(Address of principal executive
offices, including zip code)
Registrant’s 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 the definitions of
“large accelerated filer,”“accelerated
filer,” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ
Accelerated
filer o
Non-accelerated
filer o (Do
not check if a smaller reporting company)
Smaller reporting
company o
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
issuer’s classes of common stock, as of the latest
practicable date.
Common stock, $0.001 par value; 5,000,000 shares
authorized; 1,534,893 and 1,595,161 shares issued,
respectively, and 1,330,828 and 1,386,507 shares
outstanding, respectively
1,527
1,590
Additional paid-in capital
9,937,010
11,432,369
Treasury stock at cost, 204,065 and 208,654 shares,
respectively
(5,160,772
)
(5,267,412
)
Retained earnings
4,423,864
5,151,590
Accumulated other comprehensive income
331,202
283,688
Total stockholders’ equity
9,532,831
11,601,825
Total liabilities and stockholders’ equity
$
12,229,741
$
13,908,480
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Condensed
Consolidated Statements of Cash
Flows — (Continued)
Supplemental
cash flow disclosures:
During the nine months ended September 30, 2008, the
holders of the Company’s zero coupon senior convertible
notes (the “Notes”) converted $750 million of the
Notes into 36.6 million shares of Yahoo! common stock. See
Note 9 — “Debt” for additional
information.
During the nine months ended September 30, 2008, the
Company entered into an 11 year lease agreement for a data
center in the western United States (“U.S.”). Of the
total expected minimum lease commitment of $105 million,
$21 million is classified as an operating lease for real
estate and $84 million is classified as a capital lease for
equipment.
Notes to Condensed Consolidated Financial Statements
(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” 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 Company’s advertising offerings into their
Websites (referred to as “Affiliate sites”) or their
other offerings.
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. Certain prior period amounts
have been reclassified to conform to the current period
presentation. 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 acquisitions.
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 Company’s 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 Company’s 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.
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
Notes to Condensed Consolidated Financial
Statements — (Continued)
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.
In May 2008, the FASB issued FSP Accounting Principles Board
Opinion (“APB”)
No. 14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP APB
14-1”),
which requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a
manner that reflects the issuer’s nonconvertible debt
borrowing rate. FSP APB
14-1 will be
effective for the Company on January 1, 2009 and will
require retroactive disclosure. The Company is currently
evaluating the impact of adopting FSP APB
14-1 on its
consolidated financial position, cash flows, and results of
operations.
In June 2008, the FASB issued FSP No. Emerging Issues Task
Force (“EITF”)
03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities”
(“FSP
EITF 03-6-1”),
which requires entities to apply the two-class method of
computing basic and diluted earnings per share for participating
securities that include awards that accrue cash dividends
(whether paid or unpaid) any time common shareholders receive
dividends and those dividends do not need to be returned to the
entity if the employee forfeits the award. FSP
EITF 03-6-1
will be effective for the Company on January 1, 2009 and
will require retroactive disclosure. The Company is currently
evaluating the impact of adopting FSP
EITF 03-6-1
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 awards that are 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 Company’s Notes (using the
if-converted method).
The Company takes into account the effect on consolidated net
income per share of dilutive securities of entities in which the
Company holds equity interests that are accounted for using the
equity method.
Potentially dilutive securities representing approximately
143 million and 137 million shares of common stock for
the three and nine months ended September 30, 2008,
respectively, and 140 million and 135 million for the
three and nine months ended September 30, 2007,
respectively, were excluded from the computation of diluted
earnings per share for these periods because their effect would
have been anti-dilutive.
Weighted average unvested restricted stock subject to repurchase
(5,309
)
(2,222
)
(5,166
)
(3,009
)
Denominator for basic calculation
1,335,092
1,383,786
1,342,387
1,363,382
Net income per share — basic
$
0.11
$
0.04
$
0.34
$
0.53
Diluted:
Numerator:
Net income for basic calculation
$
151,286
$
54,348
$
454,277
$
727,726
Effect of dilutive securities issued by equity investees
—
—
—
(9,362
)
Net income for diluted calculation
$
151,286
$
54,348
$
454,277
$
718,364
Denominator:
Denominator for basic calculation
1,335,092
1,383,786
1,342,387
1,363,382
Weighted average effect of Yahoo! dilutive securities:
Restricted stock awards
5,896
4,097
3,633
8,242
Stock options
17,501
9,690
21,165
14,505
Notes
36,567
—
36,571
10,275
Denominator for diluted calculation
1,395,056
1,397,573
1,403,756
1,396,404
Net income per share — diluted
$
0.11
$
0.04
$
0.32
$
0.51
See Note 9 — “Debt” for additional
information related to the Company’s Notes.
Note 3
ACQUISITIONS
Transactions
completed in 2007
During the year ended December 31, 2007, the Company
completed the acquisitions of Right Media Inc. (“Right
Media”), Zimbra, Inc. (“Zimbra”), BlueLithium,
Inc. (“BlueLithium”), and other business combinations
as described in Note 3 — “Acquisitions”
to the Company’s annual financial statements for the year
ended
Notes to Condensed Consolidated Financial
Statements — (Continued)
December 31, 2007 filed on
Form 10-K.
The purchase price allocations of acquisitions completed during
2007 are summarized as follows:
Purchase
Amortizable
Price
Goodwill
Intangibles
Right Media
$
524
$
440
$
104
Zimbra
$
303
$
245
$
79
BlueLithium
$
255
$
224
$
42
Other acquisitions(*)
$
169
$
74
$
118
(*)
Includes asset acquisitions and other business combinations.
The results of operations for Right Media, Zimbra, BlueLithium,
and certain other business combinations have been included in
the Company’s 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):
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.
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
Company’s network of video publishers across the Web. The
purchase price exceeded the fair value of the net tangible and
identifiable intangible assets acquired from Maven 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 Maven. Maven
stockholders were paid in cash and outstanding Maven options and
restricted stock units were assumed. Assumed Maven options and
restricted stock units are 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 are being recognized as stock-based compensation expense
as the awards vest over a period of up to four years.
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):
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 $87 million has been allocated to
goodwill. Goodwill represents the excess of the purchase price
over the fair value of the net tangible and identifiable
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.
The results of operations for Maven and certain other immaterial
business combinations have been included in the Company’s
condensed consolidated statements of operations since the
completion of the acquisitions in 2008. During the nine months
ended September 30, 2008, the Company also completed
immaterial asset acquisitions that did not qualify as business
combinations.
The Company’s business combinations completed in 2008 do
not have a material impact on the Company’s results of
operations, and therefore pro forma disclosures have not been
presented.
Note 4
INVESTMENTS
IN EQUITY INTERESTS
The following table summarizes the Company’s investments in
equity interests (dollars in thousands):
Percent
December 31,
September 30,
Ownership of
2007
2008
Common Stock
Alibaba Group
$
1,440,278
$
2,223,693
44
%
Alibaba.com
100,804
51,970
1
%
Yahoo! Japan
636,164
835,662
34
%
Other
3,671
3,527
Total
$
2,180,917
$
3,114,852
Equity Investment in Alibaba Group. As
of September 30, 2008, the Company’s ownership
interest in Alibaba Group Holding Limited (“Alibaba
Group”) was approximately 44 percent compared to
43 percent as of December 31, 2007. The
1 percent increase is due to an increase in ownership
interest resulting from the exchange of certain Alibaba Group
shares previously held by employees for shares in Alibaba.com
Limited (“Alibaba.com”) (the business-to-business
e-commerce
subsidiary of Alibaba Group), partly offset by a decrease in
ownership interest resulting from the exercise of Alibaba
Group’s employee stock options.
Notes to Condensed Consolidated Financial
Statements — (Continued)
In the initial public offering (“IPO”) of Alibaba.com
on November 6, 2007, 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 non-cash gain of $401 million, net of
tax, within earnings in equity interests representing the
Company’s share of Alibaba Group’s gain.
As of September 30, 2008, the difference between the
Company’s 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
$
2,223,693
Proportionate share of net assets
1,657,611
Excess of carrying value of investment over proportionate share
of net assets
$
566,082
The excess carrying value has been assigned to:
Goodwill
$
528,759
Amortizable intangible assets
38,159
Deferred income taxes
(836
)
Total
$
566,082
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.
The following table presents Alibaba Group’s financial
information, as derived from Alibaba Group’s condensed
consolidated financial statements, which includes summary
operating information for the three and nine months ended
June 30, 2007 and 2008 and summary balance sheet
information as of September 30, 2007 and June 30, 2008
(in thousands):
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 nine months ended
June 30, 2008 is primarily due to Alibaba Group’s sale
of an approximate 27 percent ownership interest in
Alibaba.com from Alibaba.com’s IPO.
Notes to Condensed Consolidated Financial
Statements — (Continued)
The Company also has commercial arrangements with Alibaba Group
to provide technical, development, and advertising services.
For the three and nine months ended September 30, 2007 and
2008, respectively, these transactions were not material.
Equity Investment in Alibaba.com
Limited. As part of the IPO of Alibaba.com,
the Company purchased an approximate 1 percent interest in
Alibaba.com. This investment is accounted for using the equity
method, consistent with the Company’s investment in Alibaba
Group, which holds the controlling interest in Alibaba.com. As
of September 30, 2008, the fair value of the Company’s
investment based on the quoted stock price of Alibaba.com was
approximately $52 million. In the third quarter of 2008,
the Company recorded an impairment charge of $30 million,
net of tax, within earnings in equity interests to reduce the
carrying value of the investment to fair value.
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.
On September 1, 2007, the Company commenced a new
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 commercial
arrangement. Previously, the Company earned marketing services
revenues from advertisers and paid traffic acquisition costs
(“TAC”) to Yahoo! Japan. The Company no longer
recognizes marketing services revenues and 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 new arrangement,
the Company records marketing services revenues 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. In addition to
marketing services revenues, the Company continues to record
revenues from license fees from Yahoo! Japan. The prior
commercial arrangement resulted in net costs of approximately
$41 million and $199 million for the three and nine
months ended September 30, 2007, respectively. The new
arrangement resulted in revenues of approximately
$60 million and $214 million for the three and nine
months ended September 30, 2008, respectively. As of
December 31, 2007 and September 30, 2008, the Company
had a net receivable balance from Yahoo! Japan of approximately
$62 million and $35 million, respectively.
As of September 30, 2008, the Company’s ownership
interest in Yahoo! Japan was approximately 34 percent
compared to 33 percent as of June 30, 2008. The
1 percent increase is due to share repurchases that were
undertaken by Yahoo! Japan on the open market. The
Company’s proportionate share of Yahoo! Japan’s share
repurchase amount in excess of its book value was approximately
$111 million and has been primarily allocated to goodwill.
Goodwill is not deductible for tax purposes.
The fair value of the Company’s ownership interest in
Yahoo! Japan, based upon the quoted stock price of Yahoo! Japan
as of September 30, 2008, was approximately $6 billion.
The following table presents Yahoo! Japan’s condensed
financial information, as derived from the Yahoo! Japan
financial statements, which includes summary operating
information for the three and nine months ended
The Company records its share of the results of Yahoo! Japan one
quarter in arrears within earnings in equity interests in the
condensed consolidated statements of income.
The differences between GAAP and accounting principles generally
accepted in Japan, the standards by which Yahoo! Japan’s
financial statements are prepared, did not materially impact the
amounts reflected in the Company’s condensed consolidated
financial statements.
Note 5
GOODWILL
The changes in the carrying amount of goodwill for the nine
months ended September 30, 2008 are as follows (in
thousands):
Customer, affiliate, and advertiser related relationships
$
143,195
$
193,784
$
(78,482
)
$
115,302
Developed and acquired technology and intellectual property
rights
384,041
745,966
(355,655
)
390,311
Trade name, trademark, and domain name
84,261
205,451
(154,598
)
50,853
Total intangible assets, net
$
611,497
$
1,145,201
$
(588,735
)
$
556,466
(1)
Since the acquisition of these intangible assets, foreign
currency translation adjustments, reflecting movement in the
currencies of the underlying entities, totaled approximately
$20 million as of September 30, 2008.
(2)
As of December 31, 2007 and September 30, 2008,
$506 million and $487 million, respectively, of the
net intangibles balance were related to the U.S. segment. As of
December 31, 2007 and September 30, 2008,
$105 million and $69 million, respectively, of the net
intangibles balance were related to the International segment.
For the three months ended September 30, 2007 and 2008, the
Company recognized amortization expense for intangible assets of
$68 million and $79 million, respectively, including
$38 million in cost of revenues for the three months ended
September 30, 2007 and $55 million in cost of revenues
for the three months ended September 30, 2008. For the
nine months ended September 30, 2007 and 2008, the Company
recognized amortization expense for intangible assets of
$182 million and $226 million, respectively, including
$100 million and $155 million, respectively, in cost
of revenues. 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: three months ending December 31, 2008:
$60 million; 2009: $175 million; 2010:
$139 million; 2011: $91 million; 2012:
$58 million; 2013: $20 million; and cumulatively
thereafter: $13 million.
During the nine months ended September 30, 2007 and 2008,
the Company licensed $75 million and $67 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 September 30, 2007 and 2008,
respectively.
Interest and investment income consists of income earned from
cash in bank accounts and investments made in marketable debt
securities and money market funds.
Notes to Condensed Consolidated Financial
Statements — (Continued)
Investment losses, net includes realized gains and losses
related to sales of marketable securities
and/or
investments in publicly traded or privately held companies as
well as any declines in the values of such investments judged to
be other than temporary.
Other consists mainly of foreign exchange gains and losses due
to re-measurement.
Note 8
COMPREHENSIVE
INCOME
Comprehensive income, net of tax, is comprised of (in thousands):
Unrealized gains on available-for-sale securities, net of tax
$
26,874
$
35,298
Foreign currency translation adjustments, net of tax
304,328
248,390
Accumulated other comprehensive income
$
331,202
$
283,688
Note 9
DEBT
In April 2003, the Company issued $750 million of the Notes
due April 1, 2008 at par bearing no interest, and
convertible, under certain circumstances, no later than their
April 1, 2008 maturity date.
During the nine months ended September 30, 2008,
$750 million of the Notes were converted into
36.6 million shares of Yahoo! common stock. As of
December 31, 2007, the Notes were classified as short-term
debt, because if conversion had not been requested by the
holders of the Notes, the Company would have had to settle the
Notes in cash at maturity.
Note 10
STOCK-BASED
COMPENSATION
Stock Options.The Company’s
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
Company’s
Notes to Condensed Consolidated Financial
Statements — (Continued)
Plans and the Amended and Restated 1996 Directors’
Stock Plan for the nine months ended September 30, 2008 is
summarized as follows (in thousands, except per share amounts):
The Company’s current practice is to issue new shares to
satisfy stock option exercises.
As of September 30, 2008, there was $288 million of
unrecognized stock-based compensation costs related to unvested
stock options which is expected to be recognized over a weighted
average period of 2.5 years.
The fair value of option grants, including the options granted
under the Company’s 1996 Employee Stock Purchase Plan (the
“Purchase Plan”), was estimated using the
Black-Scholes option pricing model with the following weighted
average assumptions:
Notes to Condensed Consolidated Financial
Statements — (Continued)
Restricted stock awards and restricted stock units activity for
the nine months ended September 30, 2008 is summarized as
follows (in thousands, except per share amounts):
During the nine months ended September 30, 2008,
7.3 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 number of shares withheld of approximately
2.4 million was based on the value of the restricted stock
awards on their vesting date as determined by the Company’s
closing stock price. Total payments for the employees’
tax obligations to the relevant taxing authorities were
$65 million for the nine months ended September 30,2008 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,
1.0 million shares were reacquired by the Company to
satisfy the tax withholding obligations and $27 million was
recorded as treasury stock. Payments of $38 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 September 30, 2008, there was $486 million of
unrecognized stock-based compensation costs related to unvested
restricted stock awards and restricted stock units which is
expected to be recognized over a weighted average period of
2.3 years.
Executive Retention Compensation
Arrangement. During 2006, the Compensation
Committee of the Company’s Board of Directors approved a
three-year performance and retention compensation arrangement
with Terry Semel, the Company’s then Chief Executive
Officer (“CEO”). On June 18, 2007, the
executive retention arrangement was terminated due to
Mr. Semel’s 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.
Note 11
STOCK
REPURCHASE PROGRAM
In October 2006, the Company’s 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.
During the three months ended September 30, 2008, the
Company did not repurchase any shares of common stock. During
the nine months ended September 30, 2008, the Company
repurchased 3.4 million shares of common stock at an
average price of $23.39 per share. Total cash consideration
for the repurchased stock was $79 million. The remaining
authorization under the Company’s share repurchase program
is approximately $1.1 billion.
Notes to Condensed Consolidated Financial
Statements — (Continued)
Note 12
COMMITMENTS
AND CONTINGENCIES
Lease Commitments.The Company leases
office space and data centers under operating and capital lease
agreements with original lease periods of up to 23 years,
expiring between 2008 and 2027.
During the nine months ended September 30, 2008, the
Company entered into an 11 year lease agreement for a data
center in the western U.S. Of the total expected minimum
lease commitment of $105 million, $21 million is
classified as an operating lease for real estate and
$84 million is classified as a capital lease for
equipment. The Company has the option to renew this lease for
up to an additional ten years.
A summary of gross and net lease commitments as of
September 30, 2008 is as follows (in millions):
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 September 30, 2008, these
commitments totaled $434 million, of which $40 million
will be payable in the remainder of 2008, $170 million will
be payable in 2009, $163 million will be payable in 2010,
and $61 million will be payable in 2011.
Intellectual Property Rights. The
Company is obligated to make certain payments under various
intellectual property arrangements of up to $53 million
through 2023.
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
Company’s breach of agreements, services to be
Notes to Condensed Consolidated Financial
Statements — (Continued)
provided by the Company, or 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 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 September 30, 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 Company’s
e-mail,
message boards, photo and video sites, 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 U.S. District Court for the
Southern District of New York. The plaintiffs alleged, among
other things, that the consumer-influenced portion of
LAUNCH’s 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 U.S. 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
for the Southern District of New York against certain
underwriters involved in Overture Services Inc.’s
(“Overture”) IPO, Overture, and certain of
Overture’s 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 (the
“Securities Exchange Act”) 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
Notes to Condensed Consolidated Financial
Statements — (Continued)
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. Overture’s 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
court’s 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 Company’s
common stock between April 8, 2004 and July 18, 2006.
Plaintiffs allege that defendants engaged in a scheme to inflate
the Company’s share price by making false and misleading
statements regarding the Company’s operations, financial
results, and future business prospects in violation of
Section 10(b) of the Securities Exchange Act 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 October 7, 2008, the Court granted
defendants’ motion to dismiss the Consolidated Amended
Complaint with leave to amend. Pursuant to the order,
plaintiffs must file their Second Consolidated Amended Complaint
by November 17, 2008.
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 Company’s 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. 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. 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 plaintiff’s motion to further amend the complaint
to assert
Notes to Condensed Consolidated Financial
Statements — (Continued)
allegations relating to Microsoft Corporation’s
(“Microsoft”) 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
Microsoft’s 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 with prejudice. 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. On June 13, 2008, defendants
filed a motion to dismiss the operative complaint. On
June 16, 2008, the Court denied plaintiffs’ renewed
request for an expedited trial date and on July 11, 2008
stayed all discovery pending resolution of defendants’
motion to dismiss. In lieu of opposing the motion to dismiss,
on July 14, 2008, plaintiffs filed a motion for leave of
court to file an amended complaint (the “Second Amended and
Consolidated Complaint”). The proposed Second Amended and
Consolidated Complaint purports to allege claims against certain
former and current members of Yahoo!’s Board of Directors
on behalf of all Yahoo! stockholders, except defendants and
their affiliates. Yahoo! is named as a nominal defendant only,
and no monetary relief is sought against the Company.
The proposed Second Amended and Consolidated Complaint generally
alleges that defendants breached fiduciary duties in connection
with consideration of proposals by Microsoft to purchase all or
part of Yahoo!, adoption of severance plans, the June 12,2008 agreement between Google Inc. and Yahoo! and purports to
allege claims relating to alleged false and misleading
statements in Yahoo!’s proxy statement. With regard to the
proxy statement, plaintiffs allege that the proxy statement
falsely discloses that the severance plans were designed to help
retain the Company’s employees, maintain a stable work
environment and provide certain economic benefits to the
employees in the event their employment is actually or
constructively terminated in connection with a change in control
of the Company when, according to plaintiffs, the severance
plans allegedly (i) were designed to interfere with
Microsoft’s desire for an orderly integration and to defend
against a potential proxy contest, (ii) provide no economic
benefit to employees in the event of any reduction in force,
reorganization or alternative transaction in lieu of a sale to
Microsoft, and (iii) were drafted in a manner that may
potentially trigger a tax liability for employees who resign and
receive severance. Plaintiffs also allege that the proxy
statement is misleading in stating that Compensia advised the
Company and F.W. Cook & Co. advised the Compensation
Committee of the Board of Directors of the Company with respect
to the terms of the plans and that the proxy statement omits to
state that Yahoo! management disregarded and withheld from the
Board of Directors advice and information provided by Compensia
regarding (i) the provisions of the severance plans that
allow an employee to obtain severance benefits by claiming a
change in the employee’s duties or responsibilities
following a change in control, (ii) the amount of severance
benefits to be paid to senior executives of Yahoo! following a
change in control, and (iii) the potential
Notes to Condensed Consolidated Financial
Statements — (Continued)
total cost of the severance plans. Plaintiffs also allege that
the proxy statement omits to state that neither Compensia nor
F.W. Cook & Co. attended any relevant meeting of the
Board of Directors or the Compensation Committee. The proposed
Second Amended and Consolidated Complaint seeks unspecified
compensatory damages, declaratory and injunctive relief, as well
as an award of plaintiffs’ attorneys’ fees and costs.
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 Company’s 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 Company’s 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 following a change in control of
the Company. Benefits under the Severance Plans generally
include (1) continuation of the employee’s annual base
salary, as severance pay for a designated number of months
following the employee’s 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.
Note 13
SEGMENTS
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 revenues and segment operating
income before depreciation, amortization, and stock-based
compensation expense for making financial decisions and
allocating resources.
Notes to Condensed Consolidated Financial
Statements — (Continued)
Note 14
INCOME
TAXES
The effective tax rates for the three and nine months ended
September 30, 2008 were 64.0 percent and
44.5 percent, respectively, compared to 40.6 percent
and 42.1 percent for the same periods in 2007. The
effective tax rates for the three and nine months ended
September 30, 2008 differ from the statutory federal income
tax rate of 35.0 percent primarily due to state taxes, the
effect of
non-U.S. operations,
non-deductible stock-based compensation expense, and the
resolution of examinations by taxing authorities. The effective
tax rates for the three and nine months ended September 30,2008 were higher than the rates for the same periods in 2007
primarily due to the expiration of the federal research tax
credit in 2008 and an increase in 2008 of non-deductible
stock-based compensation expense, partially offset by the effect
of
non-U.S. operations.
In addition, for the three months ended September 30, 2008,
a change in forecasted profitability between U.S. and
international jurisdictions resulted in a higher estimated
annual tax rate as compared to the three months ended
June 30, 2008.
The Company’s total amount of unrecognized tax benefits as
of September 30, 2008 is $703 million, of which
$255 million is recorded in the financial statements in the
deferred and other long-term tax liabilities, net line item of
the condensed consolidated balance sheet. The total
unrecognized tax benefits as of September 30, 2008
increased by $17 million from the balance as of
December 31, 2007.
The Company’s federal and California income tax returns for
the years ended December 31, 2005 and 2006 are currently
under examination by the Internal Revenue Service and the
California Franchise Tax Board.
During the three months 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 first quarter of 2008 in connection with the IPO of
Alibaba.com. See Note 4 — “Investments in
Equity Interests” for additional information.
Note 15
FAIR
VALUE OF FINANCIAL INSTRUMENTS
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 assets.
Investments with effective maturities greater than
12 months from the balance sheet date are classified as
long-term assets.
The Company’s 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 Company’s 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. 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.
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
Notes to Condensed Consolidated Financial
Statements — (Continued)
(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 Company’s 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
September 30, 2008 (in thousands):
Fair Value Measurements at Reporting Date Using
Assets
Level 1
Level 2
Total
Money market
funds(1)
$
603,166
$
—
$
603,166
Available-for-sale securities
U.S. Government and agency
securities(1)
—
1,315,057
1,315,057
Municipal
bonds(1)
—
2,597
2,597
Asset-backed
securities(1)
—
14,312
14,312
Commercial
paper(1)
—
510,645
510,645
Corporate debt
securities(1)
—
160,394
160,394
Corporate equity
securities(2)
116,710
—
116,710
Total assets at fair value
$
719,876
$
2,003,005
$
2,722,881
(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 September 30,2008 includes $663 million in cash deposited with
commercial banks and $30 million in bank deposits
classified as short-term marketable securities.
The fair value of the Company’s Level 1 financial
assets are based on quoted market prices of the identical
underlying security. The fair value of the Company’s
Level 2 financial assets are obtained from
readily-available pricing sources for the identical underlying
security that may not be actively traded. As of
September 30, 2008, the Company did not have any material
Level 3 financial assets or liabilities.
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.
Notes to Condensed Consolidated Financial
Statements — (Continued)
Note 16
STRATEGIC
WORKFORCE REALIGNMENT
During the quarter ended March 31, 2008, the Company
implemented a strategic workforce realignment to more
appropriately allocate resources to the Company’s key
strategic initiatives. The strategic realignment involves
investing resources in some areas, reducing resources in others,
and eliminating some areas of the Company’s business that
do not support the Company’s strategic priorities.
During the quarter ended 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, all of
which were recorded in the first quarter of 2008. 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 September 30, 2008, the
remaining accrual related to the strategic workforce realignment
was approximately $3 million.
Note 17
SUBSEQUENT
EVENTS
Cost Reduction Initiatives. On
October 21, 2008, the Company announced its intent to
significantly reduce its costs. As part of its cost reduction
initiatives, the Company expects to reduce its global workforce
by at least 10 percent by December 31, 2008. The
Company expects to incur cash charges related to the workforce
reduction for severance and other related costs. In addition,
the Company expects to incur cash costs related to contract
terminations and consolidation of facilities as part of these
cost reduction initiatives. Total charges are expected to
include these cash costs and may also include charges or credits
related to stock-based compensation expense and charges related
to non-cash impairment costs.
The Company expects to recognize the foregoing charges during
the fourth quarter of 2008 and during 2009. Because the
Company’s cost reduction initiatives are not yet final, the
Company is unable, at this time, to estimate the amount of cash
and total charges, including non-cash impairment charges (if
any), it will incur.
Management’s
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, including 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 and cost reduction
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 distribution network of third-party entities
(referred to as “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. We manage and measure our business
geographically. Our geographic segments are the U.S. and
International.
To users, we provide owned and operated online properties and
services (“Yahoo! Properties” or “Owned and
Operated sites”). We also extend our marketing platform
and access to Internet users beyond Yahoo! Properties through
our Affiliates who have integrated our advertising offerings
into their Websites (referred to as “Affiliate sites”)
or their other offerings.
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 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.
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 user’s
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.
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 coupled with the growth of the Internet as an
advertising medium may enable us to increase our revenues in the
future.
During the second quarter of 2008, we entered into a
non-exclusive services agreement (the “Services
Agreement”) with Google Inc. (“Google”) to enable
us to run advertisements supplied by Google alongside our search
results and on Yahoo! Properties, as well as on Websites of
certain partners and Affiliates. Although the Services
Agreement was not subject to prior regulatory approval, Yahoo!
and Google voluntarily agreed to delay implementation of the
Services Agreement while the Antitrust Division of the U.S.
Department of Justice (the “DOJ”) reviewed the
agreement. At the conclusion of its review, the DOJ indicated
that it intended to file a complaint to seek to enjoin the
implementation of the Services Agreement. Following the
DOJ’s decision, Google delivered notice to us that it was
terminating the Services Agreement effective November 5,2008.
On October 21, 2008, we announced our intent to
significantly reduce our costs. As part of our cost reduction
initiatives, we expect to reduce our global workforce by at
least 10 percent by December 31, 2008. We expect to
incur cash charges related to the workforce reduction for
severance and other related costs. In addition, we expect to
incur cash costs related to contract terminations and
consolidation of facilities as part of these cost reduction
initiatives. Total charges are expected to include these cash
costs and may also include charges or credits related to
stock-based compensation expense and charges related to non-cash
impairment costs.
We expect to recognize the foregoing charges during the fourth
quarter of 2008 and during 2009. Because our cost reduction
initiatives are not yet final, we are unable, at this time, to
estimate the amount of cash and total charges, including
non-cash impairment charges (if any), we will incur.
Income from operations for the nine months ended
September 30, 2008 includes a net $17 million pre-tax
strategic workforce realignment charge, which was recorded in
the first quarter of 2008.
Income from operations for the three and nine months ended
September 30, 2008 includes incremental costs of
$37 million and $73 million, respectively, for outside
advisors related to Microsoft Corporation’s
(“Microsoft”) proposals to acquire all or a part of
the Company, other strategic alternatives, including the Google
agreement, the proxy contest, and related litigation defense
costs.
Net cash provided by operating activities for the nine months
ended September 30, 2008 includes a $350 million
one-time payment related to a commercial arrangement entered
into with AT&T Inc., which was recorded in long-term
deferred revenue in the first quarter of 2008 and is being
recognized in marketing services revenues over the underlying
service period.
During the nine months ended September 30, 2008, we
repurchased $79 million of common stock. During the nine
months ended September 30, 2007, we repurchased
approximately $1.4 billion of common stock and settled a
$250 million structured stock repurchase transaction which
was entered into in the first quarter of 2007 in which we
received 8.4 million shares of our common stock.
During the nine months ended September 30, 2008, our zero
coupon senior convertible notes (the “Notes”) were
converted, resulting in the issuance of 36.6 million shares
and payment of less than $1 million in cash.
Results
of Operations
The following table sets forth selected information on our
results of operations as a percentage of revenues for the
periods indicated:
Revenues. Revenues by groups of similar
services are as follows (dollars in thousands):
Three Months Ended September 30,
Percent
Nine Months Ended September 30,
Percent
2007
(*)
2008
(*)
Change
2007
(*)
2008
(*)
Change
Marketing services:
Owned and Operated sites
$
923,061
52
%
$
1,002,070
56
%
9
%
$
2,634,896
51
%
$
2,983,451
55
%
13
%
Affiliate sites
620,540
35
%
560,652
31
%
(10
)%
1,863,356
37
%
1,738,671
32
%
(7
)%
Marketing services
$
1,543,601
87
%
$
1,562,722
87
%
1
%
$
4,498,252
88
%
$
4,722,122
87
%
5
%
Fees
223,905
13
%
223,704
13
%
0
%
639,024
12
%
679,991
13
%
6
%
Total revenues
$
1,767,506
100
%
$
1,786,426
100
%
1
%
$
5,137,276
100
%
$
5,402,113
100
%
5
%
(*)
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.
Our revenue growth for the three and nine months ended
September 30, 2008 was attributable to continuing growth in
our search and display advertising businesses in the third
quarter of 2008. For the remainder of 2008, we expect our
revenues to be relatively flat on a year over year basis.
We believe our growing number of users, advertisers, publishers,
and inventory, both on and off our network, over recent years
has driven 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.
Marketing Services Revenues from Owned and Operated
Sites. Marketing services revenues from Owned
and Operated sites for the three and nine months ended
September 30, 2008 increased by 9 percent and
13 percent, respectively, as compared to the same periods
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. The transition of and changes in certain of our
broadband access partnerships from being fee-paying user based
to an advertising revenue sharing model have also contributed to
the increase in marketing services revenues from Owned and
Operated sites.
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
and nine months ended September 30, 2008 as compared to the
same periods in 2007, Page Views increased 17 percent
and 20 percent, respectively, and revenue per
Page View decreased 7 percent and 5 percent,
respectively. The decrease in revenue per Page View is due
to a shift to lower-yielding display advertising.
The primary components of our marketing services revenues from
Owned and Operated sites are growth in search and display
advertising. During the three and nine months ended
September 30, 2008, revenues from search advertising on
Owned and Operated sites grew 17 percent and
18 percent, respectively, compared to the same periods in
2007. During the three and nine months ended September 30,2008, revenues from display advertising on Owned and Operated
sites grew 3 percent and 10 percent, respectively,
compared to the same periods in 2007.
Marketing Services Revenues from Affiliate
Sites. Marketing services revenues from
Affiliate sites for the three and nine months ended
September 30, 2008 decreased 10 percent and
7 percent, respectively, as compared to the same periods in
2007. The sale of Overture Japan to Yahoo! Japan in the third
quarter of 2007 negatively impacted the Affiliate revenues
during the three and nine months ended September 30, 2008
by approximately
$90 million and $320 million, respectively, on a year
over year basis. For the remainder of 2008, we expect our
marketing services revenues from Affiliate sites to be
relatively flat on a year over year basis.
The number of searches on Affiliate sites increased by
approximately 18 percent for both the three and nine months
ended September 30, 2008, as compared to the same periods
in 2007. The increase in the volume of searches is primarily
attributed to a slight 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 27 percent and 24 percent, respectively, for the
three and nine months ended September 30, 2008, as compared
to the same periods in 2007, primarily as a result of a change
in traffic mix and the impact of the aforementioned sale of
Overture Japan to Yahoo! Japan.
Fees Revenues. Fees revenues for the
three months ended September 30, 2008 were flat and
increased 6 percent, for the nine months ended
September 30, 2008 as compared to the same periods in 2007.
Our fees revenues include premium fee-based services such as
Internet broadband services, sports, music, photos, games,
personals, premium
e-mail
offerings, and services for small businesses. Other fee-based
revenues include royalties, licenses, and mobile services.
Fees revenues remained flat year over year due to the transition
of and changes in certain of our broadband access partnerships,
from being fee-paying user based to an advertising revenue
sharing model. The market has moved to an environment in which
advertising revenue sharing is the prevailing model, and we are
evolving our partnerships accordingly. This has resulted 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. As we have renewed contracts
with broadband partners and our relationships have moved from
being fee-paying user based to an advertising revenue-sharing
model, our number of fee-paying users has decreased.
The increase in fees revenues for the nine months ended
September 30, 2008 is due to an increase in the number of
paying users during the first quarter of 2008.
As used in this discussion, “fee-paying users” is
based on the total number of fee-based subscriptions aggregated
from each Yahoo! Property. To calculate the average revenue per
fee-paying user, we divide the revenue generated from the
subscriptions by the average fee-paying users during the quarter.
The number of paying users for our fee-based services decreased
to 10.8 million as of September 30, 2008 compared to
18.7 million as of September 30, 2007, a decrease of
42 percent as a result of the business model changes
described above. Average monthly revenues per paying user was
approximately $4 for both the three and nine months ended
September 30, 2008, respectively, compared to approximately
$3 for the same periods in 2007. The increase in average
monthly revenues per paying user for both the three and nine
months ended September 30, 2008 is due to the change in mix
of fee-based subscribers, primarily the reduction in broadband
subscribers due to the renegotiation of broadband partnerships
from fee-paying user based to an advertising revenue sharing
model.
Adjusting the number of fee-paying users as of
September 30, 2007 to remove fee-paying users related to
our renewed broadband relationships, our fee-paying users would
have been 9.9 million, compared to 10.8 million as of
September 30, 2008, an increase of 9 percent.
Costs and Expenses. Operating costs and
expenses consist of cost of revenues, sales and marketing,
product development, general and administrative, and
amortization of intangibles expenses. Cost of revenues consists
of traffic acquisition costs (“TAC”), Internet
connection charges, and other expenses associated with the
production and usage of Yahoo! Properties, including
amortization of acquired intellectual property rights and
developed technology.
As part of our cost reduction initiatives announced on
October 21, 2008, we expect to reduce our global workforce
by at least 10 percent by December 31, 2008. We
expect to incur cash charges related to the workforce reduction
for severance and other related costs and cash costs related to
contract terminations and consolidation of facilities as part of
these cost reduction initiatives. Total charges may also include
charges or credits related to stock-based compensation expense
and charges related to non-cash impairment costs. We expect to
recognize the foregoing charges during the fourth quarter of
2008 and during 2009.
Operating costs and expenses are as follows (dollars in
thousands):
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.
The changes in operating costs and expenses include, among other
things, changes in TAC, compensation, information technology,
depreciation and amortization, and facilities expenses. Each of
these costs and expenses are described below.
Traffic Acquisition Costs. 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.
Compensation, Information Technology, Depreciation and
Amortization, and Facilities
Expenses. Compensation expense consists
primarily of salary, bonuses, commissions, and stock-based
compensation expense. Information and technology expense
includes telecom usage charges and data center operating costs.
Depreciation and amortization expense includes depreciation of
server equipment and information technology assets and
amortization of developed or acquired technology and
intellectual property rights. Facilities expense consists
primarily of building maintenance costs, rent expense, and
utilities.
The changes in operating costs and expenses for the three months
ended September 30, 2008 compared to the three months ended
September 30, 2007 are comprised of the following (in
thousands):
The changes in operating costs and expenses for the nine months
ended September 30, 2008 compared to the nine months ended
September 30, 2007 are comprised of the following (in
thousands):
Information
Depreciation and
Compensation
Technology
Amortization
Facilities
TAC
Other
Total
Cost of revenues
$
22,948
$
43,254
$
108,686
$
2,324
$
(49,058
)
$
28,268
$
156,422
Sales and marketing
47,136
(48
)
(1,533
)
14,258
—
(2,126
)
57,687
Product development
111,872
4,815
9,710
19,979
—
1,853
148,229
General and administrative
216
(1,275
)
11,211
(22,345
)
—
121,743
109,550
Amortization of intangibles
—
—
(11,072
)
—
—
—
(11,072
)
Strategic workforce realignment costs, net
—
—
—
—
—
16,885
16,885
Total
$
182,172
$
46,746
$
117,002
$
14,216
$
(49,058
)
$
166,623
$
477,701
Total compensation expense increased approximately
$27 million and $182 million for the three and nine
months ended September 30, 2008, respectively, as compared
to the same periods in 2007 primarily due to an increase in our
headcount across all functions and increases in retention
bonus. Product development headcount increased for the
maintenance and development of, and minor enhancements to
existing offerings and services on Yahoo! Properties as well as
the maintenance of Yahoo!’s technology platforms and
infrastructure. We also experienced growth in our sales and
marketing and general and administrative headcount to support
our business. Due to our recently announced cost reduction
initiatives, we do not expect our headcount to continue to grow
at its historic rate.
For the three and nine months ended September 30, 2008,
sales and marketing compensation expense decreased
$15 million and increased $47 million, respectively.
Increases in compensation expense resulting from increased
headcount were offset by reversals of $12 million and
$21 million, respectively, of stock-based compensation
expense related to the departure of executives and other
employees during the three and nine months ended
September 30, 2008 for which there were no similar
reversals in the same periods of 2007.
Additionally, stock-based compensation expense decreased due to
large grants vesting during the first half of 2008 for which no
corresponding expense was recorded during the third quarter of
2008.
For the three and nine months ended September 30, 2008,
product development compensation expense increased
$33 million and $112 million, respectively, primarily
due to increased headcount for the maintenance and development
of, and minor enhancements to existing offerings and services on
Yahoo! Properties as well as the maintenance of Yahoo!’s
technology platforms and infrastructure. For the nine months
ended September 30, 2008, the increase in compensation
expense was net of a decrease in stock-based compensation
expense of $6 million resulting from larger reversals of
stock-based compensation expense related to the departure of
executives and other employees as compared to the same period of
2007.
Information technology expenses increased $12 million and
$47 million for the three and nine months ended
September 30, 2008, respectively, as compared to the same
periods in 2007 due to increased telecom usage and data center
operating costs.
Depreciation and amortization expenses increased
$37 million and $117 million for the three and nine
months ended September 30, 2008, respectively, as compared
to the same periods in 2007 due to our continued investment in
information technology assets and server equipment. These
increases were slightly offset by a decrease in amortization
expense for acquired intangible assets due to certain intangible
assets acquired in prior years being fully amortized as well as
an increase in the weighted amortization periods of recently
acquired intangible assets, slightly offset by an increase in
our asset base as compared to the three and nine months ended
September 30, 2007. See Note 6 —
“Intangible Assets, Net” in the Notes to the condensed
consolidated financial statements for additional information.
Facilities expenses increased $5 million and
$14 million for the three and nine months ended
September 30, 2008, respectively, as compared to the same
periods in 2007 due to our expansion into new facilities and
increased rent expense on our buildings. Due to our recently
announced cost reduction initiatives, we do not expect our
facilities expense to continue to grow at its historic rate.
TAC decreased $24 million and $49 million for the
three and nine months ended September 30, 2008,
respectively, as compared to the same periods in 2007 primarily
due to the sale of Overture Japan to Yahoo! Japan. This
decrease in TAC was slightly offset by a small increase in
average TAC rates.
Other expenses increased $43 million and $167 million
for the three and nine months ended September 30, 2008,
respectively, as compared to the same periods in 2007 mainly due
to increases in outsourced service provider expenses of
$44 million and $109 million, respectively. These
increases were primarily the result of incremental costs
incurred in general and administrative expense of
$37 million and $73 million for the three and nine
months ended September 30, 2008, respectively, for outside
advisors related to Microsoft’s proposals to acquire all or
a part of the Company, other strategic alternatives, including
the Google agreement, the proxy contest, and related litigation
defense costs. Content costs, included in costs of revenues and
driven by our rich media offerings, remained flat for the three
months ended September 30, 2008 and increased
$13 million for the nine months ended September 30,2008, as compared to the same periods in 2007. Other expenses
also increased due to sales and marketing spend to support our
strategic initiatives and the integration of acquisitions.
Marketing related expenses decreased by $4 million and
$23 million for the three and nine months ended
September 30, 2008, respectively, as compared to the same
periods in 2007 as we incurred costs for our “Be a Better
...” campaign in 2007 for which no similar expense was
recorded in the three and nine months ended September 30,2008.
During the quarter ended March 31, 2008, other expenses
also included expenses related to a strategic workforce
realignment we implemented to more appropriately allocate
resources to our key strategic initiatives. The strategic
realignment involved investing resources in some areas, reducing
resources in others, and eliminating some areas of our business
that do not support our strategic priorities. We incurred total
pre-tax cash charges of approximately $29 million in
severance pay expenses and related cash expenses in connection
with the workforce realignment, all of which were recorded in
the first quarter of 2008. 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
September 30, 2008, the remaining accrual related to the
strategic workforce realignment is approximately
$3 million. See Note 16 — “Strategic
Workforce Realignment” in the Notes to the condensed
consolidated financial statements for additional information.
Other Income, Net. Other income, net is
comprised of (in thousands):
Three Months Ended September 30,
Dollar
Nine Months Ended September 30,
Dollar
2007
2008
Change
2007
2008
Change
Interest and investment income
$
30,800
$
23,249
$
(7,551
)
$
102,638
$
68,157
$
(34,481
)
Investment (losses)/gains, net
(16
)
(123
)
(107
)
(3,676
)
(353
)
3,323
Gain on sale of Overture Japan
6,083
—
(6,083
)
6,083
—
(6,083
)
Other
6,881
(14,245
)
(21,126
)
4,890
(10,587
)
(15,477
)
Total other income, net
$
43,748
$
8,881
$
(34,867
)
$
109,935
$
57,217
$
(52,718
)
Other income, net for the three and nine months ended
September 30, 2008 decreased $35 million and
$53 million, respectively, as compared to the same periods
in 2007. Interest and investment income for the three and nine
months ended September 30, 2008 decreased due to lower
average interest rates as well as lower average invested
balances, compared to the same periods in 2007. Average
interest rates were approximately 2.9 percent and
3.1 percent in the three and nine months ended
September 30, 2008, respectively, compared to
4.2 percent and 4.3 percent, respectively, in the same
periods in 2007. Other decreased by $21 million and
$17 million for the three and nine months ended
September 30, 2008, respectively, as compared to the same
periods in 2007 due to foreign exchange re-measurement. Other
income, net for the three and nine months ended
September 30, 2007 included a $6 million gain from the
sale of Overture Japan; no similar gain was recorded during the
three and nine months ended September 30, 2008.
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 rates
for the three and nine months ended September 30, 2008 were
64.0 percent and 44.5 percent, respectively, compared
to 40.6 percent and 42.1 percent for the same periods
in 2007. The effective tax rates for the three and nine months
ended September 30, 2008 differ from the statutory federal
income tax rate of 35.0 percent primarily due to state
taxes, the effect of
non-U.S. operations,
non-deductible stock-based compensation expense, and the
resolution of examinations by taxing authorities. The effective
tax rates for the three and nine months ended September 30,2008 were higher than the rates for the same periods in 2007
primarily due to the expiration of the federal research tax
credit in 2008 and an increase in 2008 of non-deductible
stock-based compensation expense, offset by the effect of
non-U.S. operations.
In addition, during the three months ended September 30,2008, a change in forecasted profitability between U.S. and
international jurisdictions resulted in a higher estimated
annual tax rate as compared to the three months ended
June 30, 2008.
Our total amount of unrecognized tax benefits as of
September 30, 2008 is $703 million, of which
$255 million is recorded in the financial statements in the
deferred and other long-term tax liabilities, net line item of
the condensed consolidated balance sheet. The total
unrecognized tax benefits as of September 30, 2008
increased by $17 million from the balance as of
December 31, 2007.
Our federal and California income tax returns for the years
ended December 31, 2005 and 2006 are currently under
examination by the Internal Revenue Service and the California
Franchise Tax Board.
Earnings in Equity Interests. Earnings
in equity interests for the three and nine months ended
September 30, 2008 were $28 million and
$537 million, respectively, as compared to $37 million
and $98 million for the same periods in 2007. Earnings in
equity interests for the nine months ended September 30,2008 included a $401 million net non-cash gain recorded in
the first quarter of 2008 related to Alibaba Group Holding
Limited’s (“Alibaba Group”) initial public
offering (“IPO”) of Alibaba.com Limited
(“Alibaba.com”), net of tax. As of September 30,2008, the fair value of our investment based on the quoted stock
price of Alibaba.com was approximately
$52 million. In the third quarter of 2008, we recorded an
impairment charge of $30 million, net of tax, within
earnings in equity interests to reduce the carrying value of the
investment to fair value.
See Note 4 — “Investments in Equity
Interests” and Note 14 — “Income
Taxes” 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 ($2) and ($3) million for
the three and nine months ended September 30, 2008,
respectively, as compared to less than $1 million and
$1 million, respectively, for the same periods in 2007.
Minority interests recorded for the three and nine months ended
September 30, 2008 and 2007 were related to our Yahoo! 7
joint venture arrangement.
Business
Segment Results
We manage our business geographically. Our primary areas of
measurement and decision-making are the U.S. and
International. Management relies on an internal management
reporting process that provides revenues and segment operating
income before depreciation, amortization, and stock-based
compensation expense for making financial decisions and
allocating resources.
Three Months Ended September 30,
Percent
Nine Months Ended September 30,
Percent
2007
(*)
2008
(*)
Change
2007
(*)
2008
(*)
Change
Revenues by segment:
United States
$
1,194,911
68
%
$
1,279,924
72
%
7
%
$
3,414,182
66
%
$
3,851,857
71
%
13
%
International
572,595
32
%
506,502
28
%
(12
)%
1,723,094
34
%
1,550,256
29
%
(10
)%
Total revenues
$
1,767,506
100
%
$
1,786,426
100
%
1
%
$
5,137,276
100
%
$
5,402,113
100
%
5
%
(*)
Percent of total revenues.
Three Months Ended
Nine Months Ended
September 30,
Percent
September 30,
Percent
2007
2008
Change
2007
2008
Change
Segment operating income before depreciation, amortization, and
stock-based compensation expense:
United States
$
338,423
$
291,406
(14
)%
$
1,042,278
$
904,438
(13
)%
International
127,886
118,972
(7
)%
357,695
366,119
2
%
Total segment operating income before depreciation,
amortization, and stock-based compensation expense
466,309
410,378
(12
)%
1,399,973
1,270,557
(9
)%
Depreciation and amortization
(170,577
)
(207,605
)
22
%
(481,472
)
(598,473
)
24
%
Stock-based compensation expense
(145,540
)
(132,599
)
(9
)%
(414,325
)
(380,772
)
(8
)%
Income from operations
$
150,192
$
70,174
(53
)%
$
504,176
$
291,312
(42
)%
Revenues are attributed to individual countries according to the
International online property that generated the revenues. No
single foreign country accounted for more than 10 percent
of revenues for the three and nine months ended
September 30, 2008 or 2007, respectively.
United States. U.S. revenues for
the three and nine months ended September 30, 2008
increased $85 million, or 7 percent, and
$438 million, or 13 percent, respectively, as compared
to the same periods in 2007. Our year over year increases in
revenues were a result of growth in advertising across the
majority of U.S. Yahoo! Properties. For the three months
ended September 30, 2008, revenues from our fee-based
services remained flat. Fees revenues were impacted by the
decrease in fee-paying users as our broadband relationships
transitioned from being fee-paying user-based to an advertising
revenue sharing model. U.S. operating income before
depreciation,
amortization, and stock-based compensation expense for the three
and nine months ended September 30, 2008 decreased
$47 million, or 14 percent and $138 million, or
13 percent, respectively, as compared to the same periods
in 2007. The decrease is primarily due to a pre-tax cash charge
for severance pay expenses and related cash expenditures in
connection with a strategic workforce realignment we implemented
during the first quarter of 2008 in addition to incremental
costs of $37 million and $73 million for the three and
nine months ended September 30, 2008, respectively, for
outside advisors related to Microsoft’s proposals to
acquire all or a part of the Company, other strategic
alternatives, including the Google agreement, the proxy contest,
and related litigation defense costs.
International. International revenues
for the three and nine months ended September 30, 2008
decreased $66 million, or 12 percent, and
$173 million, or 10 percent, respectively, as compared
to the same periods in 2007. Most of the International revenue
decrease for the three and nine months ended September 30,2008 are the result of the sale of Overture Japan to Yahoo!
Japan. Previously, we earned search marketing revenues from
advertisers and paid TAC to Yahoo! Japan. In the third quarter
of 2007, we commenced a new commercial arrangement with Yahoo!
Japan in which we provide advertising and search marketing
services to Yahoo! Japan for a service fee. Under this new
arrangement, we record marketing services revenues 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. International
operating income before depreciation, amortization, and
stock-based compensation expense for the three and nine months
ended September 30, 2008 decreased by $9 million, or
7 percent, and increased by $8 million, or
2 percent, respectively, as compared to the same periods in
2007.
Our International income from 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.
Using the average foreign currency exchange rates for the three
and nine months ended September 30, 2007, our International
revenues for the three and nine months ended September 30,2008 would have been lower than we reported by approximately
$1 million and $48 million, respectively.
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 our critical
accounting policies reflect the more significant estimates and
assumptions used in the preparation of the condensed
consolidated financial statements.
For a discussion of our critical accounting policies and
estimates, see “Critical Accounting Policies and
Estimates” included in our annual financial statements for
the year ended December 31, 2007 filed on
Form 10-K.
We have made no significant changes to our critical accounting
estimates since December 31, 2007.
Recent
Accounting Pronouncements
See Note 1 — “The Company and Summary of
Significant Accounting Policies” in the Notes to the
condensed consolidated financial statements.
Total cash, cash equivalents, and marketable debt securities
$
2,363,472
$
3,299,228
Percentage of total assets
19
%
24
%
Nine Months Ended September 30,
Cash Flow Highlights
2007
2008
(In thousands)
Net cash provided by operating activities
$
1,297,015
$
1,559,234
Net cash used in investing activities
$
(120,707
)
$
(1,072,542
)
Net cash (used in) provided by financing activities
$
(1,250,731
)
$
222,506
Our operating activities for the nine months ended
September 30, 2008 generated adequate cash to meet our
operating needs. As of September 30, 2008, we had cash,
cash equivalents, and marketable debt securities totaling
$3.3 billion, compared to $2.4 billion at
December 31, 2007.
During the nine months ended September 30, 2008, we
invested $79 million in direct stock repurchases and used
$65 million for tax withholdings related to net share
settlements of restricted stock awards and restricted stock
units. Additionally, we invested $483 million in net
capital expenditures and $209 million in acquisitions,
net. The cash used for these investments was offset by
$1.6 billion of cash generated from operating activities
(including a $350 million one-time payment from AT&T
Inc. recorded in long-term deferred revenue in the first
quarter of 2008) and $331 million from the issuance of
common stock as a result of the exercise of stock options.
During the nine months ended September 30, 2007, we
invested $1.4 billion in direct stock repurchases and
$250 million in structured stock repurchases.
Additionally, we invested $410 million in net capital
expenditures and $356 million in acquisitions, net. The
cash used for these investments was offset by $1.3 billion
of cash generated from operating activities and
$244 million of cash generated from the issuance of common
stock as a result of the exercise of stock options.
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 nine months ended
September 30, 2008 mainly due to the net impact of non-cash
adjustments to income. In the nine months ended
September 30, 2008, operating cash flows were positively
impacted by changes in working capital balances including a
one-time payment from AT&T Inc., which was recorded in
long-term deferred revenue during the first quarter of 2008.
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 nine
months ended September 30, 2008, we invested
$483 million in net capital expenditures, $67 million
to purchase intangible assets, a net $209 million in
acquisitions, and a net $8 million in other investing
activities. In the nine months ended September 30, 2007,
we invested $410 million in net capital expenditures,
$75 million to purchase intangible assets, a net
$356 million in acquisitions, and a net $30 million in
other investing activities.
Cash used in financing activities is driven by our financing
activities relating to stock repurchases and employee option
exercises. During the nine months ended September 30,2008, 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, $65 million was used for
tax withholdings related to net share settlements of restricted
stock awards and restricted stock units ($27 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. Additionally, we had cash proceeds from employee
option exercises of $331 million for the nine months ended
September 30, 2008, as compared to $244 million for
the same period in 2007.
During the nine months ended September 30, 2007, we used
$1.4 billion in the direct purchase of 49.1 million
shares of our common stock at an average price of $27.77 per
share. During the third quarter of 2007, a $250 million
structured stock repurchase transaction which was entered into
in the first quarter of 2007 settled and matured. On the
maturity date, we received 8.4 million shares of our common
stock at an effective buy-back price of $29.80 per share. In
addition, we used $4 million for tax withholdings related
to net share settlements of restricted stock awards and
restricted stock units ($2 million of which relates to
reacquired shares in treasury stock related to restricted stock
awards).
Financing
During the nine months ended September 30, 2008,
$750 million of Notes were converted into 36.6 million
shares of Yahoo! common stock and less than $1 million of
cash was paid out. See Note 9 — “Debt”
in the Notes to the condensed consolidated financial statements
for additional information.
Capital
expenditures
Capital expenditures have generally comprised purchases of
computer hardware, software, server equipment, furniture and
fixtures, and real estate. Capital expenditures, net were
$483 million for the nine months ended September 30,2008, compared to $410 million in the same period in 2007.
Our capital expenditures in 2008 are expected to be consistent
with 2007 levels.
Contractual
obligations and commitments
Leases. We have entered into various
non-cancelable operating and capital lease agreements for office
space and data centers globally for original lease periods up to
23 years, expiring between 2008 and 2027.
During the nine months ended September 30, 2008, we entered
into an 11 year lease agreement for a data center in the
western U.S. Of the total expected minimum lease commitment
of $105 million, $21 million is classified as an
operating lease for real estate and $84 million is
classified as a capital lease for equipment. We have the option
to renew this lease for up to an additional ten years.
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
September 30, 2008, these commitments totaled
$434 million, of which $40 million will be payable in
the remainder of 2008, $170 million will be payable in
2009, $163 million will be payable in 2010, and
$61 million will be payable in 2011.
Intellectual Property Rights. We are
obligated to make certain payments under various intellectual
property arrangements of up to $53 million through 2023.
Income Taxes. As of September 30,2008, the unrecognized tax benefits that resulted in an accrued
liability amounted to $255 million and are classified as
deferred and other long-term tax liabilities, net on our
condensed consolidated balance sheets. As of September 30,2008, 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 U.S. 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.
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. 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
September 30, 2008 and December 31, 2007, respectively.
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 and
nine months ended September 30, 2007, our International
revenues for the three and nine months ended September 30,2008 would have been lower than we reported by approximately
$1 million and $48 million, respectively. Our
International segment operating income before depreciation,
amortization, and stock-based compensation expense for the three
and nine months ended September 30, 2008 would have been
lower than we reported by $6 million and $26 million,
respectively.
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 U.S. Dollars in
consolidation that leads to a translation gain or loss that is
recorded in accumulated other comprehensive income as 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. We had net foreign
currency transaction losses of $14 million and
$12 million for the three and nine months ended
September 30, 2008, respectively, as compared to net
foreign currency transaction gains of $7 million and
$5 million for the three and nine months ended
September 30, 2007, respectively.
Investment Risk. We are exposed to
investment risk as it relates to changes in the market value of
our investments. We invest excess cash in marketable debt
securities and strategic public equity investments.
The primary objective of our investments in marketable debt
securities 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 and
cash equivalents and short-term and long-term investments in a
variety of securities, including both government and corporate
obligations and money market funds. As of September 30,2008 and 2007, net unrealized gains and losses on these
investments were not material.
We invest in equity instruments of public companies for business
and strategic purposes and have classified these securities as
available-for-sale or investment in equity interests. These
investments may be 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
available-for-sale
investments, which were not material as of September 30,2008 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
available-for-sale
investments, the fair value of our equity investments would
decrease by approximately $12 million as of
September 30, 2008 and 2007, respectively. In the third
quarter of 2008, we recorded an impairment charge of
$30 million, net of tax, within earnings in equity
interests to reduce the carrying value of our equity interest in
Alibaba.com to fair value.
Item 4.
Controls
and Procedures
Disclosure Controls and Procedures. The
Company’s management, with the participation of the
Company’s principal executive officer and principal
financial officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term
is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the “Securities
Exchange Act”)) as of the end of the period covered by this
Report. Based on such evaluation, the Company’s principal
executive officer and principal financial officer have concluded
that, as of the end of such period, the Company’s
disclosure controls and procedures were effective.
Internal Control Over Financial
Reporting. There have not been any changes in
the Company’s internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act) during the most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
For a description of our material legal proceedings, see
Note 12 — “Commitments and
Contingencies” to our condensed consolidated financial
statements, which is incorporated by reference herein.
Item 1A.Risk
Factors
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!. Google’s Internet search service
directly competes with us for Affiliate and advertiser
arrangements, both of which are key to our business and
operating results. Microsoft’s 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 Warner’s 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, ad networks, 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 provider’s or manufacturer’s own directory or
by providing Yahoo! with less prominent listings than the access
provider, manufacturer, or a competitor’s offerings. Such
access 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, advertisers, ad networks, and
publishers 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 September 30, 2008, 87 percent
of our total revenues came from marketing services. Our ability
to continue to retain and grow marketing services revenue
depends upon:
•
maintaining our user base;
•
maintaining our popularity as an Internet destination site;
•
broadening our relationships with advertisers to small-and
medium-sized businesses;
•
attracting advertisers to our user base;
•
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;
•
the successful implementation and acceptance of our advertising
exchange by advertisers, networks, Affiliates, and publishers;
•
the successful development and deployment of technology
improvements to our advertising platform;
•
maintaining our Affiliate program for our search marketing;
•
deriving better demographic and other information from our
users; and
driving acceptance of the Web in general and of Yahoo! in
particular by advertisers as an advertising medium.
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. The state of the global economy
and availability of capital could impact the advertising
spending patterns of existing and potential future advertisers.
Any reduction in spending by, or loss of, existing or potential
future advertisers would cause our revenues to decline, and any
decreased collectability of accounts receivable would negatively
impact our results of operations. Further, we may be unable to
adjust our expenses and capital expenditures 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 us. These arrangements expose
us to potentially significant financial risks in the event our
usage levels decrease, including the following:
•
the revenue we are entitled to receive may be adjusted downwards;
•
we may be required to “make good” on our obligations
by providing additional advertising or alternative services;
•
the partners of co-branded services may not renew the
arrangements or may renew at less advantageous terms for the
Company; and
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.
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.
Deterioration in general economic conditions has caused
and could cause additional decreases or delays in advertising
spending by our advertisers and could harm our ability to
generate advertising revenues and our results of
operations.
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, the
current deterioration in economic conditions has caused and
could cause additional decreases in or delays in advertising
spending which could reduce our revenues or negatively impact
our ability to grow our revenues. Further, any decreased
collectability of accounts receivable could negatively impact
our results of operations.
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 may have exposure to additional tax liabilities which
could result in a volatile quarterly tax expense.
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. 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. We are subject to regular review and audit by both
domestic and foreign tax authorities as well as subject to the
prospective and retrospective effects of changing tax
regulations and legislation. 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 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 and our intellectual property assets may be reduced. Any
impairment of our 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. Currently, we are engaged in lawsuits regarding such
trademark issues.
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, accessibility, 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.
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 Children’s Online
Protection Act and the Children’s 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:
•
the difficulty of assimilating the operations and personnel of
our acquired companies into our operations;
•
the potential disruption of our on-going business and
distraction of management;
•
the incurrence of additional operating losses and expenses of
the businesses we acquired or in which we invested;
•
the difficulty of integrating acquired technology and rights
into our services and unanticipated expenses related to such
integration;
the failure to successfully further develop acquired technology
resulting in the impairment of amounts currently capitalized as
intangible assets;
•
the failure of strategic investments to perform as expected;
•
the potential for patent and trademark infringement claims
against the acquired company;
•
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;
•
the impairment of relationships with employees of the acquired
companies or our existing employees as a result of integration
of new management personnel;
•
the difficulty of integrating the acquired company’s
accounting, management information, human resources and other
administrative systems;
•
our lack of, or limitations on, our control over the operations
of our joint venture companies;
•
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
•
the impact of known potential liabilities or unknown liabilities
associated with the companies we acquired or in which we
invested.
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.
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, photographs, 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 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:
•
trade barriers and changes in trade regulations;
•
difficulties in developing, staffing, and simultaneously
managing a large number of varying foreign operations as a
result of distance, language, and cultural differences;
•
stringent local labor laws and regulations;
•
longer payment cycles;
•
credit risk and higher levels of payment fraud;
•
currency exchange rate fluctuations;
•
political or social unrest or economic instability;
•
import or export restrictions;
•
seasonal volatility in business activity;
•
risks related to government regulation or required compliance
with local laws in certain jurisdictions, including those more
fully described above; and
•
potentially adverse tax consequences.
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 Internet advertising solutions
and new means of content delivery, such as rich media, audio,
video, and mobile. 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,
services and Internet advertising solutions. 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 us to incur substantial costs or data loss, and may cause
users, advertisers, ad networks, publishers, 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 threaten or 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 user’s
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 Internet’s 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 and relevancy 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.
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 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 long-lived assets, including goodwill,
amortizable intangible assets, available for sale securities, 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 sustained decline in our 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 long-lived
assets, including goodwill, amortizable intangible assets,
available for sale securities, or investments in equity
interests is determined. Doing so would adversely impact our
results of operations.
Potential continuing uncertainty resulting from proposals
to acquire all or part of Yahoo! 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 our stockholders. On
May 3, 2008, Microsoft withdrew its proposal to acquire the
Company. Subsequently, Microsoft made other proposals which
included acquiring only the Company’s search business, and
which our Board determined were not in the best interests of
Yahoo! and our stockholders. The review and consideration of
the various Microsoft proposals and related matters required the
expenditure of significant time and resources by us. There can
be no assurance that Microsoft or another person will not in the
future make proposals, or take other actions, 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 proposals as more fully described in
Note 12 — “Commitments and
Contingencies” to our condensed consolidated financial
statements. 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
September 30, 2008, the closing sale prices of our common
stock on the Nasdaq Global Select Market ranged from $16.88 to
$24.64 per share and the closing sale price on October 31,2008 was $12.82 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 performance. 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. A sustained
decline in our stock price and market capitalization could lead
to an impairment charge of our long-lived assets.
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 in 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 in control of Yahoo!.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
Submission
of Matters to a Vote of Security Holders
On August 1, 2008, the Company held its Annual Meeting of
Stockholders (the “Meeting”). After the Meeting, the
Company reported the following voting results for the election
of directors, which were certified by Corporate Election
Services, the inspector of elections for the Meeting:
Director
Shares For
% For
Shares Withheld
% Withheld
Roy J. Bostock
832,023,657
79.5
%
214,071,927
20.5
%
Ronald W. Burkle
849,373,291
81.2
%
196,722,293
18.8
%
Eric Hippeau
948,862,579
90.7
%
97,233,005
9.3
%
Vyomesh Joshi
971,594,650
92.9
%
74,500,934
7.1
%
Arthur H. Kern
814,871,925
77.9
%
231,223,659
22.1
%
Robert A. Kotick
967,044,818
92.4
%
79,050,766
7.6
%
Mary Agnes Wilderotter
964,939,727
92.2
%
81,155,857
7.8
%
Gary L. Wilson
856,006,576
81.8
%
190,089,008
18.2
%
Jerry Yang
893,055,602
85.4
%
153,039,982
14.6
%
On August 5, 2008, Broadridge Financial Solutions, Inc.
notified Corporate Election Services of errors made by
Broadridge in reporting the votes for directors at the Meeting.
These errors did not affect the outcome of the election of
directors. The following table reflects the corrected
Broadridge numbers:
Director
Shares For
% For
Shares Withheld
% Withheld
Roy J. Bostock
632,023,657
60.4
%
414,071,927
39.6
%
Ronald W. Burkle
649,373,291
62.1
%
396,722,293
37.9
%
Eric Hippeau
948,862,579
90.7
%
97,233,005
9.3
%
Vyomesh Joshi
971,594,650
92.9
%
74,500,934
7.1
%
Arthur H. Kern
714,871,925
68.3
%
331,223,659
31.7
%
Robert A. Kotick
967,044,818
92.4
%
79,050,766
7.6
%
Mary Agnes Wilderotter
964,939,727
92.2
%
81,155,857
7.8
%
Gary L. Wilson
756,006,576
72.3
%
290,089,008
27.7
%
Jerry Yang
693,055,602
66.3
%
353,039,982
33.7
%
No errors were reported with respect to the other proposals
presented at the Meeting.
At the Meeting, the stockholders also acted on the following
matters:
The stockholders ratified the appointment of
PricewaterhouseCoopers LLP as the independent registered public
accounting firm for the Company for the fiscal year ending
December 31, 2008 (with 1,021,286,375 shares voting
for, 9,952,603 against, and 14,856,606 abstaining).
The stockholders voted against the stockholder proposal
regarding pay-for-superior-performance (with
339,808,082 shares voting for, 681,650,539 shares
against and 24,636,963 shares abstaining).
The stockholders voted against the stockholder proposal
regarding Internet censorship (with 54,531,125 shares
voting for, 889,546,203 shares voting against and
102,018,256 shares abstaining).
The stockholders voted against the stockholder proposal
regarding board committee on human rights (with
41,874,370 shares voting for, 932,055,232 shares
voting against and 72,165,982 shares abstaining).
Information regarding the settlement of a proxy contest
initiated by certain stockholders with respect to the election
of directors at the Meeting is included in a supplement to the
Company’s proxy statement for the Meeting, which was filed
with the SEC and furnished to stockholders beginning on
July 28, 2008.
We currently expect to hold our 2009 annual meeting of
stockholders on June 25, 2009.
In our proxy statement relating to our 2008 annual meeting of
stockholders, we disclosed the deadlines by which stockholders
must notify us of any proposals to be included in the proxy
materials distributed by us for our 2009 annual meeting of
stockholders. Because the expected meeting date for our 2009
annual meeting of stockholders represents a change of more than
30 days from the anniversary of our 2008 annual meeting of
stockholders held on August 1, 2008, any stockholder
proposal that is submitted for inclusion in the proxy materials
to be distributed by us for our 2009 annual meeting of
stockholders pursuant to
Rule 14a-8
of the Securities Exchange Act of 1934 (the “Exchange
Act”) must be received by us at our principal executive
offices a reasonable time before we begin to print and mail our
proxy materials. We have set the date for receipt of such
proposals as the close of business on January 5, 2009.
Proposals should be sent to Yahoo!’s Corporate Secretary at
701 First Avenue, Sunnyvale, California94089 and must also
comply with
Rule 14a-8
under the Exchange Act regarding the inclusion of stockholder
proposals in company-sponsored proxy materials.
Item 6.
Exhibits
The exhibits listed in the Index to Exhibits (following the
signatures page of this Report) are filed with, or incorporated
by reference in, this Report.
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.
The following exhibits are included, or incorporated by
reference, in this Report (and are numbered in accordance with
Item 601 of
Regulation S-K).
Pursuant to Item 601(a)(2) of
Regulation S-K,
this exhibit index immediately precedes the exhibits.
Amended and Restated Bylaws of Registrant (Filed as
Exhibit 3.2 to the Registrant’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2008 and incorporated
herein by reference.)
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 November 7, 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 November 7, 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 November 7, 2008.
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.
Dates Referenced Herein and Documents Incorporated by Reference
