Quarterly Report

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-28018

Yahoo! Inc.

(Exact name of registrant as specified in its charter)

Delaware

77-0398689

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

701 First Avenue

Sunnyvale, California 94089

(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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at October 31, 2011
Common Stock, $0.001 par value		1,240,298,990

YAHOO! INC.

Table of Contents


PART I FINANCIAL INFORMATION		3

Item 1.	Condensed Consolidated Financial Statements (unaudited)	3

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2011	3

	Condensed Consolidated Balance Sheets as of December 31, 2010 and September 30, 2011	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2011	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43

PART II OTHER INFORMATION		44

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 5.	Other Information	58

Item 6.	Exhibits	58

	Signature	59

PART I — FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (unaudited)

YAHOO! INC.

Condensed Consolidated Statements of Income


	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2011			September 30, 2010			September 30, 2011
	(Unaudited, in thousands except per share amounts)
Revenue	$	1,601,203		$	1,216,665		$	4,799,542		$	3,660,046
Cost of revenue		680,754			359,276			2,069,858			1,107,893

Gross profit		920,449			857,389			2,729,684			2,552,153

Operating expenses:
Sales and marketing		320,977			290,486			965,983			833,032
Product development		269,725			254,958			804,354			744,538
General and administrative		126,816			128,977			362,577			383,531
Amortization of intangibles		8,018			8,435			24,000			25,067
Restructuring charges, net		5,758			(2,721	)		20,222			8,091

Total operating expenses		731,294			680,135			2,177,136			1,994,259

Income from operations		189,155			177,254			552,548			557,894
Other income, net		191,351			18,046			290,267			17,407

Income before income taxes and earnings in equity interests		380,506			195,300			842,815			575,301
Provision for income taxes		(86,413	)		(55,731	)		(204,381	)		(163,480	)
Earnings in equity interests		104,166			158,775			288,247			349,857

Net income		398,259			298,344			926,681			761,678
Less: Net income attributable to noncontrolling interests		(2,128	)		(5,053	)		(7,038	)		(8,423	)

Net income attributable to Yahoo! Inc.	$	396,131		$	293,291		$	919,643		$	753,255

Net income attributable to Yahoo! Inc. common stockholders per share — basic	$	0.30		$	0.23		$	0.67		$	0.59

Net income attributable to Yahoo! Inc. common stockholders per share — diluted	$	0.29		$	0.23		$	0.66		$	0.58

Shares used in per share calculation — basic		1,333,753			1,253,044			1,370,145			1,287,352

Shares used in per share calculation — diluted		1,343,094			1,259,576			1,382,255			1,296,040

Stock-based compensation expense by function:
Cost of revenue	$	698		$	956		$	2,289		$	2,479
Sales and marketing	$	19,066		$	16,759		$	54,284		$	42,829
Product development	$	22,647		$	21,093		$	81,152		$	64,296
General and administrative	$	8,686		$	12,139		$	31,752		$	35,507
Restructuring expense reversals, net	$	—		$	—		$	—		$	(1,278	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

YAHOO! INC.

Condensed Consolidated Balance Sheets


	December 31, 2010		September 30, 2011
	(Unaudited, in thousands except par values)
ASSETS
Current assets:
Cash and cash equivalents	$	1,526,427	$	1,464,219
Short-term marketable debt securities		1,357,661		650,593
Accounts receivable, net		1,028,900		872,728
Prepaid expenses and other current assets		432,560		416,809

Total current assets		4,345,548		3,404,349
Long-term marketable debt securities		744,594		754,767
Property and equipment, net		1,653,422		1,725,556
Goodwill		3,681,645		3,750,287
Intangible assets, net		255,870		204,680
Other long-term assets		235,136		218,215
Investments in equity interests		4,011,889		4,469,702

Total assets	$	14,928,104	$	14,527,556

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	162,424	$	131,473
Accrued expenses and other current liabilities		1,208,792		864,139
Deferred revenue		254,656		205,978

Total current liabilities		1,625,872		1,201,590
Long-term deferred revenue		56,365		39,054
Capital lease and other long-term liabilities		142,799		134,310
Deferred and other long-term tax liabilities, net		506,658		647,483

Total liabilities		2,331,694		2,022,437
Commitments and contingencies (Note 11)		—		—
Yahoo! Inc. stockholders’ equity:
Common stock, $0.001 par value; 5,000,000 shares authorized; 1,308,836 shares issued and 1,308,836 shares outstanding as of December 31, 2010 and 1,322,000 shares issued and 1,239,719 shares outstanding as of September 30, 2011		1,306		1,319
Additional paid-in capital		10,109,913		10,340,550
Treasury stock at cost, zero shares as of December 31, 2010 and 82,281 shares as of September 30, 2011		—		(1,202,672	)
Retained earnings		1,942,656		2,695,911
Accumulated other comprehensive income		504,254		625,001

Total Yahoo! Inc. stockholders’ equity		12,558,129		12,460,109
Noncontrolling interests		38,281		45,010

Total equity		12,596,410		12,505,119

Total liabilities and equity	$	14,928,104	$	14,527,556

The accompanying notes are an integral part of these condensed consolidated financial statements.

YAHOO! INC.

Condensed Consolidated Statements of Cash Flows


	Nine Months Ended
	September 30, 2010			September 30, 2011
	(Unaudited, in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	926,681		$	761,678
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		387,240			404,823
Amortization of intangible assets		97,969			87,784
Stock-based compensation expense, net		169,477			143,833
Non-cash restructuring charges		2,813			—
Tax benefits from stock-based awards		91,268			9,974
Excess tax benefits from stock-based awards		(131,648	)		(44,715	)
Deferred income taxes		15,752			68,740
Earnings in equity interests		(288,247	)		(349,857	)
Dividends received from equity investee		60,918			75,391
(Loss)/gain from sales of investments, assets, and other, net		(222,900	)		12,822
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net		59,464			156,092
Prepaid expenses and other		(18,502	)		10,407
Accounts payable		(19,789	)		(27,316	)
Accrued expenses and other liabilities		(169,707	)		(351,081	)
Deferred revenue		(123,744	)		(66,103	)

Net cash provided by operating activities		837,045			892,472

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net		(466,685	)		(463,006	)
Purchases of marketable debt securities		(1,789,061	)		(1,613,298	)
Proceeds from sales of marketable debt securities		1,371,852			1,067,229
Proceeds from maturities of marketable debt securities		1,784,056			1,226,892
Acquisitions, net of cash acquired		(112,361	)		(68,812	)
Purchases of intangible assets		(18,793	)		(11,020	)
Proceeds from the sales of divested businesses		325,000			—
Proceeds from the sales of investments		—			21,271
Other investing activities, net		(19,392	)		(5,763	)

Net cash provided by investing activities		1,074,616			153,493

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net		99,667			106,697
Repurchases of common stock		(1,749,311	)		(1,202,504	)
Excess tax benefits from stock-based awards		131,648			44,715
Tax withholdings related to net share settlements of restricted stock awards and restricted stock units		(44,383	)		(36,049	)
Other financing activities, net		(1,442	)		(8,333	)

Net cash used in financing activities		(1,563,821	)		(1,095,474	)

Effect of exchange rate changes on cash and cash equivalents		(7,710	)		(12,699	)
Net change in cash and cash equivalents		340,130			(62,208	)
Cash and cash equivalents at beginning of period		1,275,430			1,526,427

Cash and cash equivalents at end of period	$	1,615,560		$	1,464,219

The accompanying notes are an integral part of these condensed consolidated financial statements.

YAHOO! INC.

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 premier digital media company that delivers personalized digital content and experiences, across devices and around the globe, to vast audiences. Yahoo! provides engaging and innovative canvases for advertisers to connect with their target audiences using its unique blend of Science + Art + Scale. Through its proprietary technology and insights, Yahoo! delivers unique content and experiences for its audience and creates powerful opportunities for its advertisers to connect with their target audiences, in context and at scale. To users, Yahoo! provides online properties and services (“Yahoo! Properties”). To advertisers, Yahoo! provides a range of marketing services designed to reach and connect with users of its Yahoo! Properties, as well as with Internet users beyond Yahoo! Properties, through a distribution network of third-party entities (“Affiliates”) that have integrated Yahoo!’s advertising offerings into their Websites or other offerings (those Websites and offerings, “Affiliate sites”).

Basis of Presentation. The condensed consolidated financial statements include the accounts of Yahoo! Inc. and its majority-owned or otherwise controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the condensed consolidated balance sheets. The Company has included the results of operations of acquired companies from the date of the acquisition. Certain prior period amounts have been reclassified to conform to the current period presentation.

The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue, the useful lives of long-lived assets including property and equipment and intangible assets, investment fair values, stock-based compensation, goodwill, income taxes, contingencies, and restructuring charges. 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, 2010. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2010 was derived from the Company’s audited financial statements for the year ended December 31, 2010, but does not include all disclosures required by U.S. GAAP. However, the Company believes the disclosures are adequate to make the information presented not misleading.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance on the presentation of comprehensive income. Under the amended guidance, an entity has the option to present comprehensive income in either one continuous statement or two consecutive financial statements. A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option under the current guidance that permits the presentation of components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated. The amendment becomes effective on January 1, 2012 and is applied retrospectively. Early adoption is permitted. This guidance will not have an impact on the Company’s consolidated financial position, results of operations or cash flows as it is disclosure-only in nature.

In September 2011, the FASB issued a revised standard on testing for goodwill impairment. The revised standard allows an entity to first assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a likelihood of more than 50 percent. An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then perform the qualitative assessment in any subsequent period. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company does not believe this guidance will have any impact on its consolidated financial position, results of operations, or cash flows.

Note 2 BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO YAHOO! INC. COMMON STOCKHOLDERS PER SHARE

Basic and diluted net income attributable to Yahoo! common stockholders per share is computed using the weighted average number of common shares outstanding during the period, excluding net income attributable to participating securities (restricted stock awards granted under the Company’s 1995 Stock Plan and restricted stock units granted under the 1996 Directors’ Stock Plan (the “Directors’ Plan”)). 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 are calculated using the treasury stock method and consist of unvested restricted stock and shares underlying unvested restricted stock units, the incremental common shares issuable upon the exercise of stock options, and shares to be purchased under the 1996 Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”). The Company calculates potential tax windfalls and shortfalls by including the impact of pro forma deferred tax assets.

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 58 million shares of common stock for both the three and nine months ended September 30, 2011, and 87 million and 86 million shares of common stock for the three and nine months ended September 30, 2010, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been anti-dilutive.

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2011			September 30, 2010			September 30, 2011
*Basic:*
Numerator:
Net income attributable to Yahoo! Inc.	$	396,131		$	293,291		$	919,643		$	753,255
Less: Net income allocated to participating securities		(41	)		(3	)		(156	)		(11	)

Net income attributable to Yahoo! Inc. common stockholders — basic	$	396,090		$	293,288		$	919,487		$	753,244

Denominator:
Weighted average common shares		1,333,753			1,253,044			1,370,145			1,287,352

Net income attributable to Yahoo! Inc. common stockholders per share — basic	$	0.30		$	0.23		$	0.67		$	0.59

*Diluted:*
Numerator:
Net income attributable to Yahoo! Inc.	$	396,131		$	293,291		$	919,643		$	753,255
Less: Net income allocated to participating securities		(37	)		(3	)		(77	)		(11	)
Less: Effect of dilutive securities issued by equity investees		(653	)		(661	)		(2,018	)		(1,963	)

Net income attributable to Yahoo! Inc. common stockholders — diluted	$	395,441		$	292,627		$	917,548		$	751,281

Denominator:
Denominator for basic calculation		1,333,753			1,253,044			1,370,145			1,287,352
Weighted average effect of Yahoo! Inc. dilutive securities:
Restricted stock and restricted stock units		5,068			4,333			6,236			5,768
Stock options and employee stock purchase plan		4,273			2,199			5,874			2,920

Denominator for diluted calculation		1,343,094			1,259,576			1,382,255			1,296,040

Net income attributable to Yahoo! Inc. common stockholders per share — diluted	$	0.29		$	0.23		$	0.66		$	0.58

Note 3 ACQUISITIONS

During the nine months ended September 30, 2011, the Company acquired three companies, which were accounted for as business combinations. The total purchase price for these acquisitions was $72 million. The total cash consideration of $72 million less cash acquired of $3 million resulted in a net cash outlay of $69 million. Of the purchase price, $52 million was preliminarily allocated to goodwill, $26 million to amortizable intangible assets, $3 million to cash acquired, and $9 million to net assumed liabilities. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes.

The Company’s business combinations completed during the nine months ended September 30, 2011 did not have a material impact on the Company’s condensed consolidated financial statements, 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):


	December 31, 2010		September 30, 2011		Percent Ownership as of September 30, 2011
Alibaba Group	$	2,280,602	$	2,464,389		42	%
Yahoo Japan		1,731,287		1,997,312		35	%
Other		—		8,001		35	%

Total	$	4,011,889	$	4,469,702

Equity Investment in Alibaba Group. The investment in Alibaba Group Holding Limited (“Alibaba Group”) is accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of investments in equity interests on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Alibaba Group, and any related amortization expense, one quarter in arrears within earnings in equity interests in the condensed consolidated statements of income. During the three months ended September 30, 2011, the Company recorded a dilution gain of $25 million, net of tax of $15 million, in earnings in equity interests related to the dilution of the Company’s ownership interest in Alibaba Group as a result of option exercises and the sale of stock to Alibaba Group employees during its quarter ended June 30, 2011 at an average price higher than the Company’s invested cost per share.

As of September 30, 2011, the difference between the Company’s carrying value of its investment in Alibaba Group and its proportionate share of the net assets of Alibaba Group is summarized as follows (in thousands):


Carrying value of investment in Alibaba Group	$	2,464,389
Proportionate share of Alibaba Group stockholders’ equity		1,780,158

Excess of carrying value of investment over proportionate share of Alibaba Group’s stockholders’ equity ^(*)	$	684,231

^(*)	The excess carrying value has been primarily assigned to goodwill.

The amortizable intangible assets included in the excess carrying value have useful lives not exceeding seven years and a weighted average useful life of approximately five years. Goodwill is not deductible for tax purposes.

The following tables present Alibaba Group’s U.S. GAAP summarized financial information, as derived from the Alibaba Group consolidated financial statements (in thousands):


	Three Months Ended				Nine Months Ended
	June 30, 2010		June 30, 2011		June 30, 2010			June 30, 2011
Operating data ⁽¹⁾ :
Revenue	$	348,105	$	631,216	$	903,872		$	1,666,663
Gross profit	$	259,465	$	421,173	$	679,539		$	1,108,482
Income (loss) from operations ⁽²⁾	$	62,570	$	132,403	$	(71,004	)	$	205,654
Net income (loss)	$	50,237	$	137,253	$	(49,975	)	$	233,887
Net income (loss) attributable to Alibaba Group	$	35,917	$	118,947	$	(88,719	)	$	180,890

					September 30, 2010			June 30, 2011
Balance sheet data ^(1):
Current assets					$	4,399,571		$	3,267,962
Long-term assets					$	2,436,976		$	2,886,942
Current liabilities					$	2,660,043		$	1,434,556
Long-term liabilities					$	58,679		$	114,269
Non-voting participating redeemable securities					$	860		$	1,875
Noncontrolling interests					$	338,419		$	384,258

⁽¹⁾

To expedite obtaining an essential regulatory license, the ownership of Alibaba Group’s online payment business, Alipay.com Co., Ltd. (“Alipay”), was restructured so that 100 percent of its outstanding shares are held by a Chinese domestic company, which is majority owned by Alibaba Group’s chief executive officer, and certain control agreements were terminated which resulted in the deconsolidation of Alipay in the first quarter of 2011. Accordingly, the Alibaba Group consolidated financial statements as of and for the quarter ended June 30, 2011 do not include the results of Alipay, nor do they include the net assets of Alipay as of and for the three and six months ended June 30, 2011. As of September 30, 2010, the consolidated current assets and current liabilities of Alibaba Group both include $1.6 billion of cash collected from purchasers and to be remitted to sellers. These amounts are no longer included in the consolidated balance sheet as of June 30, 2011. The impact of the deconsolidation of Alipay was not material to the Company’s financial statements.

⁽²⁾

The loss from operations of $71 million for the nine months ended June 30, 2010 is primarily due to Alibaba Group’s impairment loss of $192 million on goodwill related to the business that Yahoo! contributed to Alibaba Group in 2005. This impairment does not impact Yahoo!’s earnings in equity interests as Yahoo!’s investment balance related to this contributed business was carried over at cost and therefore Yahoo! has no basis in the impaired goodwill.

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, 2010 and 2011, these transactions were not material.

Framework Agreement with Alibaba Group regarding Alipay. On July 29, 2011, the Company entered into a Framework Agreement (the “Framework Agreement”), with Alibaba Group, Softbank Corp., a Japanese corporation (“Softbank”), Alipay, APN Ltd., a company organized under the laws of the Cayman Islands (“IPCo”), Zhejiang Alibaba E-Commerce Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China (“HoldCo”), Jack Ma Yun, Joseph C. Tsai and certain security holders of Alipay or HoldCo as joinder parties.

Alipay, formerly a subsidiary of Alibaba Group, is a subsidiary of HoldCo, which is majority owned by Mr. Ma. IPCo is a special purpose entity formed in connection with the Framework Agreement which at the time of consummation of the transactions under the Framework Agreement will be owned by Mr. Ma and Mr. Tsai.

Pursuant to the terms of the Framework Agreement and subject to the closing of the transactions contemplated thereby, the parties have agreed, among other things, that:

(1) Upon a Liquidity Event (as defined below), HoldCo will pay to Alibaba Group 37.5 percent of the equity value of Alipay (the “Liquidity Event Payment”), less $500 million (i.e., the principal amount of the IPCo Promissory Note as described below). The Liquidity Event Payment plus $500 million must in the aggregate not be less than $2 billion and may not exceed $6 billion, subject to certain increases and additional payments if no Liquidity Event has occurred by the sixth anniversary of the consummation of the transactions (the “closing”). “Liquidity Event” means the earlier to occur of (a) a qualified initial public offering of Alipay, (b) a transfer of 37.5 percent or more of the securities of Alipay; or (c) a sale of all or substantially all of the assets of Alipay. If a Liquidity Event has not occurred by the tenth anniversary of the consummation of the transactions under the Framework Agreement, Alibaba Group will have the right to cause HoldCo to effect a Liquidity Event, provided that the equity value or enterprise value of Alipay at such time exceeds $1 billion, and in such case, the $2 billion minimum amount described above will not apply to a Liquidity Event effected by means of a qualified initial public offering, a sale of all of the securities of Alipay, or a sale of all or substantially all of the assets of Alipay.

(2) Alibaba Group will receive payment processing services on preferential terms from Alipay and its subsidiaries in accordance with a long-term agreement. The fees to be paid by Alibaba Group and its subsidiaries to Alipay for the services provided under such agreement will take into account Alibaba Group and its subsidiaries’ status as large volume customers and will be approved on an annual basis by the directors of Alibaba Group designated by Yahoo! and Softbank.

(3) Alibaba Group will license to Alipay certain intellectual property and technology and perform certain software technology services for Alipay and in return Alipay will pay to Alibaba Group a royalty and software technology services fee, which will consist of an expense reimbursement and a 49.9 percent share of the consolidated pre-tax income of Alipay and its subsidiaries. This percentage will decrease upon certain dilutive equity issuances by Alipay and HoldCo; provided, however, such percentage will not be reduced below 30 percent. This agreement will terminate upon the earlier to occur of (a) such time as it may be required to be terminated by applicable regulatory authorities in connection with a qualified initial public offering by Alipay and (b) the date the Liquidity Event Payment, the IPCo Promissory Note (as defined below) and certain related payments have been paid in full.

(4) IPCo will issue to Alibaba Group a non-interest bearing promissory note in the principal amount of $500 million with a seven year maturity (the “IPCo Promissory Note”).

(5) The IPCo Promissory Note, the Liquidity Event Payment and certain other payments will be secured by a pledge of 50,000,000 ordinary shares of Alibaba Group which will be contributed to IPCo by Mr. Ma and Mr. Tsai, as well as certain other collateral which may be pledged in the future.

(6) Yahoo!, Softbank, Alibaba Group, HoldCo, Mr. Ma and Mr. Tsai will enter into an agreement pursuant to which (a) the Alibaba Group board of directors will ratify the actions taken by Alibaba Group in connection with the restructuring of the ownership of Alipay and the termination of certain control agreements which resulted in the deconsolidation of Alipay; and (b) the Company, Softbank and Alibaba Group will release claims against Alibaba Group, Alipay, HoldCo, Mr. Ma, Mr. Tsai and certain of their related parties (including Alibaba Group’s directors in their capacity as such) from any and all claims and liabilities, subject to certain limitations, arising out of or based upon such actions.

The closing of the transactions under the Framework Agreement is subject to certain closing conditions, including PRC regulatory approvals. The parties expect the closing to occur by the end of 2011. Following closing, the Company will account for any impact of the Framework Agreement on the Company’s financial statements.

Equity Investment in Yahoo Japan. The investment in Yahoo Japan Corporation (“Yahoo Japan”) is accounted for using the equity method and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of investments in equity interests on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Yahoo Japan, and any related amortization expense, one quarter in arrears within earnings in equity interests in the condensed consolidated statements of income.

The Company makes adjustments to the earnings in equity interests line in the consolidated statements of income for any differences between U.S. GAAP and accounting principles generally accepted in Japan (“Japanese GAAP”), the standards by which Yahoo Japan’s financial statements are prepared.

During the nine months ended September 30, 2011, the Company recorded $33 million in U.S. GAAP adjustments to Yahoo Japan’s net income to reflect the Company’s 35 percent share of non-cash losses related to impairments of assets held by Yahoo Japan. The $33 million recorded during the nine months ended September 30, 2011 includes $7 million related to the Company’s share of a non-cash loss in connection with an impairment of assets held by Yahoo Japan in the second quarter of 2011 and a $26 million, net of tax, U.S. GAAP adjustment to Yahoo Japan’s net income in the first quarter of 2011 to reflect the Company’s share of an other-than-temporary impairment of a cost method investment of Yahoo Japan that resulted primarily from reductions in the projected operating results of the Yahoo Japan investee.

The fair value of the Company’s ownership interest in the common stock of Yahoo Japan, based on the quoted stock price, was approximately $6 billion as of September 30, 2011.

During the nine months ended September 30, 2010 and 2011, the Company received cash dividends from Yahoo Japan in the amounts of $61 million and $75 million, net of taxes, respectively, which were recorded as reductions to the Company’s investment in Yahoo Japan.

The following tables present summarized financial information derived from Yahoo Japan’s consolidated financial statements, which are prepared on the basis of Japanese GAAP. The Company has made adjustments to the Yahoo Japan financial information to address differences between Japanese GAAP and U.S. GAAP that materially impact the summarized financial information below. Due to these adjustments, the Yahoo Japan summarized financial information presented below is not materially different than such information presented on the basis of U.S. GAAP.


	Three Months Ended				Nine Months Ended
	June 30, 2010		June 30, 2011		June 30, 2010		June 30, 2011
	(in thousands)
Operating data:
Revenue	$	854,726	$	958,927	$	2,645,443	$	2,959,085
Gross profit	$	685,605	$	797,008	$	2,139,644	$	2,452,776
Income from operations	$	398,735	$	446,945	$	1,230,947	$	1,442,131
Net income	$	237,492	$	284,111	$	730,296	$	799,995
Net income attributable to Yahoo Japan	$	236,129	$	282,820	$	725,754	$	795,103

					September 30, 2010		June 30, 2011
					(in thousands)
Balance sheet data:
Current assets					$	2,332,325	$	2,955,871
Long-term assets					$	2,679,566	$	2,710,754
Current liabilities					$	938,985	$	846,433
Long-term liabilities					$	30,132	$	34,375
Noncontrolling interests					$	28,774	$	28,211

Under technology and trademark license and other commercial arrangements with Yahoo Japan, the Company records revenue from Yahoo Japan based on a percentage of revenue earned by Yahoo Japan. The Company recorded revenue from Yahoo Japan of approximately $78 million and $74 million for the three months ended September 30, 2010 and 2011, respectively, and revenue of approximately of $228 million and $211 million for the nine months ended September 30, 2010 and 2011, respectively. As of December 31, 2010 and September 30, 2011, the Company had net receivable balances from Yahoo Japan of approximately $40 million and $44 million, respectively.

Note 5 GOODWILL

The Company’s goodwill balance was $3.7 billion as of December 31, 2010, of which $2.7 billion was recorded in the Americas segment, $0.6 billion in the EMEA (Europe, Middle East, and Africa) segment, and $0.4 billion in the Asia Pacific segment. As of September 30, 2011, the Company’s goodwill balance was $3.8 billion, of which $2.7 billion was recorded in the Americas segment, $0.6 billion in the EMEA segment, and $0.5 billion in the Asia Pacific segment. The change in the carrying amount of goodwill of $69 million reflected on our condensed consolidated balance sheets during the nine months ended September 30, 2011 was primarily due to the addition of $30 million and $22 million related to acquisitions in the Americas and Asia Pacific segments, respectively, and the effect of foreign currency translation adjustments of $17 million.

Note 6 INTANGIBLE ASSETS, NET

The following table summarizes the Company’s intangible assets, net (in thousands):


	December 31, 2010		September 30, 2011
	Net		Gross Carrying Amount		Accumulated Amortization ^(*)			Net
Customer and advertiser related relationships	$	62,104	$	135,789	$	(78,156	)	$	57,633
Developed technology and patents		167,897		351,620		(228,824	)		122,796
Trade names, trademarks, and domain names		25,869		71,085		(46,834	)		24,251

Total intangible assets, net	$	255,870	$	558,494	$	(353,814	)	$	204,680

_(*)	Foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities, totaled approximately $18 million as of September 30, 2011.

For the three months ended September 30, 2010 and 2011, the Company recognized amortization expense for intangible assets of $30 million and $29 million, respectively, including $22 million in cost of revenue for the three months ended September 30, 2010 and $20 million in cost of revenue for the three months ended September 30, 2011. For the nine months ended September 30, 2010 and 2011, the Company recognized amortization expense for intangible assets of $98 million and $88 million, respectively, including $74 million and $62 million in cost of revenue for the nine months ended September 30, 2010 and 2011, respectively. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the remainder of 2011 and each of the succeeding years is as follows: three months ending December 31, 2011: $28 million; 2012: $85 million; 2013: $45 million; 2014: $25 million; 2015: $6 million; and 2016: $1 million.

Note 7 OTHER INCOME, NET

Other income, net is comprised of (in thousands):


	Three Months Ended					Nine Months Ended
	September 30, 2010			September 30, 2011		September 30, 2010		September 30, 2011
Interest and investment income	$	5,489		$	3,955	$	17,669	$	14,399
Gain on sale of Zimbra, Inc.		—			—		66,130		—
Gain on sale of HotJobs		186,345			—		186,345		—
Other		(483	)		14,091		20,123		3,008

Total other income, net	$	191,351		$	18,046	$	290,267	$	17,407

Interest and investment income consists of income earned from cash in bank accounts and investments made in marketable debt securities and money market funds.

In February 2010, the Company sold Zimbra, Inc. for net proceeds of $100 million and recorded a pre-tax gain of $66 million. In August 2010, the Company sold HotJobs for net proceeds of $225 million and recorded a pre-tax gain of $186 million.

Other consists of gains/losses from sales or impairments of marketable debt securities and/or investments in privately held companies and foreign exchange gains and losses due to re-measurement of monetary assets and liabilities denominated in non-functional currencies and other non-operating items.

Note 8 COMPREHENSIVE INCOME

Comprehensive income, net of taxes, is comprised of (in thousands):


	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2011			September 30, 2010			September 30, 2011
Net income	$	398,259		$	298,344		$	926,681		$	761,678
Change in net unrealized (losses) gains, on available-for-sale securities, net of tax and reclassification adjustments		(1,608	)		(6,185	)		4,140			(6,409	)
Foreign currency translation adjustments		201,640			(44,689	)		30,940			127,156

Other comprehensive income (loss)		200,032			(50,874	)		35,080			120,747

Comprehensive income		598,291			247,470			961,761			882,425
Comprehensive income attributable to noncontrolling interests		(2,128	)		(5,053	)		(7,038	)		(8,423	)

Comprehensive income attributable to Yahoo! Inc.	$	596,163		$	242,417		$	954,723		$	874,002

The following table summarizes the components of accumulated other comprehensive income (in thousands):


	December 31, 2010		September 30, 2011
Unrealized gains on available-for-sale securities, net of tax	$	8,734	$	2,325
Foreign currency translation, net of tax		495,520		622,676

Accumulated other comprehensive income	$	504,254	$	625,001

Note 9 INVESTMENTS

The following tables summarize the investments in available-for-sale securities (in thousands):


	December 31, 2010
	Gross Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government and agency securities	$	1,353,064	$	1,513	$	(514	)	$	1,354,063
Municipal bonds		6,609		8		—			6,617
Corporate debt securities, commercial paper, and bank certificates of deposit		740,043		1,608		(76	)		741,575
Corporate equity securities		2,597		—		(1,128	)		1,469

Total investments in available-for-sale securities	$	2,102,313	$	3,129	$	(1,718	)	$	2,103,724


	September 30, 2011
	Gross Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government and agency securities	$	831,785	$	1,204	$	(334	)	$	832,655
Corporate debt securities, commercial paper, and bank certificates of deposit		571,968		1,033		(296	)		572,705
Corporate equity securities		2,761		—		(2,059	)		702

Total investments in available-for-sale securities	$	1,406,514	$	2,237	$	(2,689	)	$	1,406,062


	December 31, 2010		September 30, 2011
Reported as:
Short-term marketable debt securities	$	1,357,661	$	650,593
Long-term marketable debt securities		744,594		754,767
Other assets		1,469		702

Total	$	2,103,724	$	1,406,062

Available-for-sale securities included in cash and cash equivalents on the condensed consolidated balance sheets are not included in the table above as the gross unrealized gains and losses were immaterial for both 2010 and the nine months ended September 30, 2011 as the carrying value approximates fair value because of the short maturity of those instruments.

The contractual maturities of available-for-sale marketable debt securities were as follows (in thousands):


	December 31, 2010		September 30, 2011
Due within one year	$	1,357,661	$	650,593
Due after one year through five years		744,594		754,767

Total available-for-sale marketable debt securities	$	2,102,255	$	1,405,360

The following tables show all investments in an unrealized loss position for which an other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):


	December 31, 2010
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Government and agency securities	$	539,287	$	(514	)	$	—	$	—		$	539,287	$	(514	)
Corporate debt securities, commercial paper, and bank certificates of deposits		153,209		(75	)		6,006		(1	)		159,215		(76	)
Corporate equity securities		—		—			1,469		(1,128	)		1,469		(1,128	)

Total	$	692,496	$	(589	)	$	7,475	$	(1,129	)	$	699,971	$	(1,718	)


	September 30, 2011
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Government and agency securities	$	372,920	$	(334	)	$	—	$	—		$	372,920	$	(334	)
Corporate debt securities, commercial paper, and bank certificates of deposits		193,433		(296	)		—		—			193,433		(296	)
Corporate equity securities		—		—			702		(2,059	)		702		(2,059	)

Total	$	566,353	$	(630	)	$	702	$	(2,059	)	$	567,055	$	(2,689	)

The Company’s investment portfolio consists of liquid high-quality fixed income government, agency, municipal and corporate debt securities, money market funds, and time deposits with financial institutions. 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. Fixed income securities may have their fair market value adversely impacted due to a deterioration of the credit quality of the issuer. The longer the term of the securities, the more susceptible they are to changes in market rates. Investments are reviewed periodically to identify possible other-than-temporary impairment. The Company has no current requirement or intent to sell these securities. The Company expects to recover up to (or beyond) the initial cost of investment for securities held.

The FASB’s authoritative guidance on fair value measurements establishes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy 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 sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of December 31, 2010 (in thousands):


	Fair Value Measurements at Reporting Date Using
Assets	Level 1		Level 2		Total
Money market funds ⁽¹⁾	$	291,268	$	—	$	291,268
Available-for-sale securities:
Government and agency securities ⁽¹⁾		—		1,401,991		1,401,991
Municipal bonds ⁽¹⁾		—		26,269		26,269
Commercial paper and bank certificates of deposit ⁽¹⁾		—		218,485		218,485
Corporate debt securities ⁽¹⁾		—		576,378		576,378

Available-for-sale securities at fair value	$	291,268	$	2,223,123	$	2,514,391
Corporate equity securities ⁽²⁾		1,469		—		1,469

Total assets at fair value	$	292,737	$	2,223,123	$	2,515,860

⁽¹⁾

The money market funds, government and agency securities, municipal bonds, commercial paper and bank certificates of deposit, and corporate debt securities are classified as part of either cash and cash equivalents or investments in marketable debt securities in the condensed consolidated balance sheets.

⁽²⁾	The corporate equity securities are classified as part of other long-term assets in the condensed consolidated balance sheets.

The amount of cash and cash equivalents as of December 31, 2010 includes $1.1 billion in cash deposited with commercial banks, of which $425 million are time deposits.

The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of September 30, 2011 (in thousands):


	Fair Value Measurements at Reporting Date Using
Assets	Level 1		Level 2		Total
Money market funds ⁽¹⁾	$	338,639	$	—	$	338,639
Available-for-sale securities:
Government and agency securities ⁽¹⁾		—		894,861		894,861
Commercial paper and bank certificates of deposit ⁽¹⁾		—		104,350		104,350
Corporate debt securities ⁽¹⁾		—		463,370		463,370

Available-for-sale securities at fair value	$	338,639	$	1,462,581	$	1,801,220
Corporate equity securities ⁽²⁾		702		—		702

Total assets at fair value	$	339,341	$	1,462,581	$	1,801,922

⁽¹⁾

⁽²⁾	The corporate equity securities are classified as part of other long-term assets in the condensed consolidated balance sheets.

The amount of cash and cash equivalents as of September 30, 2011 includes $1.1 billion in cash deposited with commercial banks, of which $379 million are time deposits.

The fair values of the Company’s Level 1 financial assets are based on quoted market prices of the identical underlying security. The fair values 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. The Company utilizes a pricing service to assist in obtaining fair value pricing for the majority of this investment portfolio. The Company conducts reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure. During the nine months ended September 30, 2011, the Company did not make significant transfers between Level 1 and Level 2 assets. As of December 31, 2010 and September 30, 2011, the Company did not have any significant Level 3 financial assets.

Note 10 STOCKHOLDERS’ EQUITY AND EMPLOYEE BENEFITS

Employee Stock Purchase Plan. As of September 30, 2011, there was $19 million of unamortized stock-based compensation cost related to the Company’s Employee Stock Purchase Plan which will be recognized over a weighted average period of 1.0 year.

Stock Options. The Company’s 1995 Stock Plan, the Directors’ Plan, and other stock-based award plans assumed through acquisitions are collectively referred to as the “Plans.” Stock option activity under the Company’s Plans for the nine months ended September 30, 2011 is summarized as follows (in thousands, except per share amounts):


	Shares			Weighted Average Exercise Price per Share
Outstanding at December 31, 2010		80,976		$	22.02
Options granted		6,630		$	16.31
Options assumed		14		$	5.25
Options exercised ^(*)		(5,558	)	$	10.02
Options expired		(10,370	)	$	28.74
Options cancelled/forfeited		(4,814	)	$	15.44

Outstanding at September 30, 2011		66,878		$	21.88

^(*)	The Company issued new shares of common stock to satisfy stock option exercises.

As of September 30, 2011, there was $79 million of unrecognized stock-based compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 2.3 years.

The Company determines the grant-date fair value of stock options, including the options granted under the Company’s Employee Stock Purchase Plan, using a Black-Scholes model. The following weighted average assumptions were used in determining the fair value of option grants using the Black-Scholes option pricing model:


	Stock Options						*Purchase Plan ()**
	Three Months Ended						Three Months Ended
	September 30, 2010			September 30, 2011			September 30, 2010			September 30, 2011
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate		1.6	%		1.2	%		2.3	%		1.4	%
Expected volatility		36.1	%		40.2	%		68.1	%		36.1	%
Expected life (in years)		4.50			4.25			0.11			0.82

	Stock Options						*Purchase Plan ()**
	Nine Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2011			September 30, 2010			September 30, 2011
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate		2.0	%		1.5	%		2.3	%		1.4	%
Expected volatility		34.7	%		36.6	%		68.7	%		36.1	%
Expected life (in years)		4.50			4.15			0.33			0.96

^(*)	Assumptions for the Employee Stock Purchase Plan relate to the annual average of the enrollment periods. Enrollment is currently permitted in May and November of each year.

Restricted Stock. Restricted stock awards and restricted stock units activity for the nine months ended September 30, 2011 is summarized as follows (in thousands, except per share amounts):


	Shares			Weighted Average Grant Date Fair Value Per Share
Awarded and unvested at December 31, 2010 ^(*)		31,395		$	17.99
Granted ^(*)		21,537		$	15.70
Assumed		210		$	16.61
Vested		(6,284	)	$	17.69
Forfeited		(8,777	)	$	15.96

Awarded and unvested at September 30, 2011 ^(*)		38,081		$	17.20

^(*)	Includes the maximum number of shares issuable under the Company’s performance-based executive incentive restricted stock unit awards.

As of September 30, 2011, there was $294 million of unrecognized stock-based compensation cost related to unvested restricted stock awards and restricted stock units, which is expected to be recognized over a weighted average period of 2.4 years.

During the nine months ended September 30, 2010 and 2011, 7.7 million shares and 6.3 million shares vested, respectively, which were subject to previously granted restricted stock awards and restricted stock units. A majority of these vested restricted stock awards and restricted stock units were net share settled. During the nine months ended September 30, 2010 and 2011, the Company withheld 2.8 million shares and 2.2 million shares, respectively, based upon the Company’s closing stock price on the vesting date to settle the employees’ minimum statutory obligation for the applicable income and other employment taxes. The Company then remitted cash to the appropriate taxing authorities.

Total payments for the employees’ tax obligations to the relevant taxing authorities were $44 million and $36 million for the nine months ended September 30, 2010 and 2011, respectively, and are reflected as a financing activity within the condensed consolidated statements of cash flows. The payments were used for tax withholdings related to the net share settlements of restricted stock units and tax withholdings related to reacquisitions of shares of restricted stock awards. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.

Performance-Based Executive Incentive Restricted Stock Units .

In February 2009 and February 2010, the Compensation Committee approved long-term performance-based incentive equity awards to senior officers, including three-year annual financial performance restricted stock units which generally are scheduled to vest on the third anniversary of the grant date based on the Company’s attainment of certain annual financial performance targets in each of the three years as well as the executive’s continued employment through that vesting date. The number of shares which ultimately vest will range from 0 percent to 200 percent of the target amount stated in each executive’s award agreement based on the performance of the Company relative to the applicable performance targets. The annual financial performance targets are established at the beginning of each fiscal year and, accordingly, the portion of the award subject to each annual target is treated as a separate annual grant for accounting purposes. The financial performance targets for the 2011 tranches of these awards were established in February 2011. The amount of stock-based compensation recorded for these restricted stock units will vary depending on the Company’s attainment of the financial performance targets and each executive’s completion of the service period. The grant date fair values of the 2011 tranches of the February 2009 and February 2010 annual financial performance restricted stock unit grants are $2 million and $3 million, respectively, and are being recognized as stock-based compensation expense over one-year and two-year service periods, respectively.

In February 2011, the Compensation Committee approved a long-term performance-based incentive equity award to senior officers in the form of restricted stock units that generally are scheduled to vest on the third anniversary of the grant date based on the Company’s attainment of certain financial performance targets for 2011 as well as the executive’s continued employment through that vesting date. The number of shares which ultimately vest will range from 0 percent to 200 percent of the target amount stated in each executive’s award agreement based on the performance of the Company relative to the performance targets. The financial performance targets were established in February 2011. The amount of stock-based compensation recorded for these restricted stock units will vary depending on the Company’s attainment of the financial performance targets and each executive’s completion of the service period. The grant date fair value of these restricted stock unit grants is $32 million and is being recognized as stock-based compensation expense over a three-year service period.

Stock Repurchases. In June 2010, the Board authorized a stock repurchase program allowing the Company to repurchase up to $3.0 billion of its outstanding shares of common stock from time to time. The repurchase program expires in June 2013. Repurchases under this program 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 nine months ended September 30, 2011, the Company repurchased approximately 82 million shares of its common stock under this stock repurchase program at an average price of $14.62 per share for a total of $1,203 million. During the nine months ended September 30, 2010, the Company repurchased approximately 119 million shares of its common stock at an average price of $14.68 per share for a total of $1,749 million. Of such repurchases, $973 million was under the Company’s previous stock repurchase program approved by the Board of Directors in October 2006, which was exhausted during the third quarter of 2010, and $776 million was under the June 2010 stock repurchase program.

Note 11 COMMITMENTS AND CONTINGENCIES

Lease Commitments. The Company leases office space and data centers under operating lease and capital lease agreements with original lease periods of up to 13 years, expiring between 2011 and 2022.

During the second quarter of 2010, the Company acquired certain office space for a total of $72 million ($7 million in cash and the assumption of $65 million in debt). In the first quarter of 2010, the property was reclassified from an operating lease to a capital lease as a result of a commitment to purchase the property. Accordingly, in the second quarter of 2010, the Company reduced the capital lease obligation for the $7 million cash outlay and reclassified the remaining $65 million as assumed debt in its condensed consolidated balance sheets.

A summary of gross and net lease commitments as of September 30, 2011 is as follows (in millions):


	Gross Operating Lease Commitments		Sublease Income			Net Operating Lease Commitments
Three months ending December 31, 2011	$	43	$	(3	)	$	40
Years ending December 31,
2012		156		(11	)		145
2013		131		(11	)		120
2014		101		(9	)		92
2015		77		(7	)		70
2016		41		(1	)		40
Due after 5 years		60		—			60

Total gross and net lease commitments	$	609	$	(42	)	$	567


	Capital Lease Commitment
Three months ending December 31, 2011	$	1
Years ending December 31,
2012		7
2013		8
2014		8
2015		8
2016		8
Due after 5 years		23

Gross lease commitment	$	63

Less: interest		(24	)

Net lease commitment	$	39

Affiliate Commitments. In connection with contracts to provide advertising services to Affiliates, the Company is obligated to make payments, which represent traffic acquisition costs, to its Affiliates. As of September 30, 2011, these commitments totaled $113 million, of which $30 million will be payable in the remainder of 2011, $78 million will be payable in 2012, and $5 million will be payable in 2013.

Intellectual Property Rights. The Company is committed to make certain payments under various intellectual property arrangements of up to $35 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, joint ventures and business partners, purchasers of assets or subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of agreements or representations and warranties made by the Company, services to be provided by the Company, intellectual property infringement claims made by third parties or, with respect to the sale of assets or a subsidiary, matters related to the Company’s conduct of the business and tax matters prior to the sale. 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 might 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, 2011, 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.

See Note 15 — “Search Agreement with Microsoft Corporation” for a description of the Company’s Search and Advertising Services and Sales Agreement (the “Search Agreement”) and License Agreement with Microsoft Corporation (“Microsoft”).

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 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 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 “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. On October 5, 2009, the Court granted class certification and granted final approval of a stipulated global settlement and plan of allocation. On October 6, 2010, various individuals objecting to the settlement filed opening appeal briefs with the U.S. Court of Appeals for the Second Circuit, and in early February 2011 Yahoo! and other appellees filed reply briefs in support of the settlement. The Second Circuit dismissed one appeal and remanded a second appeal to the District Court for a determination on standing. On remand, the District Court held on August 25, 2011 that the individual objector lacked standing and was not a class member; that ruling has been appealed to the Second Circuit.

On June 14, 2007, a 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 and selected officers. The complaint filed by the plaintiff alleged breaches of fiduciary duties and corporate waste, similar to the allegations in a former class action relating to stock price declines during the period April 2004 to July 2006, and alleged violation of Section 10(b) of the Exchange Act. On July 16, 2009, the plaintiff Watkins voluntarily dismissed the action against all defendants without prejudice. On July 17, 2009, plaintiff Miguel Leyte-Vidal, who had substituted in as plaintiff prior to the dismissal of the federal Watkins action, re-filed a stockholder derivative action in Santa Clara County Superior Court against members of the Board and selected officers. The Santa Clara County Superior Court derivative action purports to assert causes of action on behalf of the Company for violation of specified provisions of the California Corporations Code, for breaches of fiduciary duty regarding financial accounting and insider selling and for unjust enrichment. On August 5, 2011, Yahoo! demurred to plaintiff’s third amended complaint. By written order dated September 19, 2011, the Court sustained Yahoo!’s demurrer without leave to amend.

Since May 31, 2011, a total of eight stockholder derivative suits were filed either in the Santa Clara County Superior Court or the United States District Court for the Northern District of California purportedly on behalf of Yahoo! stockholders against certain officers and directors of the Company and third parties. The actions allege breaches of fiduciary duties, corporate waste, mismanagement, abuse of control, unjust enrichment, misappropriation of corporate assets, or contribution and seek damages, equitable relief, disgorgement and corporate governance changes in connection with Alibaba Group’s restructuring of its subsidiary Alipay and related disclosures. The Santa Clara County actions filed by plaintiffs Cinnoto, Lassoff, Zucker, and Koo were consolidated under the caption In re Yahoo! Inc. Derivative Shareholder Litigation on June 24, 2011 and September 12, 2011 (“California Derivative Litigation”). Defendants filed a motion to stay the California Derivative Litigation on October 25, 2011. The federal actions filed in the Northern District of California by plaintiffs Salzman, Tawila, and Iron Workers Mid-South Pension Fund were consolidated under the caption In re Yahoo! Inc. Shareholder Derivative Litigation on October 3, 2011 (“Federal Derivative Litigation”). An earlier action filed by plaintiff Oh in the Northern District of California was dismissed without prejudice on September 9, 2011.

Since June 6, 2011, two purported stockholder class actions were filed in the United States District Court for the Northern District of California against the Company and certain officers and directors by plaintiffs Bonato and the Twin Cities Pipe Trades Pension Trust. Plaintiffs seek to represent a class of persons who purchased or otherwise acquired the Company’s common stock between April 19, 2011 and May 13, 2011, and allege that during that class period, defendants issued false or misleading statements regarding the Company’s business and financial results and failed to disclose that Alibaba Group transferred ownership of its subsidiary Alipay at less than market value. The complaints purport to assert claims for relief for violation of Section 10(b) and 20(a) of the Exchange Act and for violation of Rule 10b-5 thereunder, and seek unspecified damages, injunctive and equitable relief, fees and costs. In October 2011, the District Court consolidated the two purported class actions under the caption In re Yahoo! Inc. Securities Litigation and appointed the Pension Trust Fund for Operating Engineers as lead plaintiff.

With respect to the legal proceedings and claims described above, the Company has determined, based on current knowledge, that the amount or range of reasonably possible losses, including reasonably possible losses in excess of amounts already accrued, is not reasonably estimable with respect to certain matters and that the aggregate amount or range of such losses that are estimable would not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Amounts accrued as of December 31, 2010 and September 30, 2011 were not material. The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties, and cannot be predicted with certainty. In the event of a determination adverse to Yahoo!, its subsidiaries, directors, or officers in these matters, however, the Company may incur substantial monetary liability, and be required to change its business practices. Either of these events could have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company may also incur substantial expenses in defending against these claims.

Note 12 SEGMENTS

The Company manages its business geographically. The primary areas of measurement and decision-making are Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific. Management relies on an internal reporting process that provides revenue ex-TAC, which is defined as revenue less TAC, and direct costs excluding TAC by segment, and consolidated income from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, the Company’s segments. Prior period presentations have been updated to conform to the current profitability measures being used by the Company’s management team to evaluate the financial performance of the Company’s segments.

The following tables present summary information by segment (in thousands):


	Three Months Ended					Nine Months Ended
	September 30, 2010		September 30, 2011			September 30, 2010		September 30, 2011
Revenue by segment:
Americas	$	1,146,511	$	791,240		$	3,434,739	$	2,418,209
EMEA		133,094		148,494			415,432		465,145
Asia Pacific		321,598		276,931			949,371		776,692

Total Revenue	$	1,601,203	$	1,216,665		$	4,799,542	$	3,660,046

TAC by segment:
Americas	$	291,676	$	37,493		$	855,494	$	115,038
EMEA		48,717		52,197			152,191		167,357
Asia Pacific		136,391		55,301			408,879		165,523

Total TAC	$	476,784	$	144,991		$	1,416,564	$	447,918

Revenue ex-TAC by segment:
Americas	$	854,835	$	753,747		$	2,579,245	$	2,303,171
EMEA		84,377		96,297			263,241		297,788
Asia Pacific		185,207		221,630			540,492		611,169

Total Revenue ex-TAC	$	1,124,419	$	1,071,674		$	3,382,978	$	3,212,128

Direct costs by segment ⁽¹⁾ :
Americas		135,899		134,672			426,136		403,612
EMEA		27,730		35,488			88,878		100,165
Asia Pacific		36,686		53,278			106,794		146,369
Global operating costs ⁽²⁾⁽³⁾		516,101		470,533			1,533,714		1,376,852
Restructuring charges, net		5,758		(2,721	)		20,222		8,091
Depreciation and amortization		161,993		152,223			485,209		474,034
Stock-based compensation expense		51,097		50,947			169,477		145,111

Income from operations	$	189,155	$	177,254		$	552,548	$	557,894

⁽¹⁾

Direct costs for each segment include cost of revenue (excluding TAC) and other operating expenses that are directly attributable to the segment such as employee compensation expense (excluding stock-based compensation expense), local sales and marketing expenses, and facilities expenses. Beginning in the fourth quarter of 2010, the Company no longer includes TAC in segment direct costs. For comparison purposes, prior period amounts have been revised to conform to the current presentation.

⁽²⁾	Global operating costs include product development, service engineering and operations, marketing, customer advocacy, general and administrative, and other corporate expenses that are managed on a global basis and that are not directly attributable to any segment.

⁽³⁾	The net cost reimbursements from Microsoft are primarily included in global operating costs.


	Three Months Ended				Nine Months Ended
	September 30, 2010		September 30, 2011		September 30, 2010		September 30, 2011
Capital expenditures, net:
Americas	$	133,101	$	90,381	$	372,451	$	336,918
EMEA		11,881		18,224		47,012		45,445
Asia Pacific		18,892		15,337		47,222		80,643

Total capital expenditures, net	$	163,874	$	123,942	$	466,685	$	463,006


	December 31, 2010		September 30, 2011
Property and equipment, net:
Americas	$	1,475,021	$	1,487,410
EMEA		63,820		87,486
Asia Pacific		114,581		150,660

Total property and equipment, net	$	1,653,422	$	1,725,556

See Note 14 —”Restructuring Charges, Net” for additional information regarding segments.

Enterprise Wide Disclosures:

The following table presents revenue for groups of similar services (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2010		September 30, 2011		September 30, 2010		September 30, 2011
Display	$	514,415	$	502,102	$	1,519,575	$	1,548,262
Search		838,697		466,785		2,521,951		1,388,580
Other		248,091		247,778		758,016		723,204

Total revenue	$	1,601,203	$	1,216,665	$	4,799,542	$	3,660,046


	Three Months Ended				Nine Months Ended
	September 30, 2010		September 30, 2011		September 30, 2010		September 30, 2011
Revenue:
U.S.	$	1,106,889	$	744,526	$	3,319,280	$	2,282,537
International		494,314		472,139		1,480,262		1,377,509

Total revenue	$	1,601,203	$	1,216,665	$	4,799,542	$	3,660,046


	December 31, 2010		September 30, 2011
Property and equipment, net:
U.S	$	1,471,536	$	1,484,608
International		181,886		240,948

Total property and equipment, net	$	1,653,422	$	1,725,556

Note 13 INCOME TAXES

The Company’s effective tax rate is the result of the geographic mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Historically, the Company’s provision for income taxes has differed from the tax computed at the U.S. federal statutory income tax rate due to state taxes, the effect of non-U.S. operations, non-deductible stock-based compensation expense, and adjustments to unrecognized tax benefits.

The effective tax rate reported for the three months ended September 30, 2011 was 29 percent compared to 23 percent for the same period in 2010. The rates in both periods were lower than the U.S. federal statutory rate primarily due to a shift in the geographic mix of earnings. During the three months ended September 30, 2010, the Company also recorded the benefit of a capital loss carryover that was used to offset the gain on sale of HotJobs.

The effective tax rate reported for the nine months ended September 30, 2011 was 28 percent compared to 24 percent for the same period in 2010. The rates in both periods were lower than the U.S. federal statutory rate primarily due to reductions of previously-recorded tax reserves upon the favorable settlement of tax audits and the shift in the geographic mix of earnings. During the nine months ended September 30, 2010, the Company also recorded the benefit of a capital loss carryover that was used to offset gains from sales of Zimbra, Inc. and HotJobs. While the discrete adjustments had a greater effect in the nine months ended September 30, 2010 than September 30, 2011, the annual effective tax rate for 2011 is projected to be lower than in 2010 as a result of a shift in the geographic mix of earnings and a lower effective blended state tax rate.

The Company is in various stages of examination and appeal in connection with all of its tax audits worldwide, which generally span tax years 2005 through 2009. It is difficult to determine when these examinations will be settled or what their final outcomes will be. The Company believes that it has adequately provided for any reasonably foreseeable adjustment and that any settlement will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

The Company’s gross amount of unrecognized tax benefits as of September 30, 2011 is $524 million, of which $405 million is recorded on the condensed consolidated balance sheets. The gross unrecognized tax benefits as of September 30, 2011 decreased by $73 million from the recorded balance as of December 31, 2010 due to favorable settlements of tax audits in the first three quarters of 2011. Since there can be no assurance as to the outcome of tax audits currently in progress, it is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.

Note 14 RESTRUCTURING CHARGES, NET

Restructuring charges, net was comprised of the following (in thousands):


	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2011			September 30, 2010		September 30, 2011
Employee severance pay and related costs	$	(215	)	$	(2,571	)	$	735	$	6,340
Non-cancelable lease, contract termination, and other charges		5,973			(150	)		19,487		3,029

Sub-total before reversal of stock-based compensation expense		5,758			(2,721	)		20,222		9,369
Reversal of stock-based compensation expense for forfeitures		—			—			—		(1,278	)

Restructuring charges, net	$	5,758		$	(2,721	)	$	20,222	$	8,091

Although the Company does not allocate restructuring charges to its segments, the amounts of the restructuring charges relating to each segment are presented below.

Q4’08 Restructuring Plan. During the fourth quarter of 2008, the Company implemented certain cost reduction initiatives, including a workforce reduction and consolidation of certain real estate facilities. During the three and nine months ended September 30, 2010, the Company incurred total pre-tax cash charges of approximately $3 million and $17 million, respectively, in facility and other related costs related to the Q4’08 restructuring plan. Net charges under the Q4’08 restructuring plan relating to the Americas segment were $2 million and $16 million for the three and nine months ended September 30, 2010, respectively. Net charges under the Q4’08 restructuring plan relating to the EMEA segment were $1 million for both the three and nine months ended September 30, 2010. During the three and nine months ended September 30, 2011, the Company incurred total pre-tax cash charges of approximately $1 million and $4 million, respectively, in facility and other related costs related to the Q4’08 restructuring plan, the majority of which related to the Americas segment.

Q4’09 Restructuring Charges. During the fourth quarter of 2009, the Company decided to close one of its EMEA facilities and began implementation of a workforce realignment at the facility to focus resources on its strategic initiatives. The Company exited the facility in the third quarter of 2010. In connection with the strategic realignment efforts, a U.S. executive of one of the Company’s acquired businesses departed. During both the three and nine months ended September 30, 2010, the Company incurred total pre-tax charges of $3 million in severance, facility and other related costs related to the Q4’09 restructuring charges, consisting of charges related to the EMEA segment. During the three months ended September 30, 2011, the Company did not incur any charges related to the Q4’09 restructuring charges. During the nine months ended September 30, 2011, the Company recorded a reversal of $1 million for adjustments to original estimates in severance and other related costs related to the Q4’09 restructuring charges, entirely related to the EMEA segment. The workforce realignment was completed during the second quarter of 2011.

Q4’10 Restructuring Plan. During the fourth quarter of 2010, the Company began implementation of a worldwide workforce reduction to align resources with its product strategy. During the three and nine months ended September 30, 2011, the Company recorded net reversals of $4 million and $3 million, respectively, for adjustments to original estimates in severance and other costs related to the Q4’10 restructuring plan. Net reversals under the Q4’10 restructuring plan relating to the Americas segment were $2 million for both the three and nine months ended September 30, 2011. Net reversals under the Q4’10 restructuring plan relating to the EMEA segment were $2 million and $1 million for the three and nine months ended September 30, 2011, respectively.

Q1’11 Restructuring Plan. During the first quarter of 2011, the Company began implementation of a workforce realignment to further reduce its cost structure. During the three months ended September 30, 2011, the Company incurred total pre-tax cash charges of less than $1 million in severance and other related costs related to the Q1’11 restructuring plan, the majority of which related to the Americas segment. During the nine months ended September 30, 2011, the Company incurred total pre-tax cash charges of $9 million in severance and other related costs related to the Q1’11 restructuring plan. The pre-tax cash charges were offset by a $1 million credit related to non-cash stock-based compensation expense reversals for unvested stock awards that were forfeited. Of the $8 million in restructuring charges, net recorded in the nine months ended September 30, 2011, $7 million related to the Americas segment and $1 million related to the EMEA segment.

Restructuring Accruals. The $43 million restructuring liability as of September 30, 2011 consists of $6 million for employee severance pay expenses, which the Company expects to substantially pay out by the end of the fourth quarter of 2012, and $37 million related to non-cancelable lease costs, which the Company expects to pay over the terms of the related obligations (which extend to the second quarter of 2017).

The Company’s restructuring accrual activity for the nine months ended September 30, 2011 is summarized as follows (in thousands):


	Q4’08 Restructuring Plan			Q4’09 Restructuring Charges			Q4’10 Restructuring Plan			Q1’11 Restructuring Plan			Total
Balance as of January 1, 2011	$	49,484		$	4,286		$	33,332		$	—		$	87,102
Employee severance pay and related costs		8			109			3,844			10,624			14,585
Reversals of stock-based compensation expense		—			(46	)		(586	)		(646	)		(1,278	)
Non-cancelable lease, contract termination, and other charges		4,953			18			8			—			4,979
Reversals of previous charges		(1,250	)		(1,664	)		(5,985	)		(1,296	)		(10,195	)

Restructuring charges, net for the quarter ended September 30, 2011	$	3,711		$	(1,583	)	$	(2,719	)	$	8,682		$	8,091
Cash paid		(16,644	)		(1,494	)		(27,381	)		(8,609	)		(54,128	)
Non-cash reversals (accelerations) of stock-based compensation expense		—			46			586			646			1,278
Non-cash adjustments		37			(1,255	)		496			920			198

Balance as of September 30, 2011	$	36,588		$	—		$	4,314		$	1,639		$	42,541

Restructuring accruals by segment consisted of the following (in thousands):


	December 31, 2010		September 30, 2011
Americas	$	68,268	$	36,384
EMEA		16,895		5,966
Asia Pacific		1,939		191

Total restructuring accruals	$	87,102	$	42,541

Note 15 SEARCH AGREEMENT WITH MICROSOFT CORPORATION

On December 4, 2009, the Company entered into the Search Agreement with Microsoft, which provides for Microsoft to be the exclusive algorithmic and paid search services provider on Yahoo! Properties and non-exclusive provider of such services on Affiliate sites. The Company also entered into a License Agreement with Microsoft. Under the License Agreement, Microsoft acquired an exclusive 10-year license to the Company’s core search technology and will have the ability to integrate this technology into its existing Web search platforms. The Company received regulatory clearance from both the U.S. Department of Justice and the European Commission on February 18, 2010 and commenced implementation of the Search Agreement on February 23, 2010. Under the Search Agreement, the Company will be the exclusive worldwide relationship sales force for both companies’ premium search advertisers, which include advertisers meeting certain spending or other criteria, advertising agencies that specialize in or offer search engine marketing services and their clients, and resellers and their clients seeking assistance with their paid search accounts. The term of the Search Agreement is 10 years from February 23, 2010, subject to earlier termination as provided in the Search Agreement.

During the first five years of the term of the Search Agreement, in transitioned markets the Company is entitled to receive 88 percent of the revenue generated from Microsoft’s services on Yahoo! Properties (the “Revenue Share Rate”) and the Company is also entitled to receive 88 percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue. For new Affiliates during the term of the Search Agreement, and for all Affiliates after the first five years of such term, the Company will receive 88 percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue and certain Microsoft costs are deducted. On the fifth anniversary of the date of implementation of the Search Agreement, Microsoft will have the option to terminate the Company’s sales exclusivity for premium search advertisers. If Microsoft exercises its option, the Revenue Share Rate will increase to 93 percent for the remainder of the term of the Search Agreement, unless the Company exercises its option to retain the Company’s sales exclusivity, in which case the Revenue Share Rate would be reduced to 83 percent for the remainder of the term. If Microsoft does not exercise such option, the Revenue Share Rate will be 90 percent for the remainder of the term of the Search Agreement. In the transitioned markets, the Company reports as revenue the 88 percent revenue share as the Company is not the primary obligor in the arrangement with the advertisers and publishers. The underlying search advertising services are provided by Microsoft. As of December 31, 2010, the Company had collected a total amount of $93 million on behalf of Microsoft and Affiliates, which was included in cash and cash equivalents as of December 31, 2010, with a corresponding liability in accrued expenses and other current liabilities. The Company remitted the $93 million to Microsoft in the first quarter of 2011. The Company’s uncollected 88 percent share in connection with the Search Agreement was $172 million and $185 million, which is included in accounts receivable, net, as of December 31, 2010 and September 30, 2011, respectively.

The Company completed the transition of its algorithmic and paid search platforms to the Microsoft platform in the U.S. and Canada in the fourth quarter of 2010. The Company has completed the transition of algorithmic search in substantially all other markets and plans to complete that transition in the remaining markets by the end of 2011. The market-by-market transition of the Company’s paid search platform to Microsoft’s platform and the migration of paid search advertisers and publishers to Microsoft’s platform are expected to continue through the first half of 2013.

Under the Search Agreement, for each market, Microsoft generally guarantees Yahoo!’s revenue per search (“RPS Guarantee”) on Yahoo! Properties only for 18 months after the transition of paid search services to Microsoft’s platform in that market. Microsoft agreed to extend the RPS Guarantee in the U.S. and Canada through March 2013. The RPS Guarantee is calculated based on the difference in revenue per search between the pre-transition and post-transition periods. The Company records the RPS Guarantee as search revenue in the quarter the amount becomes fixed, which would typically be the quarter in which the associated shortfall in revenue per search occurred.

Microsoft has agreed to reimburse the Company for certain transition costs up to an aggregate total of $150 million during the first three years of the Search Agreement. The Company’s results for the three and nine months ended September 30, 2010 reflect transition cost reimbursements from Microsoft under the Search Agreement of $18 million and $60 million, respectively. During the nine months ended September 30, 2010, the Company also recorded reimbursements of $43 million for transition costs incurred in 2009. The 2009 transition cost reimbursements were recorded in the first quarter of 2010 after regulatory clearance in the U.S. and Europe was received, implementation of the Search Agreement commenced, and Microsoft became obligated to make such payments. During the three and nine months ended September 30, 2011, the Company recorded transition cost reimbursements from Microsoft under the Search Agreement of $4 million and $27 million, respectively. During the third quarter of 2011, the Company’s cumulative transition costs exceeded Microsoft’s $150 million reimbursement cap under the Search Agreement. Transition costs the Company incurs in excess of the $150 million reimbursement cap are not subject to reimbursement.

From February 23, 2010 until the applicable services are fully transitioned to Microsoft in all markets, Microsoft will also reimburse the Company for the costs of operating algorithmic and paid search services subject to specified exclusions and limitations. The Company’s results reflect search operating cost reimbursements from Microsoft under the Search Agreement of $81 million and $202 million, respectively, for the three and nine months ended September 30, 2010 and $53 million and $164 million, respectively, for the three and nine months ended September 30, 2011. Search operating cost reimbursements began during the quarter ended March 31, 2010 and will, subject to specified exclusions and limitations, continue until the Company has fully transitioned to Microsoft’s platform.

In addition to the reimbursements for transition and search operating costs, during the first quarter of 2010, the Company recorded reimbursements of $15 million for employee retention costs incurred in the first quarter of 2010 and reimbursements of $5 million for employee retention costs incurred in 2009. These employee retention cost reimbursements are separate from and in addition to the $150 million of transition cost reimbursement payments and the search operating cost reimbursements.

Reimbursement receivables are recorded as the reimbursable costs are incurred and are applied against the operating expense categories in which the costs were incurred. Of the total amounts incurred in the fourth quarter of 2010, the total reimbursements not yet received from Microsoft of $64 million were classified as part of prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets as of December 31, 2010. Of the total amounts incurred in the third quarter of 2011, the total reimbursements not yet received from Microsoft of $25 million were classified as part of prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets as of September 30, 2011.

Note 16 SUBSEQUENT EVENTS

On November 1, 2011, the Company announced that it entered into a merger agreement with interclick, inc. and will commence an all cash tender offer for all outstanding shares of common stock of interclick at $9.00 per share. The transaction has an estimated total equity value of approximately $270 million. With interclick, the Company will acquire innovative data targeting capabilities, optimization technologies and new premium supply, as well as a team experienced in selling audiences across disparate sources of pooled supply. The Company expects the transaction to close by early 2012.

Item 2.

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 revenue, including display, search, and other revenue;

•

expectations about growth in users;

•

expectations about cost of revenue and operating expenses;

•

expectations about the amount of unrecognized tax benefits and the adequacy of our existing tax reserves;

•

anticipated capital expenditures;

•

expectations about the implementation and the financial and operational impacts of our Search Agreement with Microsoft;

•

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

Yahoo! Inc., together with its consolidated subsidiaries (“Yahoo!,” the “Company,” “we,” or “us”), is a premier digital media company that delivers personalized digital content and experiences, across devices and around the globe, to vast audiences. We provide engaging and innovative canvases for advertisers to connect with their target audiences using our unique blend of Science + Art + Scale. Through our proprietary technology and insights, we deliver unique content and experiences for our audience and create powerful opportunities for our advertisers to connect with their target audiences, in context and at scale. To users, we provide online properties and services (“Yahoo! Properties”). To advertisers, we provide a range of marketing services designed to reach and connect with users of our Yahoo! Properties, as well as with Internet users beyond Yahoo! Properties, through a distribution network of third-party entities (our “Affiliates”) that have integrated our advertising offerings into their Websites or other offerings (those Websites and offerings, “Affiliate sites”). We believe that our marketing services enable advertisers to deliver highly relevant marketing messages to their target audiences.

Our offerings to users on Yahoo! Properties currently fall into three categories: Communications and Communities; Search and Marketplaces; and Media. The majority of what we offer is available in more than 25 languages and in more than 50 countries, regions, and territories. We have properties tailored to users in specific international markets including Yahoo! Homepage and social networking Websites such as Meme and Wretch . We manage and measure our business geographically, principally in the Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific.

Third Quarter Highlights


	Three Months Ended September 30,				Dollar Change			Nine Months Ended September 30,				Dollar Change
Operating Highlights	2010		2011		Dollar Change			2010		2011		Dollar Change
	(In thousands)
Revenue	$	1,601,203	$	1,216,665	$	(384,538	)	$	4,799,542	$	3,660,046	$	(1,139,496	)
Income from operations	$	189,155	$	177,254	$	(11,901	)	$	552,548	$	557,894	$	5,346


	Nine Months Ended September 30,						Dollar Change
Cash Flow Results	2010			2011			Dollar Change
	(In thousands)
Net cash provided by operating activities	$	837,045		$	892,472		$	55,427
Net cash provided by investing activities	$	1,074,616		$	153,493		$	(921,123	)
Net cash used in financing activities	$	(1,563,821	)	$	(1,095,474	)	$	468,347

Our revenue decreased 24 percent for both the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010. This can be attributed to a decrease in both our display and search revenue for the three months ended September 30, 2011. For the nine months ended September 30, 2011, display revenue increased slightly but was offset by a decrease in search revenue. The decrease in search revenue was primarily due to the required change in revenue presentation which began in the fourth quarter of 2010, the associated revenue share with Microsoft for the Americas region, and the loss of an Affiliate in the Asia Pacific region. The decrease in income from operations of $12 million for the three months ended September 30, 2011 reflects the decrease in revenue, partially offset by a decrease in operating expenses of $51 million for the three months ended September 30, 2011 compared to the same periods in 2010. The increase in income from operations of $5 million for the nine months ended September 30, 2011 reflects the decrease in revenue, offset by a decrease in operating expenses of $183 million for the nine months ended September 30, 2011 compared to the same period in 2010.

Cash generated by operating activities is a measure of the cash productivity of our business model. Our operating activities in the nine months ended September 30, 2011 generated adequate cash to meet our operating needs. Cash provided by investing activities in the nine months ended September 30, 2011 included net proceeds from sales, maturities, and purchases of marketable debt securities of $681 million and proceeds from the sales of investments of $21 million offset by $69 million used for acquisitions, net of cash acquired, net capital expenditures of $463 million, and $11 million for the purchase of intangible assets. Cash used in financing activities included $1,203 million used in the direct repurchase of common stock and $36 million used for tax withholding payments related to the net share settlements of restricted stock units and tax withholding related reacquisition of shares of restricted stock, offset by $107 million in proceeds from employee option exercises and employee stock purchases.

Search Agreement with Microsoft Corporation

On December 4, 2009, we entered into a Search and Advertising Services and Sales Agreement (the “Search Agreement”) with Microsoft Corporation (“Microsoft”), which provides for Microsoft to be the exclusive algorithmic and paid search services provider on Yahoo! Properties and non-exclusive provider of such services on Affiliate sites. We also entered into a License Agreement with Microsoft pursuant to which Microsoft acquired an exclusive 10-year license to our core search technology that it will be able to integrate into its existing Web search platforms.

During the first five years of the Search Agreement, in transitioned markets we are entitled to receive 88 percent of the revenue generated from Microsoft’s services on Yahoo! Properties and we are also entitled to receive 88 percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue. In the transitioned markets, for search revenue generated from Microsoft’s services on Yahoo! Properties and Affiliate sites, we report as revenue the 88 percent revenue share, as we are not the primary obligor in the arrangement with the advertisers and publishers.

Under the Search Agreement, for each market, Microsoft generally guarantees Yahoo!’s revenue per search (“RPS Guarantee”) on Yahoo! Properties only for 18 months after the transition of paid search services to Microsoft’s platform in that market. Microsoft agreed to extend the RPS Guarantee in the U.S. and Canada through March 2013. The RPS Guarantee is calculated based on the difference in revenue per search between the pre-transition and post-transition periods. We record the RPS Guarantee as search revenue in the quarter the amount becomes fixed, which is typically the quarter in which the associated shortfall in revenue per search occurred.

Under the Search Agreement, Microsoft agreed to reimburse us for certain transition costs up to an aggregate total of $150 million during the first three years of the Search Agreement. During the third quarter of 2011, our cumulative transition costs exceeded Microsoft’s $150 million reimbursement cap under the Search Agreement. Transition costs we incur in excess of the $150 million reimbursement cap are not subject to reimbursement. Our results for the three and nine months ended September 30, 2011 reflect transition cost reimbursements from Microsoft under the Search Agreement of $4 million and $27 million, respectively. During the three and nine months ended September 30, 2010, we recorded transition cost reimbursements from Microsoft under the Search Agreement of $18 million and $60 million, respectively. During the nine months ended September 30, 2010, we also recorded reimbursements of $43 million for transition costs incurred in 2009. The 2009 transition cost reimbursements were recorded in the first quarter of 2010 after regulatory clearance in the U.S. and Europe was received, implementation of the Search Agreement commenced, and Microsoft became obligated to make such payments.

From February 23, 2010 until the applicable services are fully transitioned to Microsoft in all markets, Microsoft will also reimburse us for the costs of operating algorithmic and paid search services subject to specified exclusions and limitations. Our results reflect search operating cost reimbursements from Microsoft under the Search Agreement of $53 million and $164 million, respectively, for the three and nine months ended September 30, 2011 and $81 million and $202 million, respectively, for the same periods of 2010. The global transition of the algorithmic and paid search platforms to Microsoft’s platform and the migration of the paid search advertisers and publishers to Microsoft’s platform are being done on a market by market basis. Search operating cost reimbursements are expected to decline as we fully transition all markets and, in the long term, the underlying expenses are not expected to be incurred under our cost structure.

We completed the transition of our algorithmic and paid search platforms to the Microsoft platform in the U.S. and Canada in the fourth quarter of 2010. We have completed the transition of algorithmic search in substantially all other markets and plan to complete that transition in the remaining markets by the end of 2011. The market-by-market transition of our paid search platform to Microsoft’s platform and the migration of paid search advertisers and publishers to Microsoft’s platform are expected to continue through the first half of 2013.

In addition to the reimbursements for transition and search operating costs, during the first quarter of 2010, we recorded reimbursements of $15 million for employee retention costs incurred in the first quarter of 2010 and reimbursements of $5 million for employee retention costs incurred in 2009. These employee retention cost reimbursements are separate from and in addition to the $150 million of transition cost reimbursement payments and the search operating cost reimbursements.

We record receivables for the reimbursements as costs are incurred and apply them against the operating expense categories in which the costs were incurred. Of the total amounts incurred in the third quarter of 2011, the total reimbursements not yet received from Microsoft of $64 million were classified as part of prepaid expenses and other current assets on our condensed consolidated balance sheets as of December 31, 2010. Of the total amounts incurred in the third quarter of 2011, the total reimbursements not yet received from Microsoft of $25 million were classified as part of prepaid expenses and other current assets on our condensed consolidated balance sheets as of September 30, 2011. The $25 million of unpaid reimbursements is expected to be received during the fourth quarter of 2011.

See Note 15 — “Search Agreement with Microsoft Corporation” in the Notes to the condensed consolidated financial statements for additional information.

Results of Operations

Revenue. Revenue by groups of similar services was as follows (dollars in thousands):


	Three Months Ended September 30,										Percent Change			Nine Months Ended September 30,										Percent Change
	2010		*()**			2011		*()**			Percent Change			2010		*()**			2011		*()**			Percent Change
Display	$	514,415		32	%	$	502,102		42	%		(2	%)	$	1,519,575		31	%	$	1,548,262		42	%		2	%
Search		838,697		53	%		466,785		38	%		(44	%)		2,521,951		53	%		1,388,580		38	%		(45	%)
Other		248,091		15	%		247,778		20	%		0	%		758,016		16	%		723,204		20	%		(5	%)

Total revenue	$	1,601,203		100	%	$	1,216,665		100	%		(24	%)	$	4,799,542		100	%	$	3,660,046		100	%		(24	%)

^(*)	Percent of total revenue.

We currently generate revenue principally from display advertising on Yahoo! Properties and from search advertising on Yahoo! Properties and Affiliate sites.

We earn revenue from guaranteed or “premium” display advertising by delivering advertisements according to advertisers’ specified criteria, such as number of impressions during a fixed period on a specific placement. Also, we earn revenue from non-guaranteed or “non-premium” display advertising by delivering advertisements for advertisers purchasing inventory on a preemptible basis, which means that the advertisement may or may not appear, inventory is not reserved and position placement is not assured. Generally, we make our non-guaranteed display inventory available through our Right Media Exchange.

To assist us in evaluating display advertising and search advertising, beginning in the fourth quarter of 2010, we began reporting the number of Web pages viewed by users (“Page Views”) separately for display and search. “Search Page Views” is defined as the number of Web pages viewed by users on Yahoo! Properties and Affiliate sites resulting from search queries, and “revenue per Search Page View” is defined as search revenue divided by our Search Page Views. “Display Page Views” is defined as the total number of Page Views on Yahoo! Properties less the number of Search Page Views on Yahoo! Properties, and “revenue per Display Page View” is defined as display revenue divided by our Display Page Views. While we also receive display revenue for content match links (advertising in the form of contextually relevant links to advertisers’ Websites) on Yahoo! Properties and Affiliate sites and for display advertising on Affiliate sites, we do not include that revenue or those Page Views in our discussion or calculation of Display Page Views or revenue per Display Page View because the net revenue and related volume metrics associated with them are not currently material to display revenue.

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 Yahoo! Properties.

Display Revenue. Display revenue for the three and nine months ended September 30, 2011 decreased by 2 percent and increased by 2 percent, respectively, compared to the same periods in 2010. For the three months ended September 30, 2011, Americas display revenue declined as compared to the same period of 2010 primarily due to declines in non-guaranteed revenue across mail and other properties. The increase for the nine months ended September 30, 2011 can be attributed to both an increased volume of ad impressions in our EMEA and Asia Pacific segments and the favorable effects of foreign currency exchange rate fluctuations, as partially offset by a decline in Americas display revenue. The decline in Americas display revenue in the second and third quarters is attributable in part to changes in our U.S. sales force during the second quarter of 2011, which resulted in our sales force operating at less than full capacity. For both the three and nine months ended September 30, 2011, Display Page Views decreased 2 percent, and revenue per Display Page View increased 2 percent and 6 percent, respectively, compared to the same periods in 2010 due to the factors discussed above.

We expect display revenue to remain flat for the fourth quarter of 2011 compared to the same period of 2010, due to decreases in Americas display revenue offset by increases in EMEA and Asia Pacific display revenue.

Search Revenue . Search revenue for the three and nine months ended September 30, 2011 decreased by 44 percent and 45 percent respectively, compared to the same periods in 2010. Search revenue decreased primarily due to the required change in revenue presentation which began in the fourth quarter of 2010, the associated revenue share with Microsoft for the Americas region, and the loss of an Affiliate in the Asia Pacific region. For the three and nine months ended September 30, 2011, Search Page Views increased 4 percent and 2 percent, respectively. For both the three and nine months ended September 30, 2011, revenue per Search Page View decreased 46 percent, compared to the same periods in 2010. The decline in revenue per Search Page View for the three and nine months ended September 30, 2011 compared to the same periods in 2010 was attributable to the declines in search revenue over the two periods as discussed above.

We expect search revenue for the fourth quarter of 2011 to decrease compared to the same period of 2010. We expect this decrease will be attributable to several factors associated with the transition of algorithmic and paid search results to Microsoft’s platform in the transitioned markets, including the required change in revenue presentation for transitioned markets from a gross to a net basis and the revenue share with Microsoft in transitioned markets as well as the loss of an Affiliate in the Asia Pacific segment in the fourth quarter of 2010.

Other Revenue. Other revenue includes listings-based services revenue, transaction revenue and fees revenue. Other revenue for the three and nine months ended September 30, 2011 remained flat and decreased 5 percent, respectively, compared to the same periods in 2010. The decrease for the nine months ended September 30, 2011 is attributable to changes in certain of our broadband access partnerships and to the divestiture of certain business lines throughout 2010. In addition, revenue from other premium services declined year-over-year as we continue to outsource various offerings to commercial partners.

We expect other revenue to decline for the fourth quarter of 2011, compared to the same period of 2010 due to changes in certain of our broadband access partnerships discussed above.

Operating Costs and Expenses. Operating costs and expenses consist of cost of revenue, sales and marketing, product development, general and administrative, amortization of intangible assets, and restructuring charges, net. Cost of revenue 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.

Operating costs and expenses were as follows (dollars in thousands):


	Three Months Ended September 30,											Dollar Change			Percent Change
	2010		*()**			2011			*()**			Dollar Change			Percent Change
Cost of revenue	$	680,754		43	%	$	359,276			30	%	$	(321,478	)		(47	%)
Sales and marketing	$	320,977		20	%	$	290,486			24	%	$	(30,491	)		(9	%)
Product development	$	269,725		17	%	$	254,958			21	%	$	(14,767	)		(5	%)
General and administrative	$	126,816		8	%	$	128,977			11	%	$	2,161			2	%
Amortization of intangibles	$	8,018		1	%	$	8,435			1	%	$	417			5	%
Restructuring charges, net	$	5,758		0	%	$	(2,721	)		0	%	$	(8,479	)		(147	%)


	Nine Months Ended September 30,										Dollar Change			Percent Change
	2010		*()**			2011		*()**			Dollar Change			Percent Change
Cost of revenue	$	2,069,858		43	%	$	1,107,893		30	%	$	(961,965	)		(46	%)
Sales and marketing	$	965,983		20	%	$	833,032		23	%	$	(132,951	)		(14	%)
Product development	$	804,354		17	%	$	744,538		20	%	$	(59,816	)		(7	%)
General and administrative	$	362,577		8	%	$	383,531		10	%	$	20,954			6	%
Amortization of intangibles	$	24,000		1	%	$	25,067		1	%	$	1,067			4	%
Restructuring charges, net	$	20,222		0	%	$	8,091		0	%	$	(12,131	)		(60	%)

^(*)	Percent of total revenue.

Stock-based compensation expense was allocated as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2011		2010		2011
Cost of revenue	$	698	$	956	$	2,289	$	2,479
Sales and marketing		19,066		16,759		54,284		42,829
Product development		22,647		21,093		81,152		64,296
General and administrative		8,686		12,139		31,752		35,507
Restructuring expense reversals, net		—		—		—		(1,278	)

Total stock-based compensation expense	$	51,097	$	50,947	$	169,477	$	143,833

For additional information about stock-based compensation, see Note 10 — “Stockholders’ Equity and Employee Benefits” in the Notes to the condensed consolidated financial statements included elsewhere in this Report as well as “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2010 under the caption Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Traffic Acquisition Costs. TAC consists of payments made to third-party entities that have integrated our advertising offerings into their Websites or other offerings 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 revenue 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 revenue, number of paid introductions, number of searches, or other metrics are expensed based on the volume of the underlying activity or revenue 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 consists primarily of 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, 2011 compared to the three months ended September 30, 2010 are comprised of the following (in thousands):


	Compensation			Information Technology			Depreciation and Amortization			TAC			Facilities			Other			Total
Cost of revenue	$	(1,437	)	$	8,593		$	(7,156	)	$	(331,793	)	$	(326	)	$	10,641		$	(321,478	)
Sales and marketing		(515	)		81			(11	)		—			(1,041	)		(29,005	)		(30,491	)
Product development		(13,337	)		(1,362	)		649			—			(1,271	)		554			(14,767	)
General and administrative		9,370			(276	)		(3,667	)		—			6,982			(10,248	)		2,161
Amortization of intangibles		—			—			417			—			—			—			417
Restructuring charges, net		—			—			—			—			—			(8,479	)		(8,479	)

Total	$	(5,919	)	$	7,036		$	(9,768	)	$	(331,793	)	$	4,344		$	(36,537	)	$	(372,637	)

The changes in operating costs and expenses for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 are comprised of the following (in thousands):


	Compensation			Information Technology			Depreciation and Amortization			TAC			Facilities			Other			Total
Cost of revenue	$	(9,363	)	$	14,564		$	(13,336	)	$	(968,644	)	$	(645	)	$	15,459		$	(961,965	)
Sales and marketing		(46,223	)		(387	)		(1,094	)		—			(3,400	)		(81,847	)		(132,951	)
Product development		(61,354	)		(3,359	)		8,069			—			(1,283	)		(1,889	)		(59,816	)
General and administrative		13,427			(375	)		(5,881	)		—			13,634			149			20,954
Amortization of intangibles		—			—			1,067			—			—			—			1,067
Restructuring charges, net		—			—			—			—			—			(12,131	)		(12,131	)

Total	$	(103,513	)	$	10,443		$	(11,175	)	$	(968,644	)	$	8,306		$	(80,259	)	$	(1,144,842	)

Compensation Expense. Total compensation expense decreased $6 million and $104 million for the three and nine months ended September 30, 2011, respectively, as compared to the same periods in 2010. Excluding the impact of Microsoft reimbursements, compensation expense for the three and nine months ended September 30, 2011 decreased $18 million and $152 million, respectively, compared to the same periods of 2010, primarily due to decreased stock-based compensation expense, lower salaries and wages from decreased headcount in the product development and sales and marketing functions, and the capitalization of otherwise expensed compensation costs associated with increased efforts in the development of our technology platform and specific products. The decrease in stock-based compensation expense is primarily due to higher employee forfeitures of stock-based awards in the nine months ended September 30, 2011, compared to the same period of 2010. The decline in compensation expense was offset by decreased Microsoft reimbursements of $12 million and $48 million, respectively, during the three and nine months ended September 30, 2011, compared to the same periods of 2010. The decrease in Microsoft reimbursements for the three months ended September 30, 2011 was due to the transition of paid search to Microsoft platforms. Microsoft reimbursements decreased $36 million in the nine months ended September 30, 2011 compared to the same period in 2010 due to the impact of 2009 transition cost reimbursements being recorded in the first quarter of 2010.

Information Technology. Information technology expense increased $7 million and $10 million for the three and nine months ended September 30, 2011, respectively, as compared to the same periods in 2010. Excluding the impact of Microsoft reimbursements, information technology expense for the three and nine months ended September 30, 2011 increased $4 million and $17 million, respectively, compared to the same periods of 2010, due to increased data center operating costs. Information technology expense was impacted by decreased reimbursements from Microsoft of $3 million for the three months ended September 30, 2011 and increased reimbursements from Microsoft of $7 million for the nine months ended September 30, 2011, compared to the same periods of 2010. The increase in Microsoft reimbursements for the nine months ended September 30, 2011 was due to the inclusion of nine months of expenses in 2011 compared to the inclusion of seven months of expenses in the same period of 2010.

Depreciation and Amortization. Depreciation and amortization expense decreased $10 million and $11 million for the three and nine months ended September 30, 2011, as compared to the same periods in 2010. Excluding the impact of Microsoft reimbursements, depreciation and amortization expense decreased $12 million for both the three and nine months ended September 30, 2011, compared to the same periods of 2010. The decrease was due to decreased amortization expense for fully amortized intangible assets acquired in prior years.

TAC. TAC decreased $332 million and $969 million for the three and nine months ended September 30, 2011, respectively, as compared to the same periods in 2010. The decrease for the three and nine months ended September 30, 2011, compared to the same periods of 2010 was primarily due to the change in the recording of TAC in the fourth quarter of 2010 due to the Search Agreement with Microsoft as we no longer incur TAC for transitioned markets. We now receive an 88 percent revenue share in the transitioned markets as Microsoft is the primary obligor to the advertisers. In addition, the decrease in TAC year-over-year was due to the loss of an Affiliate in the Asia Pacific region during late 2010.

Facilities and Other Expenses . Facilities and other expenses decreased $32 million and $72 million for the three and nine months ended September 30, 2011, compared to the same periods in 2010. Excluding the impact of Microsoft reimbursements, facilities and other expenses decreased $44 million and $112 million, primarily due to decreases in marketing-related expenses of $29 million and $75 million for the three and nine months ended September 30, 2011. Marketing-related expenses decreased during the three and nine months ended September 30, 2011 compared to the same periods of 2010 due to the launch of various 2010 marketing campaigns, including our global branding campaign, for which there were no similar campaigns in the three and nine months ended September 30, 2011. The decline in facilities and other expenses was offset by decreased Microsoft reimbursements of $12 million and $40 million during the three and nine months ended September 30, 2011, compared to the same periods of 2010. The decrease in Microsoft reimbursements for the three months ended September 30, 2011 was due to the transition of paid search to Microsoft platforms. Microsoft reimbursements decreased $7 million in the nine months ended September 30, 2011 compared to the same period in 2010 due to the impact of 2009 transition cost reimbursements being recorded in the first quarter of 2010.

We currently expect our operating costs to decrease for the fourth quarter of 2011, compared to the same period of 2010, primarily due to higher restructuring activities and marketing expenses in 2010 than 2011 as we continue our efforts to drive efficiencies and align our spending with our strategic priorities.

Restructuring Charges, Net. Restructuring charges, net was comprised of the following (in thousands):


	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2011			September 30, 2010		September 30, 2011
Employee severance pay and related costs	$	(215	)	$	(2,571	)	$	735	$	6,340
Non-cancelable lease, contract termination, and other charges		5,973			(150	)		19,487		3,029

Sub-total before reversal of stock-based compensation expense		5,758			(2,721	)		20,222		9,369
Reversals of stock-based compensation expense for forfeitures		—			—			—		(1,278	)

Restructuring charges, net	$	5,758		$	(2,721	)	$	20,222	$	8,091

Q4’08 Restructuring Plan. During the fourth quarter of 2008, we implemented certain cost reduction initiatives, including a workforce reduction and consolidation of certain real estate facilities. During the three and nine months ended September 30, 2010, we incurred total pre-tax cash charges of approximately $3 million and $17 million, respectively, in facility and other related costs related to the Q4’08 restructuring plan. Net charges under the Q4’08 restructuring plan relating to the Americas segment were $2 million and $16 million for the three and nine months ended September 30, 2010, respectively. Net charges under the Q4’08 restructuring plan relating to the EMEA segment were $1 million for both the three and nine months ended September 30, 2010. During the three and nine months ended September 30, 2011, we incurred total pre-tax cash charges of approximately $1 million and $4 million, respectively, in facility and other related costs related to the Q4’08 restructuring plan, the majority of which related to the Americas segment. As of September 30, 2011, the aggregate outstanding restructuring liability related to the Q4’08 restructuring plan was $37 million, most of which relates to non-cancelable lease costs that we expect to pay over the lease terms of the related obligations, which end by the second quarter of 2017.

Q4’09 Restructuring Charges. During the fourth quarter of 2009, we decided to close one of our EMEA facilities and began implementation of a workforce realignment at the facility to focus resources on our strategic initiatives. We exited the facility in the third quarter of 2010. In connection with the strategic realignment efforts, a U.S. executive of one of our acquired businesses departed. During both the three and nine months ended September 30, 2010, we incurred total pre-tax charges of $3 million in severance, facility and other related costs related to the Q4’09 restructuring charges, consisting of charges primarily related to the EMEA segment. During the three months ended September 30, 2011, we did not incur any charges related to the Q4’09 restructuring charges. During the nine months ended September 30, 2011, we recorded a reversal of $1 million for adjustments to original estimates in severance and other related costs related to the Q4’09 restructuring charges, entirely related to the EMEA segment. As of September 30, 2011, there was no remaining restructuring liability related to the Q4’09 restructuring charges.

Q4’10 Restructuring Plan. During the fourth quarter of 2010, we began implementation of a worldwide workforce reduction to align resources with our product strategy. During the three and nine months ended September 30, 2011, we recorded net reversals of $4 million and $3 million, respectively, for adjustments to original estimates in severance and other costs related to the Q4’10 restructuring plan. Net reversals under the Q4’10 restructuring plan relating to the Americas segment were $2 million for both the three and nine months ended September 30, 2011. Net reversals under the Q4’10 restructuring plan relating to the EMEA segment were $2 million and $1 million for the three and nine months ended September 30, 2011, respectively. As of September 30, 2011, the aggregate outstanding restructuring liability related to the Q4’10 restructuring plan was $4 million, which we expect to substantially pay by the fourth quarter of 2012.

Q1’11 Restructuring Plan. During the first quarter of 2011, we began implementation of a workforce realignment to further reduce our cost structure. During the three months ended September 30, 2011, we incurred total pre-tax cash charges of less than $1 million in severance and other related costs related to the Q1’11 restructuring plan, the majority of which related to the Americas segment. During the nine months ended September 30, 2011, we incurred total pre-tax cash charges of $9 million in severance and other costs related to the Q1’11 restructuring plan. The pre-tax cash charges were offset by a $1 million credit related to non-cash stock-based compensation expense reversals for unvested stock awards that were forfeited. Of the $8 million in restructuring charges, net recorded in the nine months ended September 30, 2011, $7 million related to the Americas segment and $1 million related to the EMEA segment. As of September 30, 2011, the aggregate outstanding restructuring liability related to the Q1’11 restructuring plan was $2 million, which we expect to substantially pay by the fourth quarter of 2012.

In addition to the charges described above, we currently expect to incur future charges of approximately $14 million to $19 million primarily related to non-cancelable operating costs and accretion related to exited facilities identified as part of the Q4’08 restructuring plan, the majority of which related to the Americas segment. The future charges are expected to be recorded through 2017. See Note 14 — “Restructuring charges, net” in the Notes to the condensed consolidated financial statements for additional information.

Other Income, Net. Other income, net was as follows (in thousands):


	Three Months Ended September 30,					Dollar Change			Nine Months Ended September 30,				Dollar Change
	2010			2011		Dollar Change			2010		2011		Dollar Change
Interest and investment income	$	5,489		$	3,955	$	(1,534	)	$	17,669	$	14,399	$	(3,270	)
Gain on sale of Zimbra, Inc.		—			—		—			66,130		—		(66,130	)
Gain on sale of HotJobs		186,345			—		(186,345	)		186,345		—		(186,345	)
Other		(483	)		14,091		14,574			20,123		3,008		(17,115	)

Total other income, net	$	191,351		$	18,046	$	(173,305	)	$	290,267	$	17,407	$	(272,860	)

Interest and investment income consists of income earned from cash in bank accounts and investments made in marketable debt securities and money market funds.

In February 2010, we sold Zimbra, Inc. for net proceeds of $100 million and recorded a pre-tax gain of $66 million. In August 2010, we sold HotJobs for net proceeds of $225 million and recorded a pre-tax gain of $186 million.

Other income, net may fluctuate in future periods due to realized gains and losses on investments, other than temporary impairments of investments, changes in our average investment balances, and changes in interest and foreign currency exchange rates.

Income Taxes. Our effective tax rate is the result of the geographic mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Historically, our provision for income taxes has differed from the tax computed at the U.S. federal statutory income tax rate due to state taxes, the effect of non-U.S. operations, non-deductible stock-based compensation expense and adjustments to unrecognized tax benefits.

The effective tax rate reported for the three months ended September 30, 2011 was 29 percent compared to 23 percent for the same period in 2010. The rates in both periods were lower than the U.S. federal statutory rate primarily due to a shift in the geographic mix of earnings. During the three months ended September 30, 2010, we also recorded the benefit of a capital loss carryover that was used to offset the gain on sale of HotJobs.

The effective tax rate reported for the nine months ended September 30, 2011 was 28 percent compared to 24 percent for the same period in 2010. The rates in both periods were lower than the U.S. federal statutory rate primarily due to reductions of previously-recorded tax reserves upon the favorable settlement of tax audits and a shift in the geographic mix of earnings. During the nine months ended September 30, 2010, we also recorded the benefit of a capital loss carryover that was used to offset gains from sales of Zimbra, Inc. and HotJobs. While the discrete adjustments had a greater effect in the nine months ended September 30, 2010 than September 30, 2011, the annual effective tax rate for 2011 is projected to be lower than in 2010 as a result of a shift in the geographic mix of earnings and a lower effective blended state tax rate.

We are in various stages of examination and appeal in connection with all of our tax audits worldwide, which generally span tax years 2005 through 2009. It is difficult to determine when these examinations will be settled or what their final outcomes will be. We believe that we have adequately provided for any reasonably foreseeable adjustment and that any settlement will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Our gross amount of unrecognized tax benefits as of September 30, 2011 is $524 million, of which $405 million is recorded on the condensed consolidated balance sheets. The gross unrecognized tax benefits as of September 30, 2011 decreased by $73 million from the recorded balance as of December 31, 2010 due to favorable settlements of tax audits in the first three quarters of 2011. Since there can be no assurance as to the outcome of tax audits currently in progress, it is reasonably possible that over the next twelve-month period we may experience an increase or decrease in our unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.

Earnings in Equity Interests. Earnings in equity interests for the three and nine months ended September 30, 2011 was $159 million and $350 million, respectively, compared to $104 million and $288 million for the same periods in 2010. The increases for the three and nine months ended September 30, 2011 were due primarily to Yahoo Japan’s and Alibaba Group’s continued improvement in financial performance and the recognition of a dilution gain of $25 million, net of tax, related to our ownership interest in Alibaba Group offset by non-cash losses related to impairments of assets held by Yahoo Japan. See Note 4 — “Investments in Equity Interests” in the Notes to the condensed consolidated financial statements for additional information.

Noncontrolling Interests. Noncontrolling interests represent the noncontrolling holders’ percentage share of income or losses from the subsidiaries in which we hold a majority, but less than 100 percent, ownership interest and the results of which are consolidated in our condensed consolidated financial statements.

Business Segment Results

We manage our business geographically. The primary areas of measurement and decision-making are Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific. Management relies on an internal reporting process that provides revenue ex-TAC, which is defined as revenue less TAC, and direct costs excluding TAC by segment, and consolidated income from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, our segments. Prior period presentations have been updated to conform to the current profitability measures being used by our management team to evaluate the financial performance of our segments.

Summarized information by segment was as follows (dollars in thousands):


	Three Months Ended				Percent Change			Nine Months Ended				Percent Change
	September 30, 2010		September 30, 2011		Percent Change			September 30, 2010		September 30, 2011		Percent Change
Revenue by segment:
Americas	$	1,146,511	$	791,240		(31	%)	$	3,434,739	$	2,418,209		(30	%)
EMEA		133,094		148,494		12	%		415,432		465,145		12	%
Asia Pacific		321,598		276,931		(14	%)		949,371		776,692		(18	%)

Total revenue	$	1,601,203	$	1,216,665		(24	%)	$	4,799,542	$	3,660,046		(24	%)

TAC by segment:
Americas	$	291,676	$	37,493		(87	%)	$	855,494	$	115,038		(87	%)
EMEA		48,717		52,197		7	%		152,191		167,357		10	%
Asia Pacific		136,391		55,301		(59	%)		408,879		165,523		(60	%)

Total TAC	$	476,784	$	144,991		(70	%)	$	1,416,564	$	447,918		(68	%)

Revenue ex-TAC by segment:
Americas	$	854,835	$	753,747		(12	%)	$	2,579,245	$	2,303,171		(11	%)
EMEA		84,377		96,297		14	%		263,241		297,788		13	%
Asia Pacific		185,207		221,630		20	%		540,492		611,169		13	%

Total revenue ex-TAC	$	1,124,419	$	1,071,674		(5	%)	$	3,382,978	$	3,212,128		(5	%)

Direct costs by segment ⁽¹⁾ :
Americas		135,899		134,672		(1	%)