|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||
Note 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company. Yahoo! Inc. ("Yahoo!" or the "Company") is an innovative technology company that operates one of the most trafficked Internet destinations in the world and attracts hundreds of millions of users every month through its engaging media, content and communications offerings. Yahoo! connects its users to what matters to them most, and delivers powerful audience solutions through its unique combination of Science + Art + Scale. To users, Yahoo! provides online properties and services ("Yahoo! Properties" or "Owned and Operated sites"). To advertisers, Yahoo! provides a range of marketing services designed to reach and connect with users of its Owned and Operated sites, 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 ("Affiliate sites").
The Company generates revenue by providing marketing services to advertisers across a majority of Yahoo! Properties and Affiliate sites. Additionally, although many of the services the Company provides to users are free, Yahoo! does charge fees for a range of premium services.
Basis of Presentation. The condensed consolidated financial statements include the accounts of Yahoo! Inc. and its majority-owned or otherwise controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the condensed consolidated balance sheets. The Company has included the results of operations of acquired companies from the closing date of the acquisition. Certain prior period amounts have been reclassified to conform to the current period presentation.
The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.
The preparation of 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 a regular basis, the Company evaluates its estimates, including those related to uncollectible receivables, the useful lives of long-lived assets including property and equipment, investment fair values, stock-based compensation, goodwill and other intangible assets, 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, 2009. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted except for the Company's change in revenue recognition policy pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2009 was derived from the Company's audited financial statements for the year ended December 31, 2009, 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.
Revenue Recognition. In October 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standard for multiple deliverable revenue arrangements, which provided updated guidance on whether multiple deliverables exist, how deliverables in an arrangement should be separated, and how consideration should be allocated. This standard eliminates the use of the residual method and will require arrangement consideration to be allocated based on the relative selling price for each deliverable. The selling price for each arrangement deliverable can be established based on vendor specific objective evidence ("VSOE") and third-party evidence ("TPE") if VSOE is not available. The new standard provides additional flexibility to utilize an estimate of selling price ("ESP") if neither VSOE nor TPE is available.
The Company elected to early adopt this accounting standard on January 1, 2010 on a prospective basis for applicable transactions originating or materially modified after December 31, 2009. The adoption of this standard did not have a significant impact on the Company's revenue recognition for multiple deliverable arrangements. Upon adoption, the selling prices for certain custom advertising solutions may use the best estimate of selling price as provided under the new standard. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, cash flows, or results of operations for the three and nine months ended September 30, 2010.
The Company's revenue is derived principally from services, which comprise marketing services for advertisers and publishers and offerings to users. The Company classifies this revenue as marketing services and fees.
In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the related fee is reasonably assured. The Company's arrangements generally do not include a provision for cancellation, termination, or refunds that would significantly impact revenue recognition.
Marketing services revenue is generated from several offerings including the display of graphical advertisements ("display advertising"), the display of text-based links to an advertiser's Website ("search advertising"), listing-based services, and commerce-based transactions.
The Company recognizes revenue from display advertising on Yahoo! Properties as "impressions" are delivered. An "impression" is delivered when an advertisement appears in pages viewed by users. Arrangements for these services generally have terms of up to one year and in some cases the terms may be up to three years.
The Company offers customized display advertising solutions to advertisers. These customized display advertising solutions combine the Company's standard display advertising with customized content, customer insights, and campaign analysis. Due to the unique nature of these products, the Company may not be able to establish selling prices based on historical stand-alone sales or third party evidence; therefore, the Company may use its best estimate to establish selling prices. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as class of advertiser, size of transaction, seasonality, margin objectives, observed pricing trends, available online inventory, industry pricing strategies, and market conditions. The Company believes the use of the best estimates of selling price will allow revenue recognition in a manner consistent with the underlying economics of the transaction.
The Company also recognizes revenue from search advertising on Yahoo! Properties. Search advertising revenue is recognized as "click-throughs" occur. A "click-through" occurs when a user clicks on an advertiser's search result listing.
Marketing services revenue also includes listings and transaction revenue. Listings revenue is generated from a variety of consumer and business listings-based services, including classified advertising such as Yahoo! Autos, Yahoo! Real Estate, and other services. The Company recognizes listings revenue when the services are performed. Transaction revenue is generated from facilitating commercial transactions through Yahoo! Properties, principally from Small Business, Yahoo! Travel and Yahoo! Shopping. The Company recognizes transaction revenue when there is evidence that qualifying transactions have occurred (for example, when travel arrangements are booked through Yahoo! Travel).
In addition to delivering search and display advertising on Yahoo! Properties, the Company also generates revenue from search and/or display advertising offerings on Affiliate sites. The Company pays Affiliates for the revenue generated from the display of these advertisements on the Affiliates' Websites. These payments are called traffic acquisition costs ("TAC"). The revenue derived from these arrangements that involve traffic supplied by Affiliates is reported gross of the payment to Affiliates. This revenue is reported gross due to the fact that the Company is the primary obligor to the advertisers who are the customers of the advertising service.
Fees revenue consists of revenue generated from a variety of consumer and business fee-based services, including Internet broadband services, royalties received from joint venture partners, and premium mail, as well as services for small businesses. The Company recognizes fees revenue when the services are performed.
The Company accounts for cash consideration given to customers, for which it does not receive a separately identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue rather than as an expense. Cash consideration received in an arrangement with a provider may require consideration of classification of amounts received as revenue or a reimbursement of costs incurred. Additionally, the Company reports revenue for which it is the primary obligor in the arrangement and for which it provided a product or service at the gross amount.
Current deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition. Long-term deferred revenue includes amounts received from customers for which services will not be delivered within the next 12 months.
|
|||
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, as amended and restated in June 2009 (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 87 million and 86 million shares of common stock for the three and nine months ended September 30, 2010, respectively, and 119 million and 126 million shares of common stock for the three and nine months ended September 30, 2009, 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, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Basic: |
||||||||||||||||
|
Numerator: |
||||||||||||||||
|
Net income attributable to Yahoo! Inc |
$ | 186,093 | $ | 396,131 | $ | 445,038 | $ | 919,643 | ||||||||
|
Less: Net income allocated to participating securities |
(166 | ) | (41 | ) | (509 | ) | (156 | ) | ||||||||
|
Net income attributable to Yahoo! Inc. common stockholders — basic |
$ | 185,927 | $ | 396,090 | $ | 444,529 | $ | 919,487 | ||||||||
|
Denominator: |
||||||||||||||||
|
Weighted average common shares |
1,401,961 | 1,333,753 | 1,396,090 | 1,370,145 | ||||||||||||
|
Net income attributable to Yahoo! Inc. common stockholders per share — basic |
$ | 0.13 | $ | 0.30 | $ | 0.32 | $ | 0.67 | ||||||||
|
Diluted: |
||||||||||||||||
|
Numerator: |
||||||||||||||||
|
Net income attributable to Yahoo! Inc. |
$ | 186,093 | $ | 396,131 | $ | 445,038 | $ | 919,643 | ||||||||
|
Less: Net income allocated to participating securities |
(21 | ) | (37 | ) | (47 | ) | (77 | ) | ||||||||
|
Less: Effect of dilutive securities issued by equity investees |
(514 | ) | (653 | ) | (314 | ) | (2,018 | ) | ||||||||
|
Net income attributable to Yahoo! Inc. common stockholders — diluted |
$ | 185,558 | $ | 395,441 | $ | 444,677 | $ | 917,548 | ||||||||
|
Denominator: |
||||||||||||||||
|
Denominator for basic calculation |
1,401,961 | 1,333,753 | 1,396,090 | 1,370,145 | ||||||||||||
|
Weighted average effect of Yahoo! Inc. dilutive securities: |
||||||||||||||||
|
Restricted stock and restricted stock units |
12,746 | 5,068 | 11,555 | 6,236 | ||||||||||||
|
Stock options and employee stock purchase plan |
10,147 | 4,273 | 7,575 | 5,874 | ||||||||||||
|
Denominator for diluted calculation |
1,424,854 | 1,343,094 | 1,415,220 | 1,382,255 | ||||||||||||
|
Net income attributable to Yahoo! Inc. common stockholders per share — diluted |
$ | 0.13 | $ | 0.29 | $ | 0.31 | $ | 0.66 | ||||||||
|
|||
Note 3 ACQUISITIONS
During the nine months ended September 30, 2010, the Company acquired three companies in transactions which were accounted for as business combinations. The total purchase price for these acquisitions was $114 million. The total cash consideration of $114 million less cash acquired of $2 million resulted in a net cash outlay of $112 million. Of the purchase price, $75 million was preliminarily allocated to goodwill, $32 million to amortizable intangible assets, $17 million to tangible assets, $2 million to cash acquired, and $12 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. In connection with the acquisitions, the Company issued stock-based awards valued at $9 million, and such amount is being recognized as stock-based compensation expense as the awards vest over a period of up to four years.
The Company's business combinations completed during the nine months ended September 30, 2010 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, 2009 |
September 30, 2010 |
Percent Ownership of Common Stock |
||||||||||
|
Alibaba Group |
$ | 2,167,007 | $ | 2,225,928 | 43 | % | ||||||
|
Yahoo Japan |
1,329,281 | 1,557,585 | 35 | % | ||||||||
|
Total |
$ | 3,496,288 | $ | 3,783,513 | ||||||||
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 its consolidated subsidiaries, and any related amortization expense, one quarter in arrears, within earnings in equity interests in the condensed consolidated statements of income.
As of September 30, 2010, the difference between the Company's carrying value of its investment in Alibaba Group and its proportionate share of Alibaba Group's stockholders' equity is summarized as follows (in thousands):
|
Carrying value of investment in Alibaba Group |
$ | 2,225,928 | ||
|
Proportionate share of Alibaba Group stockholders' equity |
1,590,374 | |||
|
Excess of carrying value of investment over proportionate share of Alibaba Group's stockholders' equity(*) |
$ | 635,554 | ||
| (*) |
The excess carrying value has been primarily assigned to goodwill. |
The following tables present Alibaba Group's U.S. GAAP condensed financial information, as derived from the Alibaba Group consolidated financial statements (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, 2009 |
June 30, 2010 |
June 30, 2009 |
June 30, 2010 |
|||||||||||||
|
Operating data: |
||||||||||||||||
|
Revenue |
$ | 194,079 | $ | 348,105 | $ | 503,355 | $ | 903,872 | ||||||||
|
Gross profit |
$ | 142,178 | $ | 259,465 | $ | 360,793 | $ | 679,539 | ||||||||
|
Income (loss) from operations(*) |
$ | 2,756 | $ | 62,570 | $ | (40,920 | ) | $ | (71,004 | ) | ||||||
|
Net income (loss) |
$ | 19,776 | $ | 50,237 | $ | (26,683 | ) | $ | (49,975 | ) | ||||||
|
Net income (loss) attributable to Alibaba Group |
$ | 9,555 | $ | 35,917 | $ | (54,956 | ) | $ | (88,719 | ) | ||||||
| September 30, 2009 |
June 30, 2010 |
|||||||||||||||
|
Balance sheet data: |
||||||||||||||||
|
Current assets |
$ | 3,191,097 | $ | 3,968,545 | ||||||||||||
|
Long-term assets |
$ | 2,308,099 | $ | 2,326,339 | ||||||||||||
|
Current liabilities |
$ | 1,559,975 | $ | 2,299,311 | ||||||||||||
|
Long-term liabilities |
$ | 24,082 | $ | 52,363 | ||||||||||||
|
Non-voting participating redeemable shares |
$ | 1,733 | $ | 768 | ||||||||||||
|
Noncontrolling interests |
$ | 185,055 | $ | 243,042 | ||||||||||||
| (*) |
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. 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, 2009 and 2010, these transactions were not material.
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 its consolidated subsidiaries, and any related amortization expense, one quarter in arrears, within earnings in equity interests in the condensed consolidated statements of income.
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, did not materially impact the amounts reflected in the Company's condensed consolidated financial statements. The Company does, however, make adjustments to the earnings in equity interests line in the condensed consolidated statements of income for any differences between U.S. GAAP and Japanese GAAP.
The fair value of the Company's ownership interest in the common stock of Yahoo Japan, based on the quoted stock price, was approximately $7 billion as of September 30, 2010.
During the nine months ended September 30, 2009 and 2010, the Company received cash dividends from Yahoo Japan in the amounts of $26 million and $61 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, 2009 |
June 30, 2010 |
June 30, 2009 |
June 30, 2010 |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Operating data: |
||||||||||||||||
|
Revenue |
$ | 776,208 | $ | 854,726 | $ | 2,358,466 | $ | 2,645,443 | ||||||||
|
Gross profit |
$ | 644,205 | $ | 685,605 | $ | 1,983,975 | $ | 2,139,644 | ||||||||
|
Income from operations |
$ | 351,469 | $ | 398,735 | $ | 1,076,054 | $ | 1,230,947 | ||||||||
|
Net income |
$ | 198,090 | $ | 237,492 | $ | 599,376 | $ | 730,296 | ||||||||
|
Net income attributable to Yahoo Japan |
$ | 197,341 | $ | 236,129 | $ | 595,890 | $ | 725,754 | ||||||||
| September 30, 2009 |
June 30, 2010 |
|||||||||||||||
| (in thousands) | ||||||||||||||||
|
Balance sheet data: |
||||||||||||||||
|
Current assets |
$ | 1,599,624 | $ | 2,130,670 | ||||||||||||
|
Long-term assets |
$ | 2,395,863 | $ | 2,524,217 | ||||||||||||
|
Current liabilities |
$ | 997,722 | $ | 1,003,322 | ||||||||||||
|
Long-term liabilities |
$ | 3,556 | $ | 28,964 | ||||||||||||
|
Noncontrolling interests |
$ | 26,662 | $ | 26,195 | ||||||||||||
Through its commercial arrangement with Yahoo Japan, the Company provides advertising and search marketing services to Yahoo Japan for a service fee. Under this arrangement, the Company records marketing services revenue from Yahoo Japan for the provision of search marketing services based on a percentage of advertising revenue earned by Yahoo Japan for the delivery of sponsored search results. In addition, the Company recognizes revenue from license fees received from Yahoo Japan. These arrangements resulted in revenue of approximately $76 million and $78 million for the three months ended September 30, 2009 and 2010, respectively, and revenue of approximately $224 million and $228 million, respectively, for the nine months ended September 30, 2009 and 2010. As of December 31, 2009 and September 30, 2010, the Company had a net receivable balance from Yahoo Japan of approximately $41 million and $43 million, respectively.
|
|||
Note 5 GOODWILL
The Company's goodwill balance was $3.6 billion as of December 31, 2009, of which $2.6 billion was recorded in the Americas segment, $0.6 billion in the EMEA segment, and $0.4 billion in the Asia Pacific segment. The change in the carrying amount of goodwill for the nine months ended September 30, 2010 was primarily due to the addition of $75 million related to acquisitions in the Americas segment, foreign currency translation gains of $1 million, a reduction of $19 million related to the allocation of goodwill for the February 2010 sale of Zimbra, Inc., and a reduction of $41 million related to the allocation of goodwill for the August 2010 sale of HotJobs. As of September 30, 2010, the Company's goodwill balance was $3.7 billion, of which $2.7 billion was recorded in the Americas segment, $0.6 billion in the EMEA segment, and $0.4 billion in the Asia Pacific segment.
|
|||
Note 6 INTANGIBLE ASSETS, NET
The following table summarizes the Company's intangible assets, net (in thousands):
| December 31, 2009 | September 30, 2010 | |||||||||||||||
| Net | Gross Carrying Amount |
Accumulated Amortization(*) |
Net | |||||||||||||
|
Customer and advertiser related relationships |
$ | 83,232 | $ | 131,598 | $ | (64,912 | ) | $ | 66,686 | |||||||
|
Developed technology and patents |
239,285 | 384,729 | (213,846 | ) | 170,883 | |||||||||||
|
Trade names, trademarks, and domain names |
33,366 | 76,777 | (48,932 | ) | 27,845 | |||||||||||
|
Total intangible assets, net |
$ | 355,883 | $ | 593,104 | $ | (327,690 | ) | $ | 265,414 | |||||||
| (*) |
Foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities, totaled approximately $17 million as of September 30, 2010. |
For the three months ended September 30, 2009 and 2010, the Company recognized amortization expense for intangible assets of $39 million and $30 million, respectively, including $29 million in cost of revenue for the three months ended September 30, 2009 and $22 million in cost of revenue for the three months ended September 30, 2010. For the nine months ended September 30, 2009 and 2010, the Company recognized amortization expense for intangible assets of $145 million and $98 million, respectively, including $116 million in cost of revenue for the nine months ended September 30, 2009 and $74 million in cost of revenue for the nine months ended September 30, 2010. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the remainder of 2010 and each of the succeeding years is as follows: three months ending December 31, 2010: $28 million; 2011: $99 million; 2012: $70 million; 2013: $32 million; 2014: $17 million; and 2015: $3 million.
|
|||
Note 7 OTHER INCOME, NET
Other income, net is comprised of (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Interest and investment income |
$ | 4,822 | $ | 5,489 | $ | 16,310 | $ | 17,669 | ||||||||
|
Gain on sale of marketable equity securities |
98,167 | — | 164,851 | — | ||||||||||||
|
Gain on sale of Zimbra, Inc. |
— | — | — | 66,130 | ||||||||||||
|
Gain on sale of HotJobs |
— | 186,345 | — | 186,345 | ||||||||||||
|
Other |
2,401 | (483 | ) | 1,199 | 20,123 | |||||||||||
|
Total other income, net |
$ | 105,390 | $ | 191,351 | $ | 182,360 | $ | 290,267 | ||||||||
Interest and investment income consists of income earned from cash in bank accounts and investments made in marketable debt securities and money market funds.
Gain on sale of marketable equity securities includes gains from sales of investments in publicly traded companies. In May 2009, the Company sold all of its Gmarket shares for net proceeds of $120 million. The Company recorded a pre-tax gain of $67 million. In September 2009, the Company sold its direct investment in Alibaba.com for net proceeds of $145 million. The Company recorded a pre-tax gain of $98 million in connection with the Company's sale of its Alibaba.com shares. In February 2010, the Company sold Zimbra, Inc. for net proceeds of $100 million. The Company recorded a pre-tax gain of $66 million. In August 2010, the Company sold HotJobs for net proceeds of $225 million. The Company recorded a pre-tax gain of $186 million.
Other consists of foreign exchange gains and losses due to re-measurement of monetary assets and liabilities denominated in non-functional currencies, gains/losses from sales of marketable debt securities and/or investments in privately held companies, 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, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Net income |
$ | 187,816 | $ | 398,259 | $ | 449,551 | $ | 926,681 | ||||||||
|
Change in net unrealized gains (losses), net on available-for-sale securities, net of tax and reclassification adjustments |
5,707 | (1,608 | ) | (1,694 | ) | 4,140 | ||||||||||
|
Foreign currency translation adjustments |
87,233 | 201,640 | 185,002 | 30,940 | ||||||||||||
|
Other comprehensive income |
92,940 | 200,032 | 183,308 | 35,080 | ||||||||||||
|
Comprehensive income |
280,756 | 598,291 | 632,859 | 961,761 | ||||||||||||
|
Comprehensive income attributable to noncontrolling interests |
(1,723 | ) | (2,128 | ) | (4,513 | ) | (7,038 | ) | ||||||||
|
Comprehensive income attributable to Yahoo! Inc. |
$ | 279,033 | $ | 596,163 | $ | 628,346 | $ | 954,723 | ||||||||
The following table summarizes the components of accumulated other comprehensive income (in thousands):
| December 31, 2009 |
September 30, 2010 |
|||||||
|
Unrealized gains on available-for-sale securities, net of tax |
$ | 4,921 | $ | 9,061 | ||||
|
Foreign currency translation, net of tax |
364,315 | 395,255 | ||||||
|
Accumulated other comprehensive income |
$ | 369,236 | $ | 404,316 | ||||
|
|||
Note 9 INVESTMENTS
The following tables summarize the investments in available-for-sale securities (in thousands):
| December 31, 2009 | ||||||||||||||||
| Gross Amortized Costs |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
|
Government and agency securities |
$ | 1,781,674 | $ | 868 | $ | (1,825 | ) | $ | 1,780,717 | |||||||
|
Municipal bonds |
465,823 | 739 | (3 | ) | 466,559 | |||||||||||
|
Corporate debt securities, commercial paper, and bank certificates of deposit |
995,291 | 1,305 | (1,298 | ) | 995,298 | |||||||||||
|
Corporate equity securities |
2,597 | — | — | 2,597 | ||||||||||||
|
Total investments in available-for-sale securities |
$ | 3,245,385 | $ | 2,912 | $ | (3,126 | ) | $ | 3,245,171 | |||||||
| September 30, 2010 | ||||||||||||||||
| Gross Amortized Costs |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
|
Government and agency securities |
$ | 1,105,096 | $ | 1,790 | $ | (108 | ) | $ | 1,106,778 | |||||||
|
Municipal bonds |
18,476 | 21 | — | 18,497 | ||||||||||||
|
Corporate debt securities, commercial paper, and bank certificates of deposit |
712,410 | 2,343 | (169 | ) | 714,584 | |||||||||||
|
Corporate equity securities |
2,597 | — | (1,289 | ) | 1,308 | |||||||||||
|
Total investments in available-for-sale securities |
$ | 1,838,579 | $ | 4,154 | $ | (1,566 | ) | $ | 1,841,167 | |||||||
| December 31, 2009 |
September 30, 2010 |
|||||||
|
Reported as: |
||||||||
|
Short-term marketable debt securities |
$ | 2,015,655 | $ | 1,203,850 | ||||
|
Long-term marketable debt securities |
1,226,919 | 636,009 | ||||||
|
Other assets |
2,597 | 1,308 | ||||||
|
Total |
$ | 3,245,171 | $ | 1,841,167 | ||||
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 2009 and the nine months ended September 30, 2010 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, 2009 |
September 30, 2010 |
|||||||
|
Due within one year |
$ | 2,015,655 | $ | 1,203,850 | ||||
|
Due after one year through five years |
1,226,919 | 636,009 | ||||||
|
Total available-for-sale marketable debt securities |
$ | 3,242,574 | $ | 1,839,859 | ||||
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 the individual securities have been in a continuous unrealized loss position (in thousands):
| December 31, 2009 | ||||||||||||||||||||||||
| 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 |
$ | 886,657 | $ | (1,825 | ) | $ | — | $ | — | $ | 886,657 | $ | (1,825 | ) | ||||||||||
|
Municipal bonds |
8,760 | (3 | ) | — | — | 8,760 | (3 | ) | ||||||||||||||||
|
Corporate debt securities and commercial paper |
352,031 | (1,298 | ) | — | — | 352,031 | (1,298 | ) | ||||||||||||||||
|
Total investments in available-for-sale securities |
$ | 1,247,448 | $ | (3,126 | ) | $ | — | $ | — | $ | 1,247,448 | $ | (3,126 | ) | ||||||||||
| September 30, 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 |
$ | 211,690 | $ | (108 | ) | $ | — | $ | — | $ | 211,690 | $ | (108 | ) | ||||||||||
|
Corporate debt securities and commercial paper |
125,777 | (169 | ) | — | — | 125,777 | (169 | ) | ||||||||||||||||
|
Corporate equity securities |
1,308 | (1,289 | ) | — | — | 1,308 | (1,289 | ) | ||||||||||||||||
|
Total investments in available-for-sale securities |
$ | 338,775 | $ | (1,566 | ) | $ | — | $ | — | $ | 338,775 | $ | (1,566 | ) | ||||||||||
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, 2009 (in thousands):
| Fair Value Measurements at Reporting Date Using | ||||||||||||
|
Assets |
Level 1 | Level 2 | Total | |||||||||
|
Money market funds(1) |
$ | 364,602 | $ | — | $ | 364,602 | ||||||
|
Available-for-sale securities: |
||||||||||||
|
Government and agency securities(1) |
— | 1,938,608 | 1,938,608 | |||||||||
|
Municipal bonds(1) |
— | 470,031 | 470,031 | |||||||||
|
Commercial paper and bank certificates of deposit(1) |
— | 445,786 | 445,786 | |||||||||
|
Corporate debt securities(1) |
— | 641,104 | 641,104 | |||||||||
|
Available-for-sale securities at fair value |
$ | 364,602 | $ | 3,495,529 | $ | 3,860,131 | ||||||
|
Corporate equity securities(2) |
2,597 | — | 2,597 | |||||||||
|
Total assets at fair value |
$ | 367,199 | $ | 3,495,529 | $ | 3,862,728 | ||||||
| (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, 2009 includes $658 million in cash deposited with commercial banks, of which $205 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, 2010 (in thousands):
| Fair Value Measurements at Reporting Date Using | ||||||||||||
|
Assets |
Level 1 | Level 2 | Total | |||||||||
|
Money market funds(1) |
$ | 355,474 | $ | — | $ | 355,474 | ||||||
|
Available-for-sale securities: |
||||||||||||
|
Government and agency securities(1) |
— | 1,419,802 | 1,419,802 | |||||||||
|
Municipal bonds(1) |
— | 18,497 | 18,497 | |||||||||
|
Commercial paper and bank certificates of deposit(1) |
— | 206,596 | 206,596 | |||||||||
|
Corporate debt securities(1) |
— | 573,715 | 573,715 | |||||||||
|
Available-for-sale securities at fair value |
$ | 355,474 | $ | 2,218,610 | $ | 2,574,084 | ||||||
|
Corporate equity securities(2) |
1,308 | — | 1,308 | |||||||||
|
Total assets at fair value |
$ | 356,782 | $ | 2,218,610 | $ | 2,575,392 | ||||||
| (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 September 30, 2010 includes $881 million in cash deposited with commercial banks, of which $337 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, 2010, the Company did not make significant transfers between Level 1 and Level 2 assets. As of December 31, 2009 and September 30, 2010, 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, 2010, there was $2 million of unamortized stock-based compensation cost related to the Employee Stock Purchase Plan which is expected to be recognized over a weighted average period of less than two months.
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, 2010 is summarized as follows (in thousands, except per share amounts):
| Shares | Weighted Average Exercise Price per Share |
|||||||
|
Outstanding at December 31, 2009 |
119,593 | $ | 25.74 | |||||
|
Options granted |
9,329 | $ | 14.89 | |||||
|
Options exercised(*) |
(4,912 | ) | $ | 9.07 | ||||
|
Options expired |
(26,575 | ) | $ | 38.75 | ||||
|
Options cancelled/forfeited |
(8,385 | ) | $ | 18.29 | ||||
|
Outstanding at September 30, 2010 |
89,050 | $ | 22.34 | |||||
| (*) |
The Company issued new shares to satisfy stock option exercises. |
As of September 30, 2010, there was $124 million of unrecognized stock-based compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 2.1 years.
The Company determines the grant-date fair value of stock options, including the options granted under the Employee Stock Purchase Plan, using a Black-Scholes model, unless the options are subject to market conditions, in which case the Company uses a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. 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, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
|
Risk-free interest rate |
2.0 | % | 1.6 | % | 2.9 | % | 2.3 | % | ||||||||
|
Expected volatility |
41.8 | % | 36.1 | % | 58.9 | % | 68.1 | % | ||||||||
|
Expected life (in years) |
4.00 | 4.5 | 0.83 | 0.11 | ||||||||||||
| Stock Options | Purchase Plan(*) | |||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
|
Risk-free interest rate |
1.9 | % | 2.0 | % | 2.9 | % | 2.3 | % | ||||||||
|
Expected volatility |
49.1 | % | 34.7 | % | 61.1 | % | 68.7 | % | ||||||||
|
Expected life (in years) |
4.00 | 4.5 | 1.17 | 0.33 | ||||||||||||
| (*) |
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 awards and restricted stock units activity for the nine months ended September 30, 2010 is summarized as follows (in thousands, except per share amounts):
| Shares | Weighted Average Grant Date Fair Value |
|||||||
|
Awarded and unvested at December 31, 2009(*) |
26,189 | $ | 21.14 | |||||
|
Granted(*) |
15,689 | $ | 15.45 | |||||
|
Vested |
(7,713 | ) | $ | 22.30 | ||||
|
Forfeited |
(5,338 | ) | $ | 17.14 | ||||
|
Awarded and unvested at September 30, 2010(*) |
28,827 | $ | 18.47 | |||||
| (*) |
Includes the maximum number of shares issuable under the Company's performance-based executive incentive restricted stock unit awards. |
As of September 30, 2010, there was $234 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, 7.7 million shares subject to previously granted restricted stock awards and restricted stock units vested. A majority of these vested restricted stock awards and restricted stock units were net share settled. The Company withheld 2.8 million shares 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 for the nine months ended September 30, 2010 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. 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.
During the nine months ended September 30, 2009, 9.2 million shares subject to previously granted restricted stock awards and restricted stock units vested. A majority of these vested restricted stock awards and restricted stock units were net share settled. The Company withheld 3.1 million shares 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 $46 million for the nine months ended September 30, 2009 and are reflected as a financing activity within the condensed consolidated statements of cash flows. Upon the vesting of shares of certain restricted stock awards, 0.2 million shares were reacquired by the Company to satisfy the related tax withholding obligations and $3 million was recorded as treasury stock. Payments of $43 million related to the net share settlement of 2.9 million restricted stock units had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued 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, the Compensation Committee approved long-term performance-based incentive equity awards to Ms. Bartz and other senior officers, including two types of restricted stock units that vest based on the Company's achievement of certain performance goals. For both types of restricted stock units, 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 target. The first type of restricted stock unit generally will vest on the third anniversary of the grant date based on the Company's attainment of certain annual financial performance targets as well as the executive's continued employment through that vesting date. The annual financial performance targets are established at the beginning of each fiscal year and, accordingly, the tranche of the award subject to each annual target is treated as a separate annual grant for accounting purposes. The fair value of each of the 2009 tranche and the 2010 tranche of the February 2009 annual financial performance restricted stock unit grant was $3 million. Based on the Company's relative attainment of the 2009 performance target, 75 percent of the target amount of the 2009 tranche shares will vest, provided each executive remains employed through the third anniversary of the grant date. For accounting purposes, the 2009 and 2010 tranches are being recognized as stock-based compensation expense over a three- and two-year service period, respectively. The second type of restricted stock unit generally will vest following the third anniversary of the grant date based on the Company's attainment of certain levels of total stockholder return relative to the returns for the NASDAQ 100 Index companies as well as the executive's continued employment through that vesting date. The fair value of these restricted stock units is $13 million and is being recognized as stock-based compensation expense over a three-year service period.
Separately in February 2010, the Compensation Committee approved additional long-term performance-based incentive equity awards to Ms. Bartz and other senior officers, including two types of restricted stock units that vest based on the Company's achievement of certain performance goals. For both types of restricted stock units, 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 target. The first type of restricted stock unit generally will vest on the third anniversary of the grant date based on the Company's attainment of certain annual financial performance targets as well as the executive's continued employment through that vesting date. 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 amount of stock-based compensation recorded for the first type of restricted stock unit will vary depending on the Company's attainment of annual financial performance targets and the completion of the service period. The fair value of the 2010 tranche of the February 2010 annual financial performance restricted stock unit grant is $4 million and is being recognized as stock-based compensation expense over a three-year service period. The second type of restricted stock unit generally will vest following the third anniversary of the grant date based on the Company's attainment of certain levels of total stockholder return relative to the returns for the NASDAQ 100 Index companies as well as the executive's continued employment through that vesting date. The fair value of these restricted stock units is $15 million and is being recognized as stock-based compensation expense over a three-year service period.
Stock Repurchases. On June 24, 2010, the Company's Board of Directors approved a new stock repurchase program. Under the new program, which expires in June 2013, the Company is authorized to repurchase up to $3 billion of its outstanding shares of common stock from time to time. The repurchases may take place in the open market or in privately negotiated transactions, including derivative transactions, and may be made under a Rule 10b5-1 plan. During the 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 2010 and 2019.
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 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, 2010 is as follows (in millions):
| Gross Operating Lease Commitments |
Sublease Income |
Net Operating Lease Commitments |
||||||||||
|
Three months ending December 31, 2010 |
$ | 42 | $ | (2 | ) | $ | 40 | |||||
|
Years ending December 31, |
||||||||||||
|
2011 |
160 | (9 | ) | 151 | ||||||||
|
2012 |
131 | (7 | ) | 124 | ||||||||
|
2013 |
110 | (6 | ) | 104 | ||||||||
|
2014 |
88 | (6 | ) | 82 | ||||||||
|
2015 |
69 | (4 | ) | 65 | ||||||||
|
Due after 5 years |
69 | (1 | ) | 68 | ||||||||
|
Total gross and net lease commitments |
$ | 669 | $ | (35 | ) | $ | 634 | |||||
| Capital Lease Commitment |
||||||||||||
|
Three months ending December 31, 2010 |
$ | 2 | ||||||||||
|
Years ending December 31, |
||||||||||||
|
2011 |
7 | |||||||||||
|
2012 |
7 | |||||||||||
|
2013 |
8 | |||||||||||
|
2014 |
8 | |||||||||||
|
2015 |
8 | |||||||||||
|
Due after 5 years |
30 | |||||||||||
|
Gross lease commitment |
$ | 70 | ||||||||||
|
Less: interest |
(29 | ) | ||||||||||
|
Net lease commitment |
$ | 41 | ||||||||||
Affiliate Commitments. In connection with contracts to provide advertising services to Affiliates, the Company is obligated to make payments, which represent TAC, to its Affiliates. As of September 30, 2010, these commitments totaled $134 million, of which $37 million will be payable in the remainder of 2010, $87 million will be payable in 2011, $7 million will be payable in 2012, and $3 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 $38 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.
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 for pretrial purposes before Judge Shira Scheindlin. On April 1, 2009, the parties filed a motion with the Court for preliminary approval of a stipulated global settlement. On October 5, 2009, the Court granted class certification and granted final approval of the settlement and plan of allocation. Notices of appeal by various individuals objecting to the settlement have been filed with the U.S. Court of Appeals for 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 the former Brodsky/Hacker class action litigation 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 previously substituted in as plaintiff prior to the dismissal of the federal Watkins action, re-filed a shareholder 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. The Court sustained Yahoo!'s demurrer, which challenged the sufficiency of the claim. Plaintiff filed an amended complaint on June 21, 2010. The Yahoo! defendants refiled demurrers to the amended complaint on July 23, 2010 and reply briefs were filed on October 15, 2010.
Plaintiff Congregation Beth Aaron voluntarily dismissed an action filed in Santa Clara County Superior Court and on December 3, 2008 re-filed in the U.S. District Court for the Northern District of California alleging claims for breach of fiduciary duty and corporate waste in connection with Yahoo!'s consideration of proposals by Microsoft Corporation to purchase all or a part of Yahoo! in 2008, adoption of severance plans, and the June 12, 2008 agreement between Google Inc. and Yahoo!. Plaintiff filed an amended complaint on February 20, 2009. The complaint also alleges claims under Section 14(a) of the Exchange Act for alleged false statements or omissions in Yahoo!'s June 9, 2008 proxy statement regarding the severance plans and for control person liability under Section 20(a) of the Exchange Act, and also alleges that the defendants' decision to settle similar Microsoft-related Delaware lawsuits constituted an independent breach of fiduciary duty. The complaint seeks unspecified compensatory damages, injunctive relief, and an award of plaintiffs' attorneys' fees and costs. On June 15, 2009, the District Court granted defendants' motion to dismiss. Plaintiff appealed, and on October 21, 2010 the U.S. Court of Appeals for the Ninth Circuit affirmed the lower court's dismissal of all of Congregation Beth Aaron's claims.
While the outcome of the unsettled matters is currently not determinable, the Company does not believe, based on current knowledge, that any of the foregoing legal proceedings or claims is likely to have a material adverse effect on its financial position, results of operations, or cash flows. In the event of a determination adverse to Yahoo!, its subsidiaries, directors, or officers, in these matters, however, the Company may incur substantial monetary liability, and be required to change its business practices. Either of these could have a material adverse effect on the Company's financial position, results of operations, or cash flows. The Company may also incur substantial expenses in defending against these claims.
|
|||
Note 12 SEGMENTS
The Company manages its business geographically. Through the first quarter of 2010, the primary areas of measurement and decision-making were the U.S. and International. Beginning in the second quarter of 2010, the business management structure of the Company was redefined along three geographies: Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific. Prior period presentations have been updated to conform to the segments currently being used by management to evaluate the operational performance of the Company.
In the Company's Annual Report on Form 10-K for the year ended December 31, 2009, the segment profitability measure reported by the Company was segment operating income before depreciation, amortization, and stock-based compensation expense. Management no longer uses this measure to evaluate the operational performance of the Company's segments. Beginning in the first quarter of 2010, management relies on an internal reporting process that provides revenue and direct costs 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 management to evaluate the financial performance of the Company's segments.
The following tables present summarized information by segment (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Revenue by segment: |
||||||||||||||||
|
Americas |
$ | 1,177,504 | $ | 1,146,511 | $ | 3,579,198 | $ | 3,434,739 | ||||||||
|
EMEA |
142,571 | 133,094 | 439,542 | 415,432 | ||||||||||||
|
Asia Pacific |
255,324 | 321,598 | 709,598 | 949,371 | ||||||||||||
|
Total revenue |
1,575,399 | 1,601,203 | 4,728,338 | 4,799,542 | ||||||||||||
|
Direct costs by segment(1): |
||||||||||||||||
|
Americas |
456,733 | 427,575 | 1,348,083 | 1,281,631 | ||||||||||||
|
EMEA |
76,216 | 76,447 | 245,390 | 241,068 | ||||||||||||
|
Asia Pacific |
127,420 | 173,077 | 361,174 | 515,673 | ||||||||||||
|
Global operating costs(2) |
514,663 | 516,101 | 1,508,524 | 1,533,714 | ||||||||||||
|
Restructuring charges, net |
16,689 | 5,758 | 86,492 | 20,222 | ||||||||||||
|
Depreciation and amortization |
177,749 | 161,993 | 557,062 | 485,209 | ||||||||||||
|
Stock-based compensation expense |
114,430 | 51,097 | 353,676 | 169,477 | ||||||||||||
|
Income from operations |
$ | 91,499 | $ | 189,155 | $ | 267,937 | $ | 552,548 | ||||||||
| (1) |
Direct costs for each segment include TAC, other cost of revenue, 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. |
| (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 particular segment. |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Capital expenditures, net: |
||||||||||||||||
|
Americas |
$ | 85,805 | $ | 133,101 | $ | 226,680 | $ | 372,451 | ||||||||
|
EMEA |
4,192 | 11,881 | 15,591 | 47,012 | ||||||||||||
|
Asia Pacific |
8,906 | 18,892 | 21,787 | 47,222 | ||||||||||||
|
Total capital expenditures, net |
$ | 98,903 | $ | 163,874 | $ | 264,058 | $ | 466,685 | ||||||||
|
|
||||||||
| December 31, 2009 |
September 30, 2010 |
|||||||
|
Property and equipment, net: |
||||||||
|
Americas |
$ | 1,314,712 | $ | 1,405,081 | ||||
|
EMEA |
40,311 | 62,370 | ||||||
|
Asia Pacific |
71,839 | 81,994 | ||||||
|
Total property and equipment, net |
$ | 1,426,862 | $ | 1,549,445 | ||||
The following table presents revenue for groups of similar services (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Marketing services: |
||||||||||||||||
|
Owned and Operated sites |
$ | 851,382 | $ | 876,596 | $ | 2,581,445 | $ | 2,632,467 | ||||||||
|
Affiliate sites |
525,966 | 557,232 | 1,556,934 | 1,662,351 | ||||||||||||
|
Marketing services |
1,377,348 | 1,433,828 | 4,138,379 | 4,294,818 | ||||||||||||
|
Fees |
198,051 | 167,375 | 589,959 | 504,724 | ||||||||||||
|
Total revenue |
$ | 1,575,399 | $ | 1,601,203 | $ | 4,728,338 | $ | 4,799,542 | ||||||||
|
|||
Note 13 INCOME TAXES
The effective tax rates for the three and nine months ended September 30, 2010 were 23 percent and 24 percent, respectively, compared to 39 percent and 41 percent for the same periods in 2009. The effective tax rates for the three and nine months ended September 30, 2010 differ from the statutory federal income tax rate of 35 percent due to the reduction of the Company's reserves for tax uncertainties and the usage of loss carryforwards to offset the tax on the gains from sales of Zimbra, Inc. and HotJobs. In addition to those recognized benefits, the effective tax rate differs from the statutory rate as a result of several factors, including state taxes, the effect of non-U.S. operations, and non-deductible stock-based compensation expense. The effective tax rates for the three and nine months ended September 30, 2010 differed from the rates for the same periods in 2009 as a result of the same factors.
During the quarter ended June 30, 2010, the U.S. Internal Revenue Service (the "IRS") completed its field examination of the Company's 2005 and 2006 tax returns and issued notices of proposed adjustment. The Company reached an agreement with the IRS in connection with several of the adjustments and adjusted its reserves accordingly. There are other proposed adjustments, including an intercompany transfer pricing matter which could have a significant impact on the Company's tax liability in future years if not resolved favorably, that the Company has not agreed to and is contesting through the administrative process. During the quarter ended September 30, 2010, the IRS commenced an examination of the Company's 2007 and 2008 tax returns. The Company believes its existing reserves for all tax matters are adequate. During the quarter ended September 30, 2010, the Company also filed with the IRS amended federal tax returns for its fiscal years 2000 to 2008, to elect foreign tax credits for foreign taxes paid versus the previous election to deduct foreign taxes from taxable income, reducing income taxes payable by $102 million. The Company's tax provisions for all years had been computed on the basis of foreign tax credits, and differences between book and tax treatment were charged to additional paid-in capital due to the interaction of stock option deductions and the foreign tax credit computations. Accordingly, the $102 million reduction in income taxes payable has been reflected as a credit to additional paid-in capital.
The Company's gross amount of unrecognized tax benefits as of September 30, 2010 is $634 million, of which $484 million is recorded on the condensed consolidated balance sheets. In the nine months ended September 30, 2010, the Company reached an agreement with the IRS in connection with several adjustments to prior years' tax returns and this agreement resulted in a reduction to the Company's gross unrecognized tax benefits of $312 million. Of this $312 million reduction in unrecognized tax benefits, $160 million resulted in an effective tax rate benefit during the nine months ended September 30, 2010, of which $81 million relates to the three months ended March 31, 2010 and $79 million relates to the three months ended September 30, 2010. The reduction to the gross unrecognized tax benefits has been partially offset by increases from current year tax positions. In total, the gross unrecognized tax benefits as of September 30, 2010 decreased by $260 million from the recorded balance as of December 31, 2009.
The Company is in various stages of the examination and appeals process in connection with all of its tax audits worldwide and it is difficult to determine when these examinations will be settled. In addition, the Company is working to complete a pre-filing agreement with the IRS for its 2009 U.S. Federal income tax return. As a result of all of the above, 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 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, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Employee severance pay and related costs |
$ | 3,505 | $ | (215 | ) | $ | 35,703 | $ | 735 | |||||||
|
Non-cancelable lease, contract termination, and other charges |
13,184 | 5,973 | 58,389 | 19,487 | ||||||||||||
|
Sub-total before reversal of stock-based compensation expense |
16,689 | 5,758 | 94,092 | 20,222 | ||||||||||||
|
Reversal of stock-based compensation expense for forfeitures |
— | — | (7,600 | ) | — | |||||||||||
|
Restructuring charges, net |
$ | 16,689 | $ | 5,758 | $ | 86,492 | $ | 20,222 | ||||||||
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, 2009, the Company incurred total pre-tax cash charges of approximately $13 million and $60 million, respectively, in severance, facility, and other restructuring costs related to the Q4'08 restructuring plan. Net charges under the Q4'08 restructuring plan relating to the Americas segment were $11 million and $57 million for the three and nine months ended September 30, 2009, respectively. Net charges under the Q4'08 restructuring plan relating to the EMEA segment were $2 million and $3 million for the three and nine months ended September 30, 2009, respectively. 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 restructuring 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.
Q2'09 Restructuring Plan. During the second quarter of 2009, the Company implemented new cost reduction initiatives to further reduce the Company's worldwide workforce by approximately 5 percent. During the three and nine months ended September 30, 2009, the Company incurred total pre-tax cash charges of approximately $4 million and $35 million in severance and other related costs related to the Q2'09 restructuring plan. For the nine months ended September 30, 2009, the pre-tax cash charges were offset by an $8 million reduction related to non-cash stock-based compensation expense reversals for unvested stock awards that were forfeited. Net charges under the Q2'09 restructuring plan relating to the Americas segment were $3 million and $19 million for the three and nine months ended September 30, 2009, respectively. Net charges under the Q2'09 restructuring plan relating to the EMEA segment were $1 million and $7 million for the three and nine months ended September 30, 2009, respectively. Net charges under the Q2'09 restructuring plan relating to the Asia Pacific segment were $0 and $1 million for the three and nine months ended September 30, 2009, respectively. During the three and nine months ended September 30, 2010, the Company incurred insignificant charges related to the Q2'09 restructuring plan.
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, an 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 cash 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.
Restructuring Accruals. As of December 31, 2009 and September 30, 2010, the aggregate outstanding restructuring liability related to the cost reduction initiatives was $79 million and $61 million, respectively. Of the $61 million restructuring liability as of September 30, 2010, $7 million relates to employee severance pay expenses which the Company expects to substantially pay out by the end of the second quarter of 2011, and $54 million relates 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 activity in the Company's restructuring accruals for the nine months ended September 30, 2010 is summarized as follows (in thousands):
| Q4'08 Restructuring Plan |
Q2'09 Restructuring Plan |
Q4'09 Restructuring Charges |
Total | |||||||||||||
|
Balance as of January 1, 2010 |
$ | 59,965 | $ | 4,302 | $ | 14,765 | $ | 79,032 | ||||||||
|
Employee severance pay and related costs |
389 | 313 | 928 | 1,630 | ||||||||||||
|
Non-cancelable lease, contract termination, and other charges |
18,511 | — | 625 | 19,136 | ||||||||||||
|
Other non-cash charges |
72 | — | 2,725 | 2,797 | ||||||||||||
|
Reversal of previous charges |
(2,446 | ) | (425 | ) | (470 | ) | (3,341 | ) | ||||||||
|
Restructuring charges, net for the nine months ended September 30, 2010 |
$ | 16,526 | $ | (112 | ) | $ | 3,808 | $ | 20,222 | |||||||
|
Cash paid |
(24,966 | ) | (3,105 | ) | (6,971 | ) | (35,042 | ) | ||||||||
|
Non-cash adjustments |
781 | (505 | ) | (3,632 | ) | (3,356 | ) | |||||||||
|
Balance as of September 30, 2010 |
$ | 52,306 | $ | 580 | $ | 7,970 | $ | 60,856 | ||||||||
Restructuring accruals by segment consisted of the following (in thousands):
| December 31, 2009 |
September 30, 2010 |
|||||||
|
Americas |
$ | 52,860 | $ | 46,449 | ||||
|
EMEA |
25,869 | 14,341 | ||||||
|
Asia Pacific |
303 | 66 | ||||||
|
Total restructuring accruals |
$ | 79,032 | $ | 60,856 | ||||
|
|||
Note 15 SEARCH AGREEMENT WITH MICROSOFT CORPORATION
On December 4, 2009, the Company entered into a Search and Advertising Services and Sales Agreement ("Search Agreement") with Microsoft Corporation ("Microsoft") under which Microsoft will be the Company's exclusive platform technology provider for algorithmic and paid search services and non-exclusive provider for contextual advertising. 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 the transitioned markets the Company will be entitled to receive 88 percent of the net revenue generated from Microsoft's services on Yahoo! Properties (the "Revenue Share Rate") and the Company is also entitled to receive its share (at the Revenue Share Rate) of the net revenue generated from Microsoft's services on Affiliate sites after the Affiliate's share of net revenue is deducted. 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 its share (at the Revenue Share Rate) of the net revenue generated from Microsoft's services on Affiliate sites after the Affiliate's share of net 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.
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. From February 23, 2010 until the applicable services are fully transitioned to Microsoft, Microsoft will also reimburse the Company for the costs of running its algorithmic and paid search services subject to specified exclusions and limitations. These search operating cost reimbursements and certain employee retention costs are separate from and in addition to the $150 million of transition cost reimbursement payments.
The global transition of the Company's algorithmic and paid search platforms to Microsoft and migration of its paid search advertisers and publishers is expected to take up to 24 months from February 2010, when the Company commenced implementation of the Search Agreement, and will be done on a market by market basis. The Company began reflecting reimbursements from Microsoft for transition costs and the cost of running its algorithmic and paid search services during the quarter ended March 31, 2010. Based on the Company's current levels of revenue and operating expenses, it expects the Search Agreement, when fully implemented, to have a positive impact on its operating income and to result in capital expenditures savings.
The Company's results for the three and nine months ended September 30, 2010 reflect $81 million and $202 million, respectively, in search operating cost reimbursements from Microsoft under the Search Agreement. Search operating cost reimbursements will continue until the Company has fully transitioned to Microsoft's search platform. As the Company transitions each market, search operating cost reimbursements will decline and the underlying expenses will be removed from the Company's cost structure.
The Company's results for the three and nine months ended September 30, 2010 also reflect transition cost reimbursements from Microsoft under the Search Agreement, which were equal to the transition costs of $18 million and $60 million, respectively, incurred by Yahoo! related to the Search Agreement in the three and nine months ended September 30, 2010. In addition, in the nine months ended September 30, 2010, $43 million was recorded for reimbursement of transition costs incurred in 2009, $15 million for employee retention costs incurred in 2010, and $5 million for employee retention costs incurred in 2009. The 2009 transition cost reimbursements were recorded in 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. In the future, quarterly transition cost reimbursements are expected to continue to be roughly equal to quarterly transition costs.
Reimbursement receivables are recorded as the reimbursable costs are incurred and are applied against the operating expense categories in which the costs were incurred. As of September 30, 2010, a total of $325 million of reimbursable expenses had been incurred by the Company related to the Search Agreement. Of that amount, $281 million had been received from Microsoft and $44 million was classified as part of prepaid expenses and other current assets on the Company's condensed consolidated balance sheets as of September 30, 2010.
|
|||
Revenue Recognition. In October 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standard for multiple deliverable revenue arrangements, which provided updated guidance on whether multiple deliverables exist, how deliverables in an arrangement should be separated, and how consideration should be allocated. This standard eliminates the use of the residual method and will require arrangement consideration to be allocated based on the relative selling price for each deliverable. The selling price for each arrangement deliverable can be established based on vendor specific objective evidence ("VSOE") and third-party evidence ("TPE") if VSOE is not available. The new standard provides additional flexibility to utilize an estimate of selling price ("ESP") if neither VSOE nor TPE is available.
The Company elected to early adopt this accounting standard on January 1, 2010 on a prospective basis for applicable transactions originating or materially modified after December 31, 2009. The adoption of this standard did not have a significant impact on the Company's revenue recognition for multiple deliverable arrangements. Upon adoption, the selling prices for certain custom advertising solutions may use the best estimate of selling price as provided under the new standard. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, cash flows, or results of operations for the three and nine months ended September 30, 2010.
The Company's revenue is derived principally from services, which comprise marketing services for advertisers and publishers and offerings to users. The Company classifies this revenue as marketing services and fees.
In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the related fee is reasonably assured. The Company's arrangements generally do not include a provision for cancellation, termination, or refunds that would significantly impact revenue recognition.
Marketing services revenue is generated from several offerings including the display of graphical advertisements ("display advertising"), the display of text-based links to an advertiser's Website ("search advertising"), listing-based services, and commerce-based transactions.
The Company recognizes revenue from display advertising on Yahoo! Properties as "impressions" are delivered. An "impression" is delivered when an advertisement appears in pages viewed by users. Arrangements for these services generally have terms of up to one year and in some cases the terms may be up to three years.
The Company offers customized display advertising solutions to advertisers. These customized display advertising solutions combine the Company's standard display advertising with customized content, customer insights, and campaign analysis. Due to the unique nature of these products, the Company may not be able to establish selling prices based on historical stand-alone sales or third party evidence; therefore, the Company may use its best estimate to establish selling prices. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as class of advertiser, size of transaction, seasonality, margin objectives, observed pricing trends, available online inventory, industry pricing strategies, and market conditions. The Company believes the use of the best estimates of selling price will allow revenue recognition in a manner consistent with the underlying economics of the transaction.
The Company also recognizes revenue from search advertising on Yahoo! Properties. Search advertising revenue is recognized as "click-throughs" occur. A "click-through" occurs when a user clicks on an advertiser's search result listing.
Marketing services revenue also includes listings and transaction revenue. Listings revenue is generated from a variety of consumer and business listings-based services, including classified advertising such as Yahoo! Autos, Yahoo! Real Estate, and other services. The Company recognizes listings revenue when the services are performed. Transaction revenue is generated from facilitating commercial transactions through Yahoo! Properties, principally from Small Business, Yahoo! Travel and Yahoo! Shopping. The Company recognizes transaction revenue when there is evidence that qualifying transactions have occurred (for example, when travel arrangements are booked through Yahoo! Travel).
In addition to delivering search and display advertising on Yahoo! Properties, the Company also generates revenue from search and/or display advertising offerings on Affiliate sites. The Company pays Affiliates for the revenue generated from the display of these advertisements on the Affiliates' Websites. These payments are called traffic acquisition costs ("TAC"). The revenue derived from these arrangements that involve traffic supplied by Affiliates is reported gross of the payment to Affiliates. This revenue is reported gross due to the fact that the Company is the primary obligor to the advertisers who are the customers of the advertising service.
Fees revenue consists of revenue generated from a variety of consumer and business fee-based services, including Internet broadband services, royalties received from joint venture partners, and premium mail, as well as services for small businesses. The Company recognizes fees revenue when the services are performed.
The Company accounts for cash consideration given to customers, for which it does not receive a separately identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue rather than as an expense. Cash consideration received in an arrangement with a provider may require consideration of classification of amounts received as revenue or a reimbursement of costs incurred. Additionally, the Company reports revenue for which it is the primary obligor in the arrangement and for which it provided a product or service at the gross amount.
Current deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition. Long-term deferred revenue includes amounts received from customers for which services will not be delivered within the next 12 months.
|
|||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Basic: |
||||||||||||||||
|
Numerator: |
||||||||||||||||
|
Net income attributable to Yahoo! Inc |
$ | 186,093 | $ | 396,131 | $ | 445,038 | $ | 919,643 | ||||||||
|
Less: Net income allocated to participating securities |
(166 | ) | (41 | ) | (509 | ) | (156 | ) | ||||||||
|
Net income attributable to Yahoo! Inc. common stockholders — basic |
$ | 185,927 | $ | 396,090 | $ | 444,529 | $ | 919,487 | ||||||||
|
Denominator: |
||||||||||||||||
|
Weighted average common shares |
1,401,961 | 1,333,753 | 1,396,090 | 1,370,145 | ||||||||||||
|
Net income attributable to Yahoo! Inc. common stockholders per share — basic |
$ | 0.13 | $ | 0.30 | $ | 0.32 | $ | 0.67 | ||||||||
|
Diluted: |
||||||||||||||||
|
Numerator: |
||||||||||||||||
|
Net income attributable to Yahoo! Inc. |
$ | 186,093 | $ | 396,131 | $ | 445,038 | $ | 919,643 | ||||||||
|
Less: Net income allocated to participating securities |
(21 | ) | (37 | ) | (47 | ) | (77 | ) | ||||||||
|
Less: Effect of dilutive securities issued by equity investees |
(514 | ) | (653 | ) | (314 | ) | (2,018 | ) | ||||||||
|
Net income attributable to Yahoo! Inc. common stockholders — diluted |
$ | 185,558 | $ | 395,441 | $ | 444,677 | $ | 917,548 | ||||||||
|
Denominator: |
||||||||||||||||
|
Denominator for basic calculation |
1,401,961 | 1,333,753 | 1,396,090 | 1,370,145 | ||||||||||||
|
Weighted average effect of Yahoo! Inc. dilutive securities: |
||||||||||||||||
|
Restricted stock and restricted stock units |
12,746 | 5,068 | 11,555 | 6,236 | ||||||||||||
|
Stock options and employee stock purchase plan |
10,147 | 4,273 | 7,575 | 5,874 | ||||||||||||
|
Denominator for diluted calculation |
1,424,854 | 1,343,094 | 1,415,220 | 1,382,255 | ||||||||||||
|
Net income attributable to Yahoo! Inc. common stockholders per share — diluted |
$ | 0.13 | $ | 0.29 | $ | 0.31 | $ | 0.66 | ||||||||
|
| December 31, 2009 |
September 30, 2010 |
Percent Ownership of Common Stock |
||||||||||
|
Alibaba Group |
$ | 2,167,007 | $ | 2,225,928 | 43 | % | ||||||
|
Yahoo Japan |
1,329,281 | 1,557,585 | 35 | % | ||||||||
|
Total |
$ | 3,496,288 | $ | 3,783,513 | ||||||||
|
Carrying value of investment in Alibaba Group |
$ | 2,225,928 | ||
|
Proportionate share of Alibaba Group stockholders' equity |
1,590,374 | |||
|
Excess of carrying value of investment over proportionate share of Alibaba Group's stockholders' equity(*) |
$ | 635,554 | ||
| (*) |
The excess carrying value has been primarily assigned to goodwill. |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, 2009 |
June 30, 2010 |
June 30, 2009 |
June 30, 2010 |
|||||||||||||
|
Operating data: |
||||||||||||||||
|
Revenue |
$ | 194,079 | $ | 348,105 | $ | 503,355 | $ | 903,872 | ||||||||
|
Gross profit |
$ | 142,178 | $ | 259,465 | $ | 360,793 | $ | 679,539 | ||||||||
|
Income (loss) from operations(*) |
$ | 2,756 | $ | 62,570 | $ | (40,920 | ) | $ | (71,004 | ) | ||||||
|
Net income (loss) |
$ | 19,776 | $ | 50,237 | $ | (26,683 | ) | $ | (49,975 | ) | ||||||
|
Net income (loss) attributable to Alibaba Group |
$ | 9,555 | $ | 35,917 | $ | (54,956 | ) | $ | (88,719 | ) | ||||||
| September 30, 2009 |
June 30, 2010 |
|||||||||||||||
|
Balance sheet data: |
||||||||||||||||
|
Current assets |
$ | 3,191,097 | $ | 3,968,545 | ||||||||||||
|
Long-term assets |
$ | 2,308,099 | $ | 2,326,339 | ||||||||||||
|
Current liabilities |
$ | 1,559,975 | $ | 2,299,311 | ||||||||||||
|
Long-term liabilities |
$ | 24,082 | $ | 52,363 | ||||||||||||
|
Non-voting participating redeemable shares |
$ | 1,733 | $ | 768 | ||||||||||||
|
Noncontrolling interests |
$ | 185,055 | $ | 243,042 | ||||||||||||
| (*) |
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. 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. |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, 2009 |
June 30, 2010 |
June 30, 2009 |
June 30, 2010 |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Operating data: |
||||||||||||||||
|
Revenue |
$ | 776,208 | $ | 854,726 | $ | 2,358,466 | $ | 2,645,443 | ||||||||
|
Gross profit |
$ | 644,205 | $ | 685,605 | $ | 1,983,975 | $ | 2,139,644 | ||||||||
|
Income from operations |
$ | 351,469 | $ | 398,735 | $ | 1,076,054 | $ | 1,230,947 | ||||||||
|
Net income |
$ | 198,090 | $ | 237,492 | $ | 599,376 | $ | 730,296 | ||||||||
|
Net income attributable to Yahoo Japan |
$ | 197,341 | $ | 236,129 | $ | 595,890 | $ | 725,754 | ||||||||
| September 30, 2009 |
June 30, 2010 |
|||||||||||||||
| (in thousands) | ||||||||||||||||
|
Balance sheet data: |
||||||||||||||||
|
Current assets |
$ | 1,599,624 | $ | 2,130,670 | ||||||||||||
|
Long-term assets |
$ | 2,395,863 | $ | 2,524,217 | ||||||||||||
|
Current liabilities |
$ | 997,722 | $ | 1,003,322 | ||||||||||||
|
Long-term liabilities |
$ | 3,556 | $ | 28,964 | ||||||||||||
|
Noncontrolling interests |
$ | 26,662 | $ | 26,195 | ||||||||||||
|
|||
| December 31, 2009 | September 30, 2010 | |||||||||||||||
| Net | Gross Carrying Amount |
Accumulated Amortization(*) |
Net | |||||||||||||
|
Customer and advertiser related relationships |
$ | 83,232 | $ | 131,598 | $ | (64,912 | ) | $ | 66,686 | |||||||
|
Developed technology and patents |
239,285 | 384,729 | (213,846 | ) | 170,883 | |||||||||||
|
Trade names, trademarks, and domain names |
33,366 | 76,777 | (48,932 | ) | 27,845 | |||||||||||
|
Total intangible assets, net |
$ | 355,883 | $ | 593,104 | $ | (327,690 | ) | $ | 265,414 | |||||||
| (*) |
Foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities, totaled approximately $17 million as of September 30, 2010. |
|
|||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Interest and investment income |
$ | 4,822 | $ | 5,489 | $ | 16,310 | $ | 17,669 | ||||||||
|
Gain on sale of marketable equity securities |
98,167 | — | 164,851 | — | ||||||||||||
|
Gain on sale of Zimbra, Inc. |
— | — | — | 66,130 | ||||||||||||
|
Gain on sale of HotJobs |
— | 186,345 | — | 186,345 | ||||||||||||
|
Other |
2,401 | (483 | ) | 1,199 | 20,123 | |||||||||||
|
Total other income, net |
$ | 105,390 | $ | 191,351 | $ | 182,360 | $ | 290,267 | ||||||||
|
|||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Net income |
$ | 187,816 | $ | 398,259 | $ | 449,551 | $ | 926,681 | ||||||||
|
Change in net unrealized gains (losses), net on available-for-sale securities, net of tax and reclassification adjustments |
5,707 | (1,608 | ) | (1,694 | ) | 4,140 | ||||||||||
|
Foreign currency translation adjustments |
87,233 | 201,640 | 185,002 | 30,940 | ||||||||||||
|
Other comprehensive income |
92,940 | 200,032 | 183,308 | 35,080 | ||||||||||||
|
Comprehensive income |
280,756 | 598,291 | 632,859 | 961,761 | ||||||||||||
|
Comprehensive income attributable to noncontrolling interests |
(1,723 | ) | (2,128 | ) | (4,513 | ) | (7,038 | ) | ||||||||
|
Comprehensive income attributable to Yahoo! Inc. |
$ | 279,033 | $ | 596,163 | $ | 628,346 | $ | 954,723 | ||||||||
| December 31, 2009 |
September 30, 2010 |
|||||||
|
Unrealized gains on available-for-sale securities, net of tax |
$ | 4,921 | $ | 9,061 | ||||
|
Foreign currency translation, net of tax |
364,315 | 395,255 | ||||||
|
Accumulated other comprehensive income |
$ | 369,236 | $ | 404,316 | ||||
|
| September 30, 2010 | ||||||||||||||||
| Gross Amortized Costs |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
|
Government and agency securities |
$ | 1,105,096 | $ | 1,790 | $ | (108 | ) | $ | 1,106,778 | |||||||
|
Municipal bonds |
18,476 | 21 | — | 18,497 | ||||||||||||
|
Corporate debt securities, commercial paper, and bank certificates of deposit |
712,410 | 2,343 | (169 | ) | 714,584 | |||||||||||
|
Corporate equity securities |
2,597 | — | (1,289 | ) | 1,308 | |||||||||||
|
Total investments in available-for-sale securities |
$ | 1,838,579 | $ | 4,154 | $ | (1,566 | ) | $ | 1,841,167 | |||||||
| December 31, 2009 | ||||||||||||||||
| Gross Amortized Costs |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
|
Government and agency securities |
$ | 1,781,674 | $ | 868 | $ | (1,825 | ) | $ | 1,780,717 | |||||||
|
Municipal bonds |
465,823 | 739 | (3 | ) | 466,559 | |||||||||||
|
Corporate debt securities, commercial paper, and bank certificates of deposit |
995,291 | 1,305 | (1,298 | ) | 995,298 | |||||||||||
|
Corporate equity securities |
2,597 | — | — | 2,597 | ||||||||||||
|
Total investments in available-for-sale securities |
$ | 3,245,385 | $ | 2,912 | $ | (3,126 | ) | $ | 3,245,171 | |||||||
| December 31, 2009 |
September 30, 2010 |
|||||||
|
Reported as: |
||||||||
|
Short-term marketable debt securities |
$ | 2,015,655 | $ | 1,203,850 | ||||
|
Long-term marketable debt securities |
1,226,919 | 636,009 | ||||||
|
Other assets |
2,597 | 1,308 | ||||||
|
Total |
$ | 3,245,171 | $ | 1,841,167 | ||||
| December 31, 2009 |
September 30, 2010 |
|||||||
|
Due within one year |
$ | 2,015,655 | $ | 1,203,850 | ||||
|
Due after one year through five years |
1,226,919 | 636,009 | ||||||
|
Total available-for-sale marketable debt securities |
$ | 3,242,574 | $ | 1,839,859 | ||||
| September 30, 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 |
$ | 211,690 | $ | (108 | ) | $ | — | $ | — | $ | 211,690 | $ | (108 | ) | ||||||||||
|
Corporate debt securities and commercial paper |
125,777 | (169 | ) | — | — | 125,777 | (169 | ) | ||||||||||||||||
|
Corporate equity securities |
1,308 | (1,289 | ) | — | — | 1,308 | (1,289 | ) | ||||||||||||||||
|
Total investments in available-for-sale securities |
$ | 338,775 | $ | (1,566 | ) | $ | — | $ | — | $ | 338,775 | $ | (1,566 | ) | ||||||||||
| December 31, 2009 | ||||||||||||||||||||||||
| 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 |
$ | 886,657 | $ | (1,825 | ) | $ | — | $ | — | $ | 886,657 | $ | (1,825 | ) | ||||||||||
|
Municipal bonds |
8,760 | (3 | ) | — | — | 8,760 | (3 | ) | ||||||||||||||||
|
Corporate debt securities and commercial paper |
352,031 | (1,298 | ) | — | — | 352,031 | (1,298 | ) | ||||||||||||||||
|
Total investments in available-for-sale securities |
$ | 1,247,448 | $ | (3,126 | ) | $ | — | $ | — | $ | 1,247,448 | $ | (3,126 | ) | ||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||
|
Assets |
Level 1 | Level 2 | Total | |||||||||
|
Money market funds(1) |
$ | 355,474 | $ | — | $ | 355,474 | ||||||
|
Available-for-sale securities: |
||||||||||||
|
Government and agency securities(1) |
— | 1,419,802 | 1,419,802 | |||||||||
|
Municipal bonds(1) |
— | 18,497 | 18,497 | |||||||||
|
Commercial paper and bank certificates of deposit(1) |
— | 206,596 | 206,596 | |||||||||
|
Corporate debt securities(1) |
— | 573,715 | 573,715 | |||||||||
|
Available-for-sale securities at fair value |
$ | 355,474 | $ | 2,218,610 | $ | 2,574,084 | ||||||
|
Corporate equity securities(2) |
1,308 | — | 1,308 | |||||||||
|
Total assets at fair value |
$ | 356,782 | $ | 2,218,610 | $ | 2,575,392 | ||||||
| (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. |
| Fair Value Measurements at Reporting Date Using | ||||||||||||
|
Assets |
Level 1 | Level 2 | Total | |||||||||
|
Money market funds(1) |
$ | 364,602 | $ | — | $ | 364,602 | ||||||
|
Available-for-sale securities: |
||||||||||||
|
Government and agency securities(1) |
— | 1,938,608 | 1,938,608 | |||||||||
|
Municipal bonds(1) |
— | 470,031 | 470,031 | |||||||||
|
Commercial paper and bank certificates of deposit(1) |
— | 445,786 | 445,786 | |||||||||
|
Corporate debt securities(1) |
— | 641,104 | 641,104 | |||||||||
|
Available-for-sale securities at fair value |
$ | 364,602 | $ | 3,495,529 | $ | 3,860,131 | ||||||
|
Corporate equity securities(2) |
2,597 | — | 2,597 | |||||||||
|
Total assets at fair value |
$ | 367,199 | $ | 3,495,529 | $ | 3,862,728 | ||||||
| (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. |
|
|||
| Shares | Weighted Average Exercise Price per Share |
|||||||
|
Outstanding at December 31, 2009 |
119,593 | $ | 25.74 | |||||
|
Options granted |
9,329 | $ | 14.89 | |||||
|
Options exercised(*) |
(4,912 | ) | $ | 9.07 | ||||
|
Options expired |
(26,575 | ) | $ | 38.75 | ||||
|
Options cancelled/forfeited |
(8,385 | ) | $ | 18.29 | ||||
|
Outstanding at September 30, 2010 |
89,050 | $ | 22.34 | |||||
| (*) |
The Company issued new shares to satisfy stock option exercises. |
| Stock Options | Purchase Plan(*) | |||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
|
Risk-free interest rate |
2.0 | % | 1.6 | % | 2.9 | % | 2.3 | % | ||||||||
|
Expected volatility |
41.8 | % | 36.1 | % | 58.9 | % | 68.1 | % | ||||||||
|
Expected life (in years) |
4.00 | 4.5 | 0.83 | 0.11 | ||||||||||||
| Stock Options | Purchase Plan(*) | |||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2009 |
September 30, 2010 |
September 30, 2009 |
September 30, 2010 |
|||||||||||||
|
Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
|
Risk-free interest rate |
1.9 | % | 2.0 | % | 2.9 | % | 2.3 | % | ||||||||
|
Expected volatility |
49.1 | % | 34.7 | % | 61.1 | % | 68.7 | % | ||||||||