Further, any failure
on our part to comply with these regulations may subject us to
significant liabilities.
Changes
in regulations or user concerns regarding privacy and protection
of user data could adversely affect our business.
Federal, state, foreign and international laws and regulations
may govern the collection, use, retention, sharing and security
of data that we receive from our users, advertising partners,
and Affiliates. In addition, we have posted on our and our
Affiliates Websites our own privacy policies and practices
concerning the collection, use, and disclosure of user data.
Any failure, or perceived failure, by us to comply with our
posted privacy policies or with any data-related consent orders,
Federal Trade Commission requirements or orders, or other
federal, state, or international privacy or consumer
protection-related laws, regulations or industry self-regulatory
principles could result in proceedings or actions against us by
governmental entities or others, which could potentially have an
adverse effect on our business.
Further, failure or perceived failure by us to comply with our
policies, applicable requirements, or industry self-regulatory
principles related to the collection, use, sharing or security
of personal information, or other privacy or data
protection-related matters could result in a loss of user
confidence in us, damage to the Yahoo! brands, and ultimately in
a loss of users, advertising partners, or Affiliates which could
adversely affect our business.
A large number of legislative proposals pending before the
U.S. Congress, various federal and state and legislative
bodies and foreign governments concern data privacy and
retention issues related to our business. It is not possible to
predict whether or when such legislation may be adopted. Certain
proposals, if adopted, could impose requirements that may result
in a decrease in our user registrations and revenues. In
addition, the interpretation and application of privacy, data
protection and data retention laws and regulations are currently
unsettled in the U.S. and internationally. These laws may
be interpreted and applied inconsistently from country to
country and inconsistently with our current data protection
policies and practices. Complying with these varying
international requirements could cause us to incur substantial
costs or require us to change our business practices in a manner
adverse to our business.
Acquisitions
and strategic investments could result in adverse impacts on our
operations and in unanticipated liabilities.
We have acquired, and have made strategic investments in, a
number of companies (including through joint ventures) in the
past, and we expect to make additional acquisitions and
strategic investments in the future. Such transactions may
result in dilutive issuances of our equity securities, use of
our cash resources, and incurrence of debt and amortization
expenses related to intangible assets. Our acquisitions and
strategic investments to date were accompanied by a number of
risks, including:
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the difficulty of assimilating the operations and personnel of
our acquired companies into our operations;
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the potential disruption of our on-going business and
distraction of management;
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the incurrence of additional operating losses and expenses of
the businesses we acquired or in which we invested;
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the difficulty of integrating acquired technology and rights
into our services and unanticipated expenses related to such
integration;
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the failure to successfully further develop acquired technology
resulting in the impairment of amounts currently capitalized as
intangible assets;
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the failure of strategic investments to perform as expected;
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the potential for patent and trademark infringement claims
against the acquired company;
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the impairment of relationships with customers and partners of
the companies we acquired or in which we invested or with our
customers and partners as a result of the integration of
acquired operations;
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the impairment of relationships with employees of the acquired
companies or our existing employees as a result of integration
of new management personnel;
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the difficulty of integrating the acquired companys
accounting, management information, human resources and other
administrative systems;
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our lack of, or limitations on, our control over the operations
of our joint venture companies;
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in the case of foreign acquisitions, uncertainty regarding
foreign laws and regulations and difficulty integrating
operations and systems as a result of cultural, systems, and
operational differences; and
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the impact of known potential liabilities or unknown liabilities
associated with the companies we acquired or in which we
invested.
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We are likely to experience similar risks in connection with our
future acquisitions and strategic investments. Our failure to
be successful in addressing these risks or other problems
encountered in connection with our past or future acquisitions
and strategic investments could cause us to fail to realize the
anticipated benefits of such acquisitions or investments, incur
unanticipated liabilities and harm our business generally.
Our
failure to manage growth, diversification, and changes to our
business could harm us.
We are continuing to grow, diversify, and evolve our business
both in the U.S. and internationally. As a result of the
diversification of our business, personnel growth, acquisitions,
and international expansion in recent years, more than one-half
of our employees are now based outside of our Sunnyvale,
California headquarters. If we are unable to effectively manage
a large and geographically dispersed group of employees or to
anticipate our future growth and personnel needs, our business
may be adversely affected.
As we grow and diversify our business, we must also expand and
adapt our operational infrastructure. Our business relies on
our data systems, billing systems, and other operational and
financial reporting and control systems. All of these systems
have become increasingly complex in the recent past due to the
growing diversification and complexity of our business, to
acquisitions of new businesses with different systems and to
increased regulation over controls and procedures. To
effectively manage our technical support infrastructure, we will
need to continue to upgrade and improve our data systems,
billing systems, and other operational and financial systems,
procedures and controls. In particular, any failure of our
billing systems to accommodate increasing numbers of
transactions and accurately bill users, advertisers, and
Affiliates could adversely affect our business and ability to
collect revenue. These upgrades and improvements will require a
dedication of resources and in some cases are likely to be
complex. If we are unable to adapt our systems in a timely
manner to accommodate our growth, our business may be adversely
affected.
We have announced and are currently implementing on-going
strategic initiatives to better and more efficiently manage our
business. Implementing these initiatives requires significant
time and resource commitments from our senior management. In
the event that we are unable to effectively implement these
initiatives, we are unable to recruit, maintain the caliber of,
or retain key employees as a result of these initiatives or
these initiatives do not yield the anticipated benefits, our
business may be adversely affected.
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We
have dedicated considerable resources to provide a variety of
premium services, which may not prove to be successful in
generating significant revenue for us.
We offer fee-based enhancements to many of our free services,
including
e-mail,
personals, finance, games, music, and sports. The development
cycles for these technologies are long and generally require
significant investment by us. We have and will continue to
invest in new products and services. Some of these new products
and services may not be profitable or may not meet anticipated
user adoption rates. We have previously discontinued certain
non-profitable premium services and may discontinue others. We
must, however, continue to provide new services that are
compelling to our users while continuing to develop an effective
method for generating revenues for such services. General
economic conditions as well as the rapidly evolving competitive
landscape may affect users willingness to pay for such
services. If we cannot generate revenues from these services
that are greater than the cost of providing such services, our
operating results could be harmed.
If our
operating expenses continue to increase at a rate faster than we
grow revenues as we attempt to expand the Yahoo! brand, fund
product development, develop media properties, and acquire other
businesses or technologies, our operating results could be
reduced.
We currently expect that our operating expenses will continue to
increase as we expand our operations in areas of expected
growth, continue to develop and extend the Yahoo! brand, fund
greater levels of product development, develop and commercialize
additional media properties and premium services, and acquire
and integrate complementary businesses and technologies. If our
expenses continue to increase at a greater pace than our
revenues, our operating results could be reduced.
If we
are unable to maintain the caliber of our existing senior
management and key personnel and to hire new highly skilled
personnel, we may not be able to execute our business
plan.
We are substantially dependent on the continued services of our
senior management who have acquired specialized knowledge and
skills with respect to Yahoo! and its operations. The loss of
any of these individuals could harm our business. Our business
is also dependent on our ability to retain, attract, hire, and
motivate talented, highly skilled personnel. Achieving this
objective may be difficult due to many factors, including the
intense competition for such highly skilled personnel in the
San Francisco Bay Area, where our corporate headquarters
and the headquarters of several of our vertical and horizontal
competitors, are located, fluctuations in global economic and
industry conditions, changes in Yahoo!s management or
leadership, competitors hiring practices, and the
effectiveness of our compensation programs. If we do not
succeed in recruiting, retaining, and motivating our key
employees and in attracting new key personnel, we may be unable
to meet our business plan and as a result, our stock price may
decline.
More
individuals are utilizing non-Personal Computer
(PC), devices to access the Internet and our
services, and versions of our services developed or optimized
for these devices may not gain widespread adoption by users,
manufacturers, or distributors of such devices or may not work
on these devices, based on the broad range of unique technical
requirements that may be established for each device by their
manufacturers and distributors globally.
The number of individuals who access the Internet through
devices other than a PC, such as personal digital assistants,
mobile telephones, televisions, and set-top box devices, has
increased dramatically, and the trend is likely to continue.
Our services were originally designed for rich, graphical
environments such as those available on the desktop and PC. The
lower resolution, functionality, and memory associated with
alternative devices currently available may make the use of our
services through such devices difficult, and the versions of our
services developed for these devices may not be compelling to
users, manufacturers, or distributors of alternative devices.
Each manufacturer or distributor may establish unique technical
standards for its devices, and our services may not work or be
viewable on these devices as a result. As we have limited
experience to date in operating versions of our services
developed or optimized for users of alternative devices, and as
new devices and new platforms are continually being released, it
is difficult to predict the problems we may encounter in
developing versions of our services for use on these alternative
devices, and we may need to devote significant resources to the
creation, support, and maintenance of such versions. We may be
unable to attract and retain a substantial number of
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alternative device manufacturers, distributors, and users to our
services, or to capture a sufficient share of an increasingly
important portion of the market for these services, and,
therefore, we may be unsuccessful in attracting both advertisers
and premium service subscribers to these services.
We
plan to expand operations in international markets in which we
may have limited experience or rely on business
partners.
We plan to expand Yahoo! branded online properties and search
offerings in international markets. We have currently
developed, through joint ventures, strategic investments,
subsidiaries, and branch offices, localized offerings in more
than 20 countries outside of the U.S. As we expand into new
international markets, we will have only limited experience in
marketing and operating our products and services in such
markets. In other instances, we may rely on the efforts and
abilities of foreign business partners in such markets. Certain
international markets may be slower than domestic markets in
adopting the Internet as an advertising and commerce medium and
so our operations in international markets may not develop at a
rate that supports our level of investment.
In
international markets we compete with local Internet service
providers that may have competitive advantages.
In a number of international markets, especially those in Asia,
Europe, and Latin America, we face substantial competition from
local Internet service providers and other portals that offer
search, communications, and other commercial services. Many of
these companies have a dominant market share in their
territories and are owned by local telecommunications providers
which give them a competitive advantage. Local providers of
competing online services may also have a substantial advantage
over us in attracting users in their country due to more
established branding in that country, greater knowledge with
respect to the tastes and preferences of users residing in that
country
and/or their
focus on a single market. Further, the local providers may have
greater regulatory and operational flexibility than Yahoo! due
to the fact that we are subject to both U.S. and foreign
regulatory requirements. We must continue to improve our local
offerings, become more knowledgeable about our local users and
their preferences, deepen our relationships with our local users
as well as increase our branding and other marketing activities
in order to remain competitive and strengthen our international
market position.
Our
international operations are subject to increased risks which
could harm our business, operating results, and financial
condition.
In addition to uncertainty about our ability to continue to
generate revenues from our foreign operations and expand our
international market position, there are certain risks inherent
in doing business internationally, including:
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trade barriers and changes in trade regulations;
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difficulties in developing, staffing, and simultaneously
managing a large number of varying foreign operations as a
result of distance, language, and cultural differences;
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stringent local labor laws and regulations;
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longer payment cycles;
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credit risk and higher levels of payment fraud;
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currency exchange rate fluctuations;
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political or social unrest or economic instability;
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import or export restrictions;
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seasonal volatility in business activity;
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risks related to government regulation or required compliance
with local laws in certain jurisdictions, including those more
fully described above; and
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potentially adverse tax consequences.
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One or more of these factors could harm our future international
operations and consequently, could harm our brand, business,
operating results, and financial condition.
We may
be subject to legal liability for online services.
We host a wide variety of services that enable individuals and
businesses to exchange information, generate content, advertise
products and services, conduct business, and engage in various
online activities on a domestic and an international basis. The
law relating to the liability of providers of these online
services for activities of their users is currently unsettled
both within the U.S. and internationally. Claims have been
threatened and have been brought against us for defamation,
negligence, copyright or trademark infringement, unfair
competition, unlawful activity, tort, including personal injury,
fraud, or other theories based on the nature and content of
information to which we provide links or that may be posted
online or generated by our users. In addition, Yahoo! has been
and may again in the future be subject to domestic or
international actions alleging that the availability of certain
content within our services violates laws in domestic and
international jurisdictions. Defense of any such actions could
be costly and involve significant time and attention of our
management and other resources.
We also periodically enter into arrangements to offer
third-party products, services, or content under the Yahoo!
brand or via distribution on Yahoo! Properties, including stock
quotes and trading information. We may be subject to claims
concerning these products, services, or content by virtue of our
involvement in marketing, branding, broadcasting, or providing
access to them, even if we do not ourselves host, operate,
provide, or provide access to these products, services, or
content. While our agreements with respect to these products,
services, and content, often provide that we will be indemnified
against such liabilities, the ability to receive such
indemnification depends on the financial resources of the other
party to the agreement and any amounts received may not be
adequate to cover our liabilities or the costs associated with
defense of such proceedings.
It is also possible that if the manner in which information is
provided or any information provided directly by us contains
errors or is otherwise wrongfully provided to users, third
parties could make claims against us. For example, we offer
Web-based
e-mail
services, which expose us to potential risks, such as
liabilities or claims resulting from unsolicited
e-mail, lost
or misdirected messages, illegal or fraudulent use of
e-mail, or
interruptions or delays in
e-mail
service. We may also face purported consumer class actions or
state actions relating to our online services, including our
fee-based services. In addition, our customers, third-parties
or government entities may assert claims or actions against us
if our online services are used to spread or facilitate
malicious or harmful applications. Investigating and defending
these types of claims is expensive, even if the claims are
without merit or do not ultimately result in liability, could
subject us to significant monetary liability or cause a change
in business practices that could impact our ability to compete.
We may
have difficulty scaling and adapting our existing technology
architecture to accommodate increased traffic and technology
advances or requirements of our users, advertisers, publishers,
and developers.
As one of the most highly trafficked Websites on the Internet,
Yahoo! delivers a growing number of products, services, and
Page Views to an increasing number of users around the
world. In addition, the products and services offered by Yahoo!
have expanded and changed significantly and are expected to
continue to expand and change rapidly in the future to
accommodate new technologies and new means of content delivery,
such as rich media, audio, and video. Our future success will
depend on our ability to adapt to rapidly changing technologies,
to adapt our products and services to evolving industry
standards, and to improve the performance and reliability of our
products and services. Rapid increases in the levels or types
of use of our online properties and services could result in
delays or interruptions in our service.
Widespread adoption of new Internet, networking or
telecommunications technologies, or other technological changes
could require substantial expenditures to modify or adapt our
services or infrastructure. The technology architectures
utilized for our services are highly complex and may not provide
satisfactory support in the future, as usage increases and
products and services expand, change and become more complex.
In the future, we may make changes to our architectures and
systems, including moving to completely new architectures and
systems. Such changes may be technologically challenging to
develop and implement, may take time to test and deploy, may
cause
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us to incur substantial costs or data loss, and may cause users,
advertisers, and Affiliates to experience delays or
interruptions in our service. These changes, delays, or
interruptions in our service may cause users, advertisers, and
Affiliates to become dissatisfied with our service and move to
competing providers of online services or to engage in
litigation. Further, to the extent that demands for our
services increase, we will need to expand our infrastructure,
including the capacity of our hardware servers and the
sophistication of our software. This expansion is likely to be
expensive and complex and require additional technical
expertise. As we acquire users who rely upon us for a wide
variety of services, it becomes more technologically complex and
costly to retrieve, store, and integrate data that will enable
us to track each users preferences. Any difficulties
experienced in adapting our architectures and infrastructure to
accommodate increased traffic, to store user data, and track
user preferences, together with the associated costs and
potential loss of traffic, could harm our operating results,
cash flows from operations, and financial condition.
Our
business depends on the continued growth and maintenance of the
Internet infrastructure.
The success and the availability of our Internet-based products
and services depends in part upon the continued growth and
maintenance of the Internet infrastructure itself, including its
protocols, architecture, network backbone, data capacity, and
security. Spam, viruses, worms, spyware, denial of service
attacks, phishing, and other acts of malice may affect not only
the Internets speed, reliability, and availability but
also its continued desirability as a vehicle for commerce,
information, and user engagement. If the Internet proves unable
to meet the new threats and increased demands placed upon it,
our business plans, user and advertiser relationships, site
traffic, and revenues could be adversely affected.
New
technologies could block our advertisements or our search
marketing listings, which would harm our operating
results.
Technologies have been developed and are likely to continue to
be developed that can block the display of our advertisements or
our search marketing listings. Most of our revenues are derived
from fees paid to us by advertisers in connection with the
display of advertisements or our search marketing listings on
Web pages. As a result, advertisement-blocking technology could
reduce the number of advertisements and search results that we
are able to deliver and, in turn, our advertising revenues and
operating results.
We
rely on third-party providers for our principal Internet
connections and technologies, databases, and network services
critical to our properties and services, and any errors,
failures, or disruption in the services provided by these
third-parties could significantly harm our business and
operating results.
We rely on private third-party providers for our principal
Internet connections, co-location of a significant portion of
our data servers, and network access. Any disruption, from
natural disasters, technology malfunctions, sabotage, or other
factors, in the Internet or network access or co-location
services provided by these third-party providers or any failure
of these third-party providers to handle current or higher
volumes of use could significantly harm our business, operating
results, and financial condition. We have little control over
these third-party providers, which increases our vulnerability
to disruptions or problems with their services. Any financial
difficulties experienced by our providers may have negative
effects on our business, the nature and extent of which we
cannot predict. We license technology and related databases
from third-parties for certain elements of our properties,
including, among others, technology underlying the delivery of
news, stock quotes and current financial information, chat
services, street mapping and telephone listings, streaming
capabilities, and similar services. We have experienced and
expect to continue to experience interruptions and delays in
service and availability for such elements. We also rely on a
third-party provider for key components of our
e-mail
service. Furthermore, we depend on hardware and software
suppliers for prompt delivery, installation and service of
servers, and other equipment to deliver our services. Any
errors, failures, interruptions or delays experienced in
connection with these third-party technologies and information
services could negatively impact our relationship with users and
adversely affect our brand, our business, and operating results.
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We
rely on distribution agreements and relationships with various
third-parties, and any failure to obtain or maintain such
distribution relationships on reasonable terms could impair our
ability to fully execute our business plan.
In addition to our relationships with Internet access providers,
we have certain distribution agreements and informal
relationships with operators of online networks and leading
Websites, software companies, electronics companies, and
computer manufacturers to increase traffic for our offerings and
make them more available and attractive to advertisers and
users. Depending on the distributor and the agreement, these
distribution arrangements may not be exclusive and may only have
a short term. Some of our distributors, particularly
distributors who are also competitors or potential competitors,
may not renew their distribution agreements with us. In
addition, as new methods for accessing the Internet become
available, including through alternative devices, we may need to
enter into amended distribution agreements with existing
distributors to cover the new devices and agreements with
additional distributors. In the future, existing and potential
distributors may not offer distribution of our properties and
services to us on reasonable terms, or at all. If we fail to
obtain distribution or to obtain distribution on terms that are
reasonable, we may not be able to fully execute our business
plan.
We
rely on third-party providers of rich media products to provide
the technologies required to deliver rich media content to our
users, and any change in the licensing terms, costs,
availability or user acceptance of these products could
adversely affect our business.
We rely on leading providers of streaming media products to
license the software necessary to deliver rich media content to
our users. There can be no assurance that these providers will
continue to license these products to us on reasonable terms, or
at all. Our users are currently able to electronically download
copies of the software to play rich media free of charge, but
providers of rich media products may begin charging users for
copies of their player software or otherwise change their
business model in a manner that slows the widespread acceptance
of these products. In order for our rich media services to be
successful, there must be a large base of users of these rich
media products. We have limited or no control over the
availability or acceptance of rich media software, and to the
extent that any of these circumstances occur, our business may
be adversely affected.
If we
fail to prevent click fraud, or other malicious applications or
activity of others, or if we choose to manage traffic quality in
a way that advertisers find unsatisfactory, we could lose the
confidence of our advertisers as well as face potential
litigation, government regulation or legislation, which could
adversely impact our business and profitability.
We are exposed to the risk of click fraud or other clicks or
conversions that advertisers may perceive as undesirable. If
fraudulent or other malicious applications or activity is
perpetrated by others and we are unable to detect and prevent
it, or if we choose to manage traffic quality in a way that
advertisers find unsatisfactory, the affected advertisers may
experience or perceive a reduced return on their investment in
our advertising programs which could lead the advertisers to
become dissatisfied with our advertising programs. This could
damage our brand and lead to a loss of advertisers and revenue.
Advertiser dissatisfaction has led to litigation alleging click
fraud and other types of traffic quality-related claims and
could potentially lead to further litigation or government
regulation of advertising. We may also issue refunds or credits
as a result of such activity. Any increase in costs due to any
such litigation, government regulation or legislation, refunds
or credits could negatively impact our profitability.
Interruptions,
delays, or failures in the provision of our services could
damage our brand and harm our operating results.
Our operations are susceptible to outages and interruptions due
to fire, flood, power loss, telecommunications failures, cyber
attacks, terrorist attacks, and similar events. In addition, a
significant portion of our network infrastructure is located in
Northern California, an area subject to earthquakes. Despite
our implementation of network security measures, our servers are
vulnerable to computer viruses, worms, physical and electronic
break-ins, sabotage, and similar disruptions from unauthorized
tampering with our computer systems. For example, we are
vulnerable to coordinated attempts to overload our systems with
data, resulting in denial or reduction of service to some or all
of our users for a period of time. We have experienced a
coordinated denial of service attack in the
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past, and may experience such attempts in the future. We do not
have multiple site capacity for all of our services and some of
our systems are not fully redundant in the event of any such
occurrence. In an effort to reduce the likelihood of a
geographical or other disaster impacting our business, we have
distributed and intend to continue distributing our servers
among additional data centers located around the world. Failure
to execute these changes properly or in a timely manner could
result in delays or interruptions to our service, which could
result in a loss of users, damage to our brand, and harm our
operating results. We may not carry sufficient business
interruption insurance to compensate us for losses that may
occur as a result of any events that cause interruptions in our
service.
We may
be required to record a significant charge to earnings if our
goodwill, amortizable intangible assets, or investments in
equity interests become impaired.
We are required under GAAP to review our amortizable intangible
assets and investments in equity interests for impairment when
events or changes in circumstances indicate the carrying value
may not be recoverable. Goodwill is required to be tested for
impairment at least annually. Factors that may be considered a
change in circumstances indicating that the carrying value of
our amortizable intangible assets may not be recoverable include
a decline in stock price and market capitalization, and slower
growth rates in our industry. Factors that may be considered a
change in circumstances indicating that the carrying value of an
investment in equity interest may not be recoverable include a
decline in the stock price of an equity investee that is a
public company or a decline in the operating performance of an
equity investee if a private company. We may be required to
record a significant charge to earnings in our consolidated
financial statements during the period in which any impairment
of our goodwill, amortizable intangible assets, or investments
in equity interests is determined. This could adversely impact
our results of operations.
Potential
continuing uncertainty resulting from Microsofts recent
unsolicited acquisition proposal and related matters may
adversely affect our business.
On January 31, 2008, we received an unsolicited proposal
from Microsoft to acquire all of the outstanding shares of
common stock of the Company. On February 11, 2008, our
Board of Directors announced that, after carefully reviewing the
proposal, it unanimously concluded that the proposal was not in
the best interests of Yahoo! and its stockholders. On
May 3, 2008, Microsoft withdrew its proposal to acquire the
Company. The review and consideration of the Microsoft proposal
and related matters required the expenditure of significant time
and resources by us. There can be no assurance that Microsoft
will not in the future make another proposal, or take other
actions, to acquire the Company, which may create continuing
uncertainty for our employees, publishers, advertisers and other
business partners. This continuing uncertainty could negatively
impact our business. Additionally, we and members of our Board
of Directors have been named in a number of purported
stockholder class action complaints relating to the Microsoft
proposal as more fully described in Part II, Item 1
Legal Proceedings of this Quarterly Report on
Form 10-Q.
These lawsuits or any future lawsuits may become time consuming
and expensive. These matters, alone or in combination, may harm
our business.
Our
stock price has been volatile historically and may continue to
be volatile regardless of our operating
performance.
The trading price of our common stock has been and may continue
to be subject to wide fluctuations. During the quarter ended
March 31, 2008, the closing sale prices of our common stock
on the Nasdaq Global Select Market ranged from $19.05 to $29.98
per share and the closing sale price on May 7, 2008 was
$25.64 per share. Our stock price may fluctuate in response to
a number of events and factors, such as quarterly variations in
operating results, announcements and implementations of
technological innovations or new services, upgrades and media
properties by us or our competitors; changes in financial
estimates and recommendations by securities analysts; the
operating and stock price performance of other companies that
investors may deem comparable to us; the operating performance
of companies in which we have an equity investment, including
Yahoo! Japan and Alibaba Group Holding Limited; and news reports
relating to trends in our markets or general economic conditions.
In addition, the stock market in general, and the market prices
for Internet-related companies in particular, have experienced
volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our stock,
regardless of our operating
61
performance. Additionally, volatility or a lack of positive
performance in our stock price may adversely affect our ability
to retain key employees, all of whom have been granted stock
options or other stock-based awards.
In addition, Microsofts making and withdrawal of its
unsolicited proposal caused additional substantial volatility in
our stock price.
Anti-takeover
provisions could make it more difficult for a third-party to
acquire us.
We have adopted a stockholder rights plan and initially declared
a dividend distribution of one right for each outstanding share
of common stock to stockholders of record as of March 20,
2001. As a result of our two-for-one stock split effective
May 11, 2004, each share of common stock is now associated
with one-half of one right. Each right entitles the holder to
purchase one unit consisting of one one-thousandth of a share of
our Series A Junior Participating Preferred Stock for $250
per unit. Under certain circumstances, if a person or group
acquires 15 percent or more of our outstanding common
stock, holders of the rights (other than the person or group
triggering their exercise) will be able to purchase, in exchange
for the $250 exercise price, shares of our common stock or of
any company into which we are merged having a value of $500.
The rights expire on March 1, 2011, unless extended by our
Board of Directors. Because the rights may substantially dilute
the stock ownership of a person or group attempting to take us
over without the approval of our Board of Directors, our rights
plan could make it more difficult for a third-party to acquire
us (or a significant percentage of our outstanding capital
stock) without first negotiating with our Board of Directors
regarding that acquisition.
In addition, our Board of Directors has the authority to issue
up to 10 million shares of Preferred Stock (of which
2 million shares have been designated as Series A
Junior Participating Preferred Stock) and to determine the
price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further
vote or action by the stockholders.
The rights of the holders of our common stock may be subject to,
and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change of control of Yahoo! without
further action by the stockholders and may adversely affect the
voting and other rights of the holders of our common stock.
Further, certain provisions of our charter documents, including
provisions eliminating the ability of stockholders to take
action by written consent and limiting the ability of
stockholders to raise matters at a meeting of stockholders
without giving advance notice, may have the effect of delaying
or preventing changes in control or management of Yahoo!, which
could have an adverse effect on the market price of our stock.
In addition, our charter documents do not permit cumulative
voting, which may make it more difficult for a third-party to
gain control of our Board of Directors. Further, we are subject
to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which will prohibit us from
engaging in a business combination with an
interested stockholder for a period of three years
after the date of the transaction in which the person became an
interested stockholder, even if such combination is favored by a
majority of stockholders, unless the business combination is
approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or
preventing a change of control or management.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
Stock repurchase activity during the three months ended
March 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
that May Yet be
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of a
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Publicly Announced
|
|
|
the Programs
|
|
Period
|
|
Purchased (1) (2)
|
|
|
per Share
|
|
|
Program
|
|
|
(in 000s) (1) (2)
|
|
|
January 1 January 31, 2008
|
|
|
3,387,811
|
|
|
$
|
23.39
|
|
|
|
3,387,811
|
|
|
$
|
1,086,843
|
|
February 1 February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,086,843
|
|
March 1 March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,086,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,387,811
|
|
|
$
|
23.39
|
|
|
|
3,387,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
(1) |
|
The shares repurchased in the three months ended March 31,
2008 were under our stock repurchase program that was announced
in October 2006 with an authorized level of $3.0 billion.
This program will expire in October 2011. |
|
(2) |
|
Excludes 605,000 shares delivered by employees to satisfy
tax-withholding obligations upon the vesting of restricted stock
awards. |
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
|
|
Item 5.
|
Other
Information
|
None.
63
Exhibits are incorporated herein by reference or are filed with
this report as indicated below (numbered in accordance with
Item 601 of
Regulation S-K):
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
|
Amended and Restated Certificate of Incorporation of Registrant
(Filed as Exhibit 3.1 to the Registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 and
incorporated herein by reference.)
|
|
3
|
.2
|
*
|
|
Amended and Restated Bylaws of Registrant.
|
|
4
|
.1
|
|
|
Form of Senior Indenture (Filed as Exhibit 4.1 to the
Registrants Registration Statement on Form S-3,
Registration No. 333-46458, filed September 22, 2000 [the
September 22, 2000 Form S-3] and incorporated herein by
reference.)
|
|
4
|
.2
|
|
|
Form of Subordinated Indenture (Filed as Exhibit 4.2 to the
September 22, 2000 Form S-3 and incorporated herein by
reference.)
|
|
4
|
.3
|
**
|
|
Form of Senior Note.
|
|
4
|
.4
|
**
|
|
Form of Subordinated Note.
|
|
4
|
.5
|
**
|
|
Form of Certificate of Designation for Preferred Stock (together
with Preferred Stock certificate.)
|
|
4
|
.6
|
|
|
Form of Deposit Agreement (together with Depository Receipt)
(Filed as Exhibit 4.6 to the September 22, 2000 Form S-3 and
incorporated herein by reference.)
|
|
4
|
.7
|
**
|
|
Form of Warrant Agreement (together with Form of Warrant
Certificate.)
|
|
4
|
.8
|
|
|
Amended and Restated Rights Agreement, dated as of April 1,
2005, by and between Yahoo! Inc. and Equiserve Trust Company,
N.A., as rights agent (Filed as Exhibit 4.1 to the
Registrants Current Report on Form 8-K, filed April 4,
2005, and incorporated herein by reference.)
|
|
4
|
.9
|
|
|
Indenture, dated as of April 9, 2003 by and between the
Registrant and U.S. Bank National Association (Filed as Exhibit
4.1 to the Registrants Current Report on Form 8-K filed on
April 10, 2003
[the April 10, 2003 Form 8-K] and incorporated herein
by reference.)
|
|
4
|
.10
|
|
|
Registration Rights Agreement, dated as of April 9, 2003 among
the Registrant and Credit Suisse First Boston LLC (Filed as
Exhibit 4.2 to the April 10, 2003 Form 8-K and incorporated
herein by reference.)
|
|
10
|
.14
|
*
|
|
Summary of Compensation Payable to Named Executive Officers.
|
|
10
|
.18
|
|
|
Yahoo! Inc. Change in Control Employee Severance Plan for Level
I and Level II Employees (Filed as Exhibit 10.18 to the
Registrants Annual Report on Form 10-K, filed February 27,
2008, and incorporated herein by reference.)
|
|
31
|
.1
|
*
|
|
Certificate of Chief Executive Officer Pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 8,
2008.
|
|
31
|
.2
|
*
|
|
Certificate of Chief Financial Officer Pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 8,
2008.
|
|
32
|
|
*
|
|
Certificate of Chief Executive Officer and Chief Financial
Officer Pursuant to Securities Exchange Act Rules 13a-14(b) and
15d-14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 8,
2008.
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
To be filed by a report on
Form 8-K
pursuant to Item 601 of
Regulation S-K
or, where applicable, incorporated herein by reference from a
subsequent filing in accordance with Section 305(b)(2) of
the Trust Indenture Act of 1939. |
64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
YAHOO! INC.
|
|
|
Dated: May 8, 2008
|
|
By: /s/ BLAKE
JORGENSEN
Blake
Jorgensen
Chief Financial Officer (Principal Financial Officer)
|
|
|
|
Dated: May 8, 2008
|
|
By: /s/ MICHAEL
MURRAY
Michael
Murray
Senior Vice President, Finance and Chief
Accounting Officer (Principal Accounting Officer)
|
65
YAHOO!
INC.
Index to
Exhibits
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
|
Amended and Restated Certificate of Incorporation of Registrant
(Filed as Exhibit 3.1 to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2000 and incorporated herein
by reference.)
|
|
3
|
.2
|
*
|
|
Amended and Restated Bylaws of Registrant.
|
|
4
|
.1
|
|
|
Form of Senior Indenture (Filed as Exhibit 4.1 to the
Registrants Registration Statement on
Form S-3,
Registration
No. 333-46458,
filed September 22, 2000 [the September 22, 2000
Form S-3]
and incorporated herein by reference.)
|
|
4
|
.2
|
|
|
Form of Subordinated Indenture (Filed as Exhibit 4.2 to the
September 22, 2000
Form S-3
and incorporated herein by reference.)
|
|
4
|
.3
|
**
|
|
Form of Senior Note.
|
|
4
|
.4
|
**
|
|
Form of Subordinated Note.
|
|
4
|
.5
|
**
|
|
Form of Certificate of Designation for Preferred Stock (together
with Preferred Stock certificate.)
|
|
4
|
.6
|
|
|
Form of Deposit Agreement (together with Depository Receipt)
(Filed as Exhibit 4.6 to the September 22, 2000
Form S-3
and incorporated herein by reference.)
|
|
4
|
.7
|
**
|
|
Form of Warrant Agreement (together with Form of Warrant
Certificate.)
|
|
4
|
.8
|
|
|
Amended and Restated Rights Agreement, dated as of April 1,
2005, by and between Yahoo! Inc. and Equiserve
Trust Company, N.A., as rights agent (Filed as
Exhibit 4.1 to the Registrants Current Report on
Form 8-K,
filed April 4, 2005, and incorporated herein by reference.)
|
|
4
|
.9
|
|
|
Indenture, dated as of April 9, 2003 by and between the
Registrant and U.S. Bank National Association (Filed as
Exhibit 4.1 to the Registrants Current Report on
Form 8-K
filed on April 10, 2003
[the April 10, 2003
Form 8-K]
and incorporated herein by reference.)
|
|
4
|
.10
|
|
|
Registration Rights Agreement, dated as of April 9, 2003
among the Registrant and Credit Suisse First Boston LLC (Filed
as Exhibit 4.2 to the April 10, 2003
Form 8-K
and incorporated herein by reference.)
|
|
10
|
.14
|
*
|
|
Summary of Compensation Payable to Named Executive Officers.
|
|
10
|
.18
|
|
|
Yahoo! Inc. Change in Control Employee Severance Plan for
Level I and Level II Employees (Filed as
Exhibit 10.18 to the Registrants Annual Report on
Form 10-K,
filed February 27, 2008, and incorporated herein by
reference.)
|
|
31
|
.1
|
*
|
|
Certificate of Chief Executive Officer Pursuant to Securities
Exchange Act
Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated May 8, 2008.
|
|
31
|
.2
|
*
|
|
Certificate of Chief Financial Officer Pursuant to Securities
Exchange Act
Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated May 8, 2008.
|
|
32
|
|
*
|
|
Certificate of Chief Executive Officer and Chief Financial
Officer Pursuant to Securities Exchange Act
Rules 13a-14(b)
and 15d-14(b) and 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
dated May 8, 2008.
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
To be filed by a report on
Form 8-K
pursuant to Item 601 of
Regulation S-K
or, where applicable, incorporated herein by reference from a
subsequent filing in accordance with Section 305(b)(2) of
the Trust Indenture Act of 1939. |