Quarterly Report


Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x

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

For the quarterly period ended June 30, 2015

or

 

¨

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

For the transition period from                to              

Commission File Number 000-28018

 

 

Yahoo! Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   77-0398689
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

701 First Avenue

Sunnyvale, California 94089

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (408) 349-3300

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

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

 

Class

 

Outstanding at July 31, 2015

Common Stock, $0.001 par value

  941,390,842

 

 

 


Table of Contents

YAHOO! INC.

TABLE OF CONTENTS

 

 

PART I

 

 

FINANCIAL INFORMATION

 

    

 

3

 

  

 

Item 1.  

Condensed Consolidated Financial Statements (unaudited)

     3   
 

 

Condensed Consolidated Balance Sheets as of December 31, 2014 and June 30, 2015 (unaudited)

     3   
 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2015 (unaudited)

     4   
 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2015 (unaudited)

     5   
 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2015 (unaudited)

     6   
 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

     7   

 

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

     51   

 

Item 4.

 

 

Controls and Procedures

     53   

 

PART II

 

 

 

OTHER INFORMATION

 

    

 

54

 

  

 

 

Item 1.

 

 

Legal Proceedings

     54   

 

Item 1A.    

 

 

Risk Factors

     54   

 

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

     69   

 

Item 3.

 

 

Defaults Upon Senior Securities

     69   

 

Item 4.

 

 

Mine Safety Disclosures

     69   

 

Item 5.

 

 

Other Information

     69   

 

Item 6.

 

 

Exhibits

     69   
 

 

Signatures

     70   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

 

 

Item 1. Condensed Consolidated Financial Statements

(unaudited)

YAHOO! INC.

Condensed Consolidated Balance Sheets

 

    

December 31,

 

        

June 30,

 

 
      2014           2015  
     (Unaudited, in thousands  
    

 

except par values)

 

 

 
ASSETS        
Current assets:        

Cash and cash equivalents

     $          2,664,098           $          1,188,169   

Short-term marketable securities

     5,327,412           4,636,152   

Accounts receivable, net

     1,032,704           985,105   

Prepaid expenses and other current assets

     673,504           771,506   
                   

Total current assets

     9,697,718           7,580,932   
Long-term marketable securities      2,230,892           1,169,671   
Property and equipment, net      1,487,684           1,524,539   
Goodwill      5,152,570           5,146,579   
Intangible assets, net      470,842           412,235   
Other long-term assets and investments      554,616           475,497   
Investment in Alibaba Group      39,867,789           31,555,927   
Investments in equity interests      2,489,578           2,326,436   
                   
Total assets      $        61,951,689           $        50,191,816   
                   
LIABILITIES AND EQUITY        
Current liabilities:        

Accounts payable

     $             238,018           $             301,433   

Income taxes payable related to sale of Alibaba Group ADSs

     3,282,293           -   

Other accrued expenses and current liabilities

     665,828           903,005   

Deferred revenue

     336,963           202,246   
                   

Total current liabilities

     4,523,102           1,406,684   
Convertible notes      1,170,423           1,201,540   
Long-term deferred revenue      20,774           23,442   
Other long-term liabilities      143,095           126,138   
Deferred tax liabilities related to investment in Alibaba Group      16,154,906           12,768,155   
Deferred and other long-term tax liabilities      1,153,797           1,102,007   
                   
Total liabilities      23,166,097           16,627,966   
                   
Commitments and contingencies (Note 12)        
Yahoo! Inc. stockholders’ equity:        

Common stock, $0.001 par value; 5,000,000 shares authorized; 949,771 shares issued and 936,838 shares outstanding as of December 31, 2014 and 956,999 shares issued and 939,850 shares outstanding as of June 30, 2015

     945           953   

Additional paid-in capital

     8,496,683           8,633,143   

Treasury stock at cost, 12,933 shares as of December 31, 2014 and 17,149 shares as of June 30, 2015

     (712,455        (913,515

Retained earnings

     8,937,036           8,936,682   

Accumulated other comprehensive income

     22,019,628           16,875,339   
                   

Total Yahoo! Inc. stockholders’ equity

     38,741,837           33,532,602   
Noncontrolling interests      43,755           31,248   
                   
Total equity      38,785,592           33,563,850   
                   
Total liabilities and equity      $        61,951,689           $        50,191,816   
                   

 

 

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

 

3


Table of Contents

YAHOO! INC.

Condensed Consolidated Statements of Operations

 

     Three Months Ended          Six Months Ended  
     June 30,          June 30,          June 30,          June 30,  
     

 

2014

 

         

 

2015

 

         

 

2014

 

         

 

2015

 

 
     (Unaudited, in thousands  
  

 

except per share amounts)

 

 

 
Revenue      $  1,084,191           $  1,243,265           $  2,216,921           $   2,469,235   
                                         
Operating expenses:                  

Cost of revenue — traffic acquisition costs

     43,826           200,230           89,735           383,369   

Cost of revenue — other

     295,786           295,932           589,389           581,195   

Sales and marketing

     253,198           274,304           555,523           549,661   

Product development

     291,778           306,428           560,042           633,175   

General and administrative

     154,881           180,595           319,504           354,108   

Amortization of intangibles

     15,164           19,982           33,504           40,055   

Gains on sales of patents

     (61,500        (9,100        (61,500        (11,100

Restructuring charges, net

     52,621           19,688           62,108           70,920   
                                         

Total operating expenses

     1,045,754           1,288,059           2,148,305           2,601,383   
                                         
Income (loss) from operations      38,437           (44,794        68,616           (132,148

Other expense, net

     (13,589        (11,741        (27,042        (42,804
                                         
Income (loss) before income taxes and earnings in equity interests      24,848           (56,535        41,574           (174,952
Provision for income taxes      (8,143        (58,495        (12,360        (17,595
Earnings in equity interests, net of tax      255,852           95,841           557,254           195,531   
                                         
Net income (loss)      272,557           (19,189        586,468           2,984   

Net income attributable to noncontrolling interests

     (2,850        (2,365        (5,183        (3,340
                                         
Net income (loss) attributable to Yahoo! Inc.      $     269,707           $      (21,554        $     581,285           $            (356
                                         
Net income (loss) attributable to Yahoo! Inc. common stockholders per share — basic      $           0.27           $          (0.02        $           0.58           $           (0.00
                                         
Net income (loss) attributable to Yahoo! Inc. common stockholders per share — diluted      $           0.26           $          (0.02        $           0.55           $           (0.00
                                         
Shares used in per share calculation — basic      999,765           937,569           1,004,828           936,159   
                                         
Shares used in per share calculation — diluted      1,014,692           937,569           1,023,056           936,159   
                                         
Stock-based compensation expense by function:                  

Cost of revenue — other

     $         5,356           $         7,200           $       30,007           $        13,209   

Sales and marketing

     31,233           39,978           81,907           78,099   

Product development

     39,507           50,762           53,434           98,983   

General and administrative

     26,349           27,190           46,278           50,535   

Restructuring charges, net

     -           -           -           2,705   

 

 

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

 

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YAHOO! INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

     Three Months Ended          Six Months Ended  
    

June 30,

 

        

June 30,

 

        

June 30,

 

        

June 30,

 

 
     

2014

 

         

2015

 

         

2014

 

         

2015

 

 
    

(Unaudited, in thousands)

 

 

 

Net income (loss)

 

     $       272,557           $         (19,189        $       586,468           $              2,984   
                                         
Available-for-sale securities:                  

Unrealized gains (losses) on available-for-sale securities, net of taxes of $(3,238) and $149,980 for the three months ended June 30, 2014 and 2015, respectively, and $(4,136) and $3,388,114 for the six months ended June 30, 2014 and 2015, respectively

 

     9,788           (212,465        16,516           (4,926,084

Reclassification adjustment for realized (gains) losses on available-for-sale securities included in net income, net of taxes of $65 and $49 for the three months ended June 30, 2014 and 2015, respectively, and $73 and $(2) for the six months ended June 30, 2014 and 2015, respectively

 

     (109        (81        (121        2   
                                         

Net change in unrealized gains on available-for-sale securities, net of tax

 

     9,679           (212,546        16,395           (4,926,082
                                         

Foreign currency translation adjustments (“CTA”):

 

                 

Foreign CTA gains (losses), net of taxes of $9,608 and $(128) for the three months ended June 30, 2014 and 2015, respectively, and $2,422 and $454 for the six months ended June 30, 2014 and 2015, respectively

 

     63,939           38,140           (82,918        (233,102

Net investment hedge CTA gains (losses), net of taxes of $7,130 and $(9,153) for the three months ended June 30, 2014 and 2015, respectively, and $15,562 and $(10,744) for the six months ended June 30, 2014 and 2015, respectively

 

     (11,862        15,404           (25,911        18,038   
                                         

Net foreign CTA losses, net of tax

 

     52,077           53,544           (108,829        (215,064
                                         

Cash flow hedges:

 

                 

Unrealized gains (losses) on cash flow hedges, net of taxes of $127 and $(1,065) for the three months ended June 30, 2014 and 2015, respectively, and $431 and $(689) for the six months ended June 30, 2014 and 2015, respectively

 

     (1,383        5,875           (1,889        (5,281

Reclassification adjustment for realized (gains) losses on cash flow hedges included in net income, net of taxes of $231 and $529 for the three months ended June 30, 2014 and 2015, respectively, and $504 and $718 for the six months ended June 30, 2014 and 2015, respectively

 

     (285        478           (739        2,138   
                                         

Net change in unrealized losses on cash flow hedges, net of tax

 

     (1,668        6,353           (2,628        (3,143
                                         

Other comprehensive income (loss)

 

     60,088           (152,649        (95,062        (5,144,289
                                         

Comprehensive income (loss)

 

     332,645           (171,838        491,406           (5,141,305

Less: comprehensive income attributable to noncontrolling interests

     (2,850        (2,365        (5,183        (3,340
                                         

Comprehensive income (loss) attributable to Yahoo! Inc.

 

     $       329,795           $       (174,203        $       486,223           $      (5,144,645
                                         

 

 

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

 

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Table of Contents

YAHOO! INC.

Condensed Consolidated Statements of Cash Flows

     Six Months Ended  
    

June 30,

 

        

June 30,

 

 
     

2014

 

         

2015

 

 
    

(Unaudited, in thousands)

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES:        

Net income

     $         586,468           $             2,984   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

       

Depreciation

     239,631           236,694   

Amortization of intangible assets

     64,763           68,524   

Accretion of convertible notes discount

     29,526           31,117   

Stock-based compensation expense

     211,626           243,531   

Non-cash restructuring reversals

     (7,031        (933

Loss from sales of investments, assets, and other, net

     18,667           44,847   

Gains on sales of patents

     (61,500        (11,100

Loss on Hortonworks warrants

     -           6,460   

Earnings in equity interests

     (557,254        (195,531

Tax benefits (detriments) from stock-based awards

     76,828           (3,617

Excess tax benefits from stock-based awards

     (79,100        (1,850

Deferred income taxes

     14,185           (13,218

Dividends received from equity investee

     83,685           141,670   

Changes in assets and liabilities, net of effects of acquisitions:

       

Accounts receivable

     154,129           32,881   

Prepaid expenses and other assets

     13,592           (90,078

Accounts payable

     (10,075        37,505   

Accrued expenses and other liabilities

     (202,142        255,678   

Incomes taxes payable related to sale of Alibaba Group ADSs

     -           (3,282,293

Deferred revenue

     (79,523        (132,790
                   

Net cash provided by (used in) operating activities

     496,475           (2,629,519
                   
CASH FLOWS FROM INVESTING ACTIVITIES:        

Acquisition of property and equipment, net

     (192,013        (290,363

Purchases of marketable securities

     (1,363,836        (2,326,886

Proceeds from sales of marketable securities

     380,954           473,775   

Proceeds from maturities of marketable securities

     690,018           3,584,596   

Acquisitions, net of cash acquired

     (21,661        (21,291

Proceeds from sales of patents

     1,500           20,000   

Purchases of intangible assets

     (2,174        (4,611

Proceeds from settlement of derivative hedge contracts

     173,258           64,767   

Payments for settlement of derivative hedge contracts

     (4,616        (3,882

Payments for equity investments in privately held companies

     (10,399        -   

Other investing activities, net

     (640        (153
                   

Net cash (used in) provided by investing activities

     (349,609        1,495,952   
                   
CASH FLOWS FROM FINANCING ACTIVITIES:        

Proceeds from issuance of common stock

     163,737           46,777   

Repurchases of common stock

     (1,168,206        (203,771

Excess tax benefits from stock-based awards

     79,100           1,850   

Tax withholdings related to net share settlements of restricted stock units

     (159,581        (149,960

Distributions to noncontrolling interests

     (22,344        (15,847

Other financing activities, net

     (6,130        (9,015
                   

Net cash used in financing activities

     (1,113,424        (329,966
                   
Effect of exchange rate changes on cash and cash equivalents      3,554           (12,396

Net change in cash and cash equivalents

     (963,004        (1,475,929
Cash and cash equivalents at beginning of period      2,077,590           2,664,098   
                   
Cash and cash equivalents at end of period      $      1,114,586           $      1,188,169   
                   

 

 

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

 

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YAHOO! INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1  The Company And Summary Of Significant Accounting Policies

 

The Company .  Yahoo! Inc., together with its consolidated subsidiaries (“Yahoo” or the “Company”), is a guide focused on informing, connecting, and entertaining its users. By creating highly personalized experiences for its users, the Company keeps people connected to what matters most to them, across devices and around the world. In turn, the Company creates value for advertisers by connecting them with the audiences that build their businesses. For advertisers, the opportunity to be a part of users’ digital habits across products and platforms is a powerful tool to engage audiences and build brand loyalty. Advertisers can build their businesses by advertising to targeted audiences on the Company’s online properties and services (“Yahoo Properties”) and through a distribution network of third-party entities (“Affiliates”) who integrate the Company’s advertising offerings into their websites or other offerings (“Affiliate sites”). The Company manages and measures its business geographically, principally in the Americas, EMEA (Europe, Middle East, and Africa) and Asia Pacific.

Basis of Presentation .  The condensed consolidated financial statements include the accounts of Yahoo! Inc. and its majority-owned or otherwise controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the condensed consolidated balance sheets. The Company has included the results of operations of acquired companies from the date of the acquisition. Beginning in the three months ended March 31, 2015, the Company classifies editorial costs as cost of revenue — other rather than including such costs in sales and marketing expense. To conform to the current period presentation, the Company reclassified $25 million and $37 million, respectively, in certain website editorial costs previously included in sales and marketing expense to cost of revenue — other for the three and six months ended June 30, 2014. Also, beginning in the three months ended March 31, 2015, the Company classifies non-data center facilities-related costs within general and administrative expense. To conform to the current period presentation, the Company reclassified $12 million and $25 million, respectively, in facilities-related costs previously included in product development expense and $15 million and $30 million, respectively, previously included in sales and marketing expense to general and administrative expense for the three and six months ended June 30, 2014. During the six months ended June 30, 2015, the Company identified measurement period adjustments of $11 million to previous purchase accounting estimates for acquisitions, which were primarily related to the finalization of tax and other adjustments. These adjustments were immaterial and applied retrospectively to the acquisition dates. Accordingly, the Company’s consolidated balance sheet as of December 31, 2014 has been updated to reflect the effects of the measurement period adjustments.

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

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue, the useful lives of long-lived assets including property and equipment and intangible assets, investment fair values, stock-based compensation, goodwill, income taxes, contingencies, and restructuring charges. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results may differ from these estimates.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2014 was derived from the Company’s audited financial statements for the year ended December 31, 2014, 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.

Cost of revenue — TAC . TAC consists of payments made to Affiliates and payments made to companies that direct consumer and business traffic to Yahoo Properties. TAC is either recorded as a reduction of revenue or as cost of revenue - TAC. TAC related to the Company’s Search and Advertising Sales Agreement (as amended, the “Search Agreement”) with Microsoft Corporation (“Microsoft”) is recorded as a reduction of revenue. See Note 17 — “Search Agreement With Microsoft Corporation” for a description of the Search Agreement and License Agreement with Microsoft. The Company also has an agreement to compensate a third party, Mozilla Corporation (“Mozilla”), to make the Company the default search provider on certain of Mozilla’s products in the United States. The Company records these payments as cost of revenue – TAC.

 

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Recent Accounting Pronouncements .  In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB voted to defer the effective date of ASU 2014-09. Accordingly, this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15, 2016. The Company plans to adopt this guidance on January 1, 2018. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on the Company’s financial position, results of operations and cash flows.

Note 2  Marketable Securities, Investments And Fair Value Disclosures

 

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

 

 

    December 31, 2014  
    

Cost

 

Basis

 

        

Gross

 

Unrealized

 

Gains

 

        

Gross

 

Unrealized

 

Losses

 

        

Estimated

 

 

Fair Value

 
Government and agency securities     $             850,712          $                      82          $                     (792       $             850,002   
Corporate debt securities, commercial paper, time deposits, and bank certificates of deposit     6,711,683          612          (4,653       6,707,642   
Alibaba Group equity securities     2,713,484          37,154,305          -          39,867,789   
Hortonworks equity securities     26,246          77,783          -          104,029   
Other corporate equity securities     230          430          -          660   
                                     

Total available-for-sale marketable securities 

    $        10,302,355          $        37,233,212          $                  (5,445       $        47,530,122   
                                     
                                             
    June 30, 2015  
    

Cost

 

Basis

 

        

Gross

 

Unrealized

 

Gains

 

        

Gross

 

Unrealized

 

Losses

 

        

Estimated

 

Fair Value

 

 
Government and agency securities     $             804,776          $                    378          $                       (41       $             805,113   
Corporate debt securities, commercial paper, time deposits, and bank certificates of deposit     5,002,096          721          (2,107       5,000,710   
Alibaba Group equity securities     2,713,484          28,842,443          -          31,555,927   
Hortonworks equity securities     26,246          71,130          -          97,376   
Other corporate equity securities     230          314          -          544   
                                     

Total available-for-sale marketable securities 

    $          8,546,832          $        28,914,986          $                  (2,148       $        37,459,670   
                                     
                                             

 

    

December 31,

 

        

June 30,

 

 
     

2014

 

         

2015

 

 
Reported as:        
Short-term marketable securities      $        5,327,412           $        4,636,152   
Long-term marketable securities      2,230,892           1,169,671   
Investment in Alibaba Group      39,867,789           31,555,927   
Other long-term assets and investments      104,029           97,920   
                   

Total

     $      47,530,122           $      37,459,670   
                   
                       

 

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Short-term, highly liquid investments of $2.0 billion and $518 million as of December 31, 2014 and June 30, 2015, respectively, 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 not material as the carrying value approximates estimated fair value because of the short maturity of those instruments. Realized gains and losses from sales of available-for-sale marketable debt securities were not material for both the three and six months ended June 30, 2014 and 2015.

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

 

    

December 31,

 

        

June 30,

 

 
     

2014

 

         

2015

 

 

Due within one year

 

     $         5,327,412           $         4,636,152   

Due after one year through five years

 

     2,230,892           1,169,671   
                   

Total available-for-sale marketable debt securities

 

     $         7,558,304           $         5,805,823   
                   
                       

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

 

    December 31, 2014  
    Less than 12 Months         12 Months or Longer         Total  
   

Fair

 

       

Unrealized

 

       

Fair

 

       

Unrealized

 

       

Fair

 

       

Unrealized

 

 
    

Value

 

        

Loss

 

        

Value

 

        

Loss

 

        

Value

 

        

Loss

 

 

Government and agency securities

 

    $ 744,948          $ (792       $ -          $ -          $ 744,948          $ (792

Corporate debt securities, commercial paper, and bank certificates of deposit

 

    2,601,288          (4,646       3,234          (7       2,604,522          (4,653
                                                         

Total available-for-sale marketable debt securities

    $       3,346,236          $           (5,438       $           3,234          $             (7       $       3,349,470          $           (5,445
                                                         
                                                                     

 

    June 30, 2015  
    Less than 12 Months         12 Months or Longer         Total  
   

Fair

 

       

Unrealized

 

       

Fair

 

       

Unrealized

 

       

Fair

 

       

Unrealized

 

 
    

Value

 

        

Loss

 

        

Value

 

        

Loss

 

        

Value

 

        

Loss

 

 

Government and agency securities

 

    $ 133,333          $ (41       $ -          $ -          $ 133,333          $ (41

Corporate debt securities, commercial paper, and bank certificates of deposit

 

    2,045,898          (2,107         -            -          2,045,898          (2,107
                                                         

Total available-for-sale marketable debt securities

 

    $       2,179,231          $           (2,148       $                  -          $                -          $       2,179,231          $           (2,148
                                                         
                                                                     

The Company’s investment portfolio includes equity securities of Alibaba Group Holding Limited (“Alibaba Group”) and Hortonworks, Inc. (“Hortonworks”), as well as liquid high-quality fixed income debt securities including government, agency and corporate debt, money market funds, and time deposits with financial institutions. The fair value of any debt or equity security will vary over time and is subject to a variety of market risks including: macro-economic, regulatory, industry, company performance, and systemic risks of the equity markets overall. Consequently, the carrying value of the Company’s investment portfolio will vary over time as the value of its investment changes. 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 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 value adversely impacted due to a

 

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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 the securities in an unrealized loss position. The Company expects to recover up to (or beyond) the initial cost of investment for securities held.

The following table sets forth the financial assets and liabilities, measured at fair value, by level within the fair value hierarchy as of December 31, 2014 (in thousands):

 

    Fair Value Measurements at Reporting Date Using  

Assets

 

 

Level 1

 

        

Level 2

 

        

Level 3

 

        

Total

 

 
Money market funds (1)     $ 373,822          $ -              $ -              $ 373,822   

Available-for-sale marketable debt securities:

 

 

 

Government and agency securities (1)

    -              850,002          -              850,002   

Commercial paper and bank certificates of deposit (1)

    -              3,602,321          -              3,602,321   

Corporate debt securities (1)

    -              3,327,017          -              3,327,017   

Time deposits (1)

    -              1,361,165          -              1,361,165   

Available-for-sale equity securities:

 

             

Other corporate equity securities (2)

    660          -              -              660   

Alibaba Group equity securities

 

    39,867,789          -              -              39,867,789   

Hortonworks equity securities (2)

    104,029          -              -              104,029   

Hortonworks warrants

 

    -              -              98,062          98,062   
Foreign currency derivative contracts (3)     -              202,928          -              202,928   
                                     

Financial assets at fair value

 

    $     40,346,300          $ 9,343,433          $ 98,062          $     49,787,795   
Liabilities              
Foreign currency derivative contracts (3)     -              (6,157       -              (6,157
                                     

Total financial assets and liabilities at fair value

    $     40,346,300          $       9,337,276          $       98,062          $     49,781,638   
                                     
                                             

The following table sets forth the financial assets and liabilities, measured at fair value, by level within the fair value hierarchy as of June 30, 2015 (in thousands):

 

     Fair Value Measurements at Reporting Date Using  

Assets

 

  

Level 1

 

         

Level 2

 

         

Level 3

 

         

Total

 

 
Money market funds (1)      $     403,419           $                 -               $           -               $     403,419   
Available-for-sale marketable debt securities:   

Government and agency securities (1)

     -               805,113           -               805,113   

Commercial paper and bank certificates of deposit (1)

     -               1,982,018           -               1,982,018   

Corporate debt securities (1)

     -               3,059,041           -               3,059,041   

Time deposits (1)

     -               73,988           -               73,988   
Available-for-sale equity securities:                  

Other corporate equity securities (2)

     544           -               -               544   

Alibaba Group equity securities

     31,555,927           -               -               31,555,927   

Hortonworks equity securities (2)

     97,376           -               -               97,376   
Hortonworks warrants      -               -               91,601           91,601   
Foreign currency derivative contracts (3)      -               181,196           -               181,196   
                                         

Financial assets at fair value

     $32,057,266           $      6,101,356           $      91,601           $38,250,223   
Liabilities                  
Foreign currency derivative contracts (3)      -               (9,278        -               (9,278
                                         

Total financial assets and liabilities at fair value

     $32,057,266           $      6,092,078           $      91,601           $38,240,945   
                                         
                                                 

(1) The money market funds, government and agency securities, commercial paper and bank certificates of deposit, corporate debt securities, and time deposits are classified as part of either cash and cash equivalents or short or long-term marketable securities on the condensed consolidated balance sheets.

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

(3) Foreign currency derivative contracts are classified as part of either other current or noncurrent assets or liabilities on the condensed consolidated balance sheets. The notional amounts of the foreign currency derivative contracts were: $2.1 billion, including contracts designated as net investment hedges of $1.6 billion, as of December 31, 2014; and $2.3 billion, including contracts designated as net investment hedges of $1.8 billion, as of June 30, 2015.

 

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The amount of cash and cash equivalents as of December 31, 2014 and June 30, 2015 included $702 million and $670 million, respectively, in cash.

The fair values of the Company’s Level 1 financial assets and liabilities are based on quoted prices in active markets for identical assets or liabilities. The fair values of the Company’s Level 2 financial assets and liabilities are obtained using quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices (e.g., interest rates and yield curves). The Company utilizes a pricing service to assist in obtaining fair value pricing for the marketable debt securities. The fair value of this Level 3 financial asset was determined using a Black-Scholes model.

Activity between Levels of the Fair Value Hierarchy

During the year ended December 31, 2014 and the six months ended June 30, 2015, the Company did not make any transfers between Level 1, Level 2, and Level 3 assets or liabilities.

Hortonworks Warrants

The estimated fair value of the Hortonworks warrants was $98 million and $92 million as of December 31, 2014 and June 30, 2015, respectively, which is included in other long-term assets and investments on our condensed consolidated balance sheets. During the three and six months ended June 30, 2015, the Company recorded a gain of $5 million and a loss of $6 million, respectively, due to the change in estimated fair value of the Hortonworks warrants during the respective periods, which was included within other expense, net in the Company’s condensed consolidated statements of operations. The fair value of the Company’s Level 3 financial asset was determined using a Black-Scholes model.

Assets and Liabilities at Fair Value on a Nonrecurring Basis

Convertible Senior Notes. In 2013, the Company issued $1.4375 billion aggregate principal amount of 0.00% Convertible Senior Notes due 2018 (the “Notes”). The Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked to market each period. The approximate estimated fair value of the Notes as of both December 31, 2014 and June 30, 2015 was $1.2 billion. The fair value of the Notes was determined on the basis of quoted market prices observable in the market and is considered Level 2 in the fair value hierarchy. See Note 11 — “Convertible Notes” for additional information related to the Notes.

Other Investments . As of December 31, 2014 and June 30, 2015, the Company held approximately $82 million and $83 million, respectively, of investments in equity securities of privately-held companies that are accounted for using the cost method. These investments are included within other long-term assets and investments on the condensed consolidated balance sheets. Such investments are reviewed periodically for impairment using fair value measurements.

Note 3 Consolidated Financial Statement Details

 

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income were as follows (in thousands):

 

    

December 31,

 

        

June 30,

 

 
     

2014

 

         

2015

 

 
Unrealized gains on available-for-sale securities, net of tax      $    22,084,960           $    17,158,878   
Unrealized gains (losses) on cash flow hedges, net of tax      1,856           (1,287
Foreign currency translation, net of tax      (67,188        (282,252
                   
Accumulated other comprehensive income      $    22,019,628           $    16,875,339   
                   
                       

 

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Noncontrolling Interests

Noncontrolling interests were as follows (in thousands):

 

    

December 31,

 

        

June 30,

 

 
     

2014

 

         

2015

 

 
Beginning noncontrolling interests      $          55,688           $          43,755   
Distributions to noncontrolling interests      (22,344        (15,847
Net income attributable to noncontrolling interests      10,411           3,340   
                   

Ending noncontrolling interests

     $          43,755           $          31,248   
                   
                       

Other Expense, Net

Other expense, net was as follows (in thousands):

 

 

     Three Months Ended          Six Months Ended  
    

June 30,

 

        

June 30,

 

        

June 30,

 

        

June 30,

 

 
     

2014

 

         

2015

 

         

2014

 

         

2015

 

 
Interest, dividend and investment income      $               5,596           $               8,034           $             11,033           $             16,879   
Interest expense      (17,088        (17,558        (34,169        (35,128
Gain (loss) on Hortonworks warrants      -               5,449           -               (6,460
Other      (2,097        (7,666        (3,906        (18,095
                                         

Total other expense, net

     $            (13,589        $            (11,741        $            (27,042        $            (42,804
                                         
                                                 

Interest, dividend and investment income consists of income earned from cash and cash equivalents in bank accounts, and investments made in marketable debt securities.

Interest expense is related to the Notes, interest expense on notes payable related to building and capital lease obligations for data centers.

During the three and six months ended June 30, 2015, the Company recorded a gain of $5 million and a loss of $6 million, respectively, due to the change in estimated fair value of the Hortonworks warrants during the respective periods, which was included within other expense, net in the condensed consolidated statements of operations.

Other consists of gains and losses from sales or impairments of marketable securities and/or investments in privately-held companies, foreign exchange gains and losses due to re-measurement of monetary assets and liabilities denominated in non-functional currencies, and unrealized and realized foreign currency transaction gains and losses, including gains and losses related to balance sheet hedges. Other increased $6 million for the three months ended June 30, 2015, compared to the same period of 2014, primarily due to foreign exchange losses from hedging activities of $11 million offset by unrealized foreign exchange currency transaction gains of $8 million. Other increased $14 million for the six months ended June 30, 2015, compared to the same period of 2014, primarily due to unrealized foreign exchange currency transaction losses of $25 million partially offset by foreign exchange gains from hedging activities of $12 million.

 

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Reclassifications Out of Accumulated Other Comprehensive Income

Reclassifications out of accumulated other comprehensive income for the three months ended June 30, 2014 and 2015 were as follows (in thousands):

 

     Three Months Ended            
    

June 30,

 

2014

 

         

June 30,

 

2015

 

           
    

Reclassified from

 

        

Reclassified from

 

          
    

Accumulated

 

        

Accumulated

 

          
    

Other

 

        

Other

 

          
    

Comprehensive

 

        

Comprehensive

 

        

Affected Line Item in the

 

     

Income

 

         

Income

 

         

Statement of Income

 

Realized (gains) losses on cash flow hedges, net of tax

 

       $                    (285          $                         478         Revenue
Realized (gains) losses on available-for-sale securities, net of tax      (109        (81      Other income, net
                        

Total reclassifications for the period

 

       $                    (394          $                         397        
                        
                                

Reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2014 and 2015 were as follows (in thousands):

 

     Six Months Ended            
    

June 30,

 

        

June 30,

 

          
    

2014

 

         

2015

 

           
    

Reclassified from

 

        

Reclassified from

 

          
    

Accumulated

 

        

Accumulated

 

          
    

Other

 

        

Other

 

          
    

Comprehensive

 

        

Comprehensive

 

        

Affected Line Item in the

 

     

Income

 

         

Income

 

         

Statement of Income

 

Realized (gains) losses on cash flow hedges, net of tax

 

     $                      (739        $                      2,138         Revenue
Realized (gains) losses on available-for-sale securities, net of tax      (121        2         Other income, net
                        

Total reclassifications for the period

 

       $                      (860          $                      2,140        
                        
                                

Note 4  Acquisitions and Dispositions

 

Transactions Completed in 2014. During the six months ended June 30, 2014, the Company acquired five companies, all of which were accounted for as business combinations. The total purchase price for these acquisitions was $23 million less cash acquired of $1 million, which resulted in a net cash outlay of $22 million. The purchase price for the assets and liabilities assumed was allocated based on their estimated fair values as follows: $9 million to amortizable intangibles; $1 million to net assumed assets; and the remainder of $13 million to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes.

Transactions Completed in 2015. During the six months ended June 30, 2015, the Company acquired one company which was accounted for as a business combination. The total purchase price for this acquisition was $23 million. The preliminary purchase price allocation of the assets acquired and liabilities assumed based on their estimated fair values was as follows: $5 million to amortizable intangibles; $2 million to net liabilities assumed; and the remainder of $20 million to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes.

The Company’s business combinations completed during the six months ended June 30, 2014 and 2015 did not have a material impact on the Company’s condensed consolidated financial statements and therefore actual and proforma disclosures have not been presented.

 

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Patent Sale and License Agreement. During the three months ended June 30, 2014, the Company entered into a patent sale and license agreement for total cash consideration of $460 million. The total consideration was allocated based on the estimated relative fair value of each of the elements of the agreement: $61 million was allocated to the sale of patents (“Sold Patents”), $135 million to the license of existing patents (“Existing Patents”) and $264 million to the license of patents developed or acquired in the next five years (“Capture Period Patents”). The Company recorded $60 million as a gain on the Sold Patents during the three months ended June 30, 2014 and the remaining $1 million gain on the Sold Patents was recorded in the three months ended September 30, 2014 when the payment was due. The amounts allocated to the license of the Existing Patents are being recorded as revenue over the four-year payment period under the license when payments are due. The amounts allocated to the Capture Period Patents are being recorded as revenue over the five-year capture period. During the three and six months ended June 30, 2015, the Company recognized $22 million and $43 million, respectively, associated with the patent sale and license agreement.

During the three and six months ended June 30, 2015, the Company sold certain patents and recorded gains on sales of patents of approximately $9 million and $11 million, respectively, and during the three and six months ended June 30, 2014 the Company sold certain patents and recorded gains on sales of patents of approximately $62 million.

Note 5 Goodwill

 

The changes in the carrying amount of goodwill for the six months ended June 30, 2015 were as follows (in thousands):

 

     

Americas (1)

 

          

EMEA (2)

 

          

Asia Pacific (3)

 

          

Total

 

 
Net balance as of January 1, 2015      $     4,322,219             $           532,469             $           297,882             $     5,152,570    
Acquisitions      -                  20,249             -                  20,249    
Foreign currency translation adjustments      (1,110)            (22,169)            (2,961)            (26,240)   
                                            

Net balance as of June 30, 2015

     $     4,321,109             $           530,549             $           294,921             $     5,146,579    
                                            
   

 

 

(1)

Gross goodwill balance for the Americas segment was $4.3 billion as of June 30, 2015.

 

(2)

Gross goodwill balance for the EMEA segment was $1.2 billion as of June 30, 2015. The EMEA segment includes accumulated impairment losses of $630 million as of June 30, 2015.

 

(3)

Gross goodwill balance for the Asia Pacific segment was $454 million as of June 30, 2015. The Asia Pacific segment includes accumulated impairment losses of $159 million as of June 30, 2015.

Note 6 Intangible Assets, Net

 

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

 

    

December 31, 2014

 

         

June 30, 2015

 

 
     

Net

 

          

Gross Carrying

 

Amount

 

          

Accumulated

 

Amortization (*)

 

          

Net

 

 
Customer, affiliate, and advertiser related relationships      $                281,596            $          363,500            $          (111,038)            $           252,462   
Developed technology and patents      122,674            202,354            (103,538)            98,816   
Trade names, trademarks, and domain names      66,572            107,939            (46,982)            60,957   
                                            

Total intangible assets, net

     $                470,842            $          673,793            $          (261,558)            $           412,235   
                                            
   

 

(*)

Cumulative foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities, increased total intangible assets by approximately $18 million as of June 30, 2015.

For the three months ended June 30, 2014 and 2015, the Company recognized amortization expense for intangible assets of $30 million and $34 million, respectively, including $15 million and $14 million in cost of revenue — other for the three months ended June 30, 2014 and 2015, respectively. For the six months ended June 30, 2014 and 2015, the Company recognized amortization expense for intangible assets of $65 million and $68 million, respectively, including $31 million and $28 million in cost of revenue — other for the six months ended June 30, 2014 and 2015, respectively. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the remainder of 2015 and each of the succeeding years is as follows: six months ending December 31, 2015: $65 million; 2016: $108 million; 2017: $99 million; 2018: $80 million; 2019: $43 million; and cumulatively thereafter: $1 million.

 

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Note 7  Basic And Diluted Net Income (Loss) Attributable To Yahoo! Inc. Common Stockholders Per Share

 

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

The Company takes into account the effect on consolidated net income (loss) 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 7 million and 4 million shares of common stock for the three and six months ended June 30, 2014, respectively, and 1 million shares of common stock for both the three and six months ended June 30, 2015, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been anti-dilutive.

The Company has the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion of the Notes. The Company’s intent is to settle the principal amount of the Notes in cash upon conversion. As a result, upon conversion of the Notes, only the amounts payable in excess of the principal amounts of the Notes are considered in diluted earnings per share under the treasury stock method.

The denominator for diluted net income (loss) per share does not include any effect from the note hedges. In future periods, the denominator for diluted net income (loss) per share will exclude any effect of the note hedges, if their effect would be anti-dilutive. In the event an actual conversion of any or all of the Notes occurs, the shares that would be delivered to the Company under the note hedges are designed to neutralize the dilutive effect of the shares that the Company would issue under the Notes. See Note 11 — “Convertible Notes” for additional information.

 

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

 

    

Three Months Ended

 

         

Six Months Ended

 

 
     

June 30,

 

2014

 

          

June 30,

 

2015

 

          

June 30,

 

2014

 

          

June 30,

 

2015

 

 
Basic:                     
Numerator:                     

Net income (loss) attributable to Yahoo! Inc.

     $          269,707             $            (21,554)            $            581,285             $             (356)   

Less: Net income allocated to participating securities

     (2)            -                   (5)            -          
                                            

Net income (loss) attributable to Yahoo! Inc. common stockholders — basic

     $          269,705             $            (21,554)            $            581,280             $             (356)   
                                            
Denominator:                     

Weighted average common shares

     999,765             937,569             1,004,828                         936,159    
                                            

Net income (loss) attributable to Yahoo! Inc. common stockholders per share — basic

     $                0.27             $                (0.02)            $                  0.58             $            (0.00)   
                                            
Diluted:                     
Numerator:                     

Net income (loss) attributable to Yahoo! Inc.

     $          269,707             $            (21,554)            $            581,285             $             (356)   

Less: Net income allocated to participating securities

     (2)            -                  (5)            -          

Less: Effect of dilutive securities issued by equity investees

     (9,421)            (1,125)            (21,786)            (2,319)   
                                            

Net income (loss) attributable to Yahoo! Inc. common stockholders — diluted

     $          260,284             $            (22,679)            $            559,494             $          (2,675)   
                                            
Denominator:                     

Denominator for basic calculation

     999,765             937,569             1,004,828             936,159    

Weighted average effect of Yahoo! Inc. dilutive securities:

                    

Restricted stock units

     10,855             -                   13,262             -         

Stock options and employee stock purchase plan

     4,072             -                   4,966             -         
                                            

Denominator for diluted calculation

     1,014,692             937,569             1,023,056             936,159    
                                            

Net income (loss) attributable to Yahoo! Inc. common stockholders per share — diluted

     $                 0.26             $                 (0.02)            $                   0.55             $            (0.00)   
                                            
   

Note 8  Investments In Equity Interests Using The Equity Method Of Accounting

 

The following table summarizes the Company’s investments in equity interests using the equity method of accounting (dollars in thousands):

 

    

December 31,

 

2014

 

    

Percent

 

Ownership

 

   

June 30,

 

2015

 

    

Percent

 

Ownership

 

 
Yahoo Japan     $      2,482,660         35.5     $      2,319,586         35.5
Other     6,918         20     6,850         20
                     

Total

    $      2,489,578           $      2,326,436      
                     
   

 

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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 the investments in equity interests balance on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Yahoo Japan, and any related amortization expense, one quarter in arrears within earnings in equity interests in the condensed consolidated statements of operations.

The Company makes adjustments to the earnings in equity interests line in the condensed consolidated statements of operations for any differences between U.S. GAAP and International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board, the standards by which Yahoo Japan’s financial statements are prepared.

The fair value of the Company’s ownership interest in the common stock of Yahoo Japan, based on the quoted stock price, was approximately $8 billion as of June 30, 2015.

During the three and six months ended June 30, 2014 and 2015, the Company received cash dividends from Yahoo Japan in the amount of $84 million and $142 million, net of withholding taxes, respectively, which were recorded as reductions to the Company’s investment in Yahoo Japan.

During the six months ended June 30, 2014, the Company sold data center assets and assigned a data center lease to Yahoo Japan for cash proceeds of $11 million and recorded a net gain of approximately $5 million.

The following tables present summarized financial information derived from Yahoo Japan’s consolidated financial statements, which are prepared on the basis of IFRS. The Company has made adjustments to the Yahoo Japan financial information to address differences between IFRS 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           Six Months Ended  
     

March 31,

 

2014

 

    

March 31,

 

2015

 

          

March 31,

 

2014

 

    

March 31,

 

2015

 

 
    

(In thousands)

 

 

 

Operating data:

 

              

Revenue

 

    

 

$       1,055,064

 

  

 

    

 

$           987,417

 

  

 

       

 

$       2,086,720

 

  

 

    

 

$        1,928,658

 

  

 

Gross profit

 

    

 

$          861,258

 

  

 

    

 

$           790,966

 

  

 

       

 

$       1,705,184

 

  

 

    

 

$        1,541,950

 

  

 

Income from operations

 

    

 

$          477,945

 

  

 

    

 

$           438,166

 

  

 

       

 

$          967,387

 

  

 

    

 

$           863,219

 

  

 

Net income

 

    

 

$          314,029

 

  

 

    

 

$           274,721

 

  

 

       

 

$          621,141

 

  

 

    

 

$           561,514

 

  

 

Net income attributable to Yahoo Japan

     $          311,182         $           274,129            $          615,527         $           558,975   
   

 

     

September 30,

 

2014

 

    

March 31,

 

2015

 

 
    

(In thousands)

 

 

 

Balance sheet data:

 

     

Current assets

 

    

 

$      6,161,126

 

  

 

    

 

$      6,303,704

 

  

 

Long-term assets

 

    

 

$      1,908,379

 

  

 

    

 

$      2,203,642

 

  

 

Current liabilities

 

    

 

$      1,948,540

 

  

 

    

 

$      2,014,409

 

  

 

Long-term liabilities

 

    

 

$           35,418

 

  

 

    

 

$         228,902

 

  

 

Noncontrolling interests

     $           66,998         $         171,849   
   

Under technology and trademark license and other commercial arrangements with Yahoo Japan, the Company records revenue from Yahoo Japan based on a percentage of advertising revenue earned by Yahoo Japan. The Company recorded revenue from Yahoo Japan of approximately $64 million and $55 million for the three months ended June 30, 2014 and 2015, respectively, and approximately $132 million and $115 million for the six months ended June 30, 2014 and 2015, respectively. The revenue from Yahoo Japan for the three and six months ended June 30, 2015 was impacted by unfavorable foreign exchange fluctuations. As of December 31, 2014 and June 30, 2015, the Company had net receivable balances from Yahoo Japan of approximately $47 million and $35 million, respectively.

 

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Table of Contents

Alibaba Group

Equity Investment in Alibaba Group .  Prior to the closing of the initial public offering by Alibaba Group (“Alibaba Group IPO”) of American Depositary Shares (“ADSs”) in September 2014, the Company’s investment in Alibaba Group was accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets and goodwill, was classified as part of investments in equity interests on the Company’s consolidated balance sheets. Prior to the Alibaba Group IPO, the Company recorded its share of the results of Alibaba Group one quarter in arrears, within earnings in equity interests in the consolidated statements of operations, including any related tax impacts related to the earnings in equity interest.

See Note 2 — “Marketable Securities, Investments And Fair Value Disclosures” for additional information.

Technology and Intellectual Property License Agreement (the “TIPLA”) .  As a result of the Alibaba Group IPO, the TIPLA will terminate on September 18, 2015 and Alibaba Group’s obligation to make royalty payments under the TIPLA ceased on September 24, 2014. The remaining TIPLA deferred revenue of $60 million is now being recognized ratably over the remaining term of the TIPLA through September 18, 2015. For the three months ended June 30, 2014 and 2015, the Company recognized approximately $62 million and $69 million, respectively, and for the six months ended June 30, 2014 and 2015, the Company recognized approximately $132 million and $139 million, respectively, related to the TIPLA.

Spin-Off of Remaining Holdings in Alibaba Group.  On January 27, 2015, Yahoo announced a plan for a spin-off of all of the Company’s remaining holdings in Alibaba Group into a newly formed independent registered investment company. The name selected for the new company is Aabaco Holdings, Inc. (“Aabaco”). The stock of Aabaco will be distributed pro rata to Yahoo stockholders, resulting in Aabaco becoming a separate publicly traded registered investment company. On July 17, 2015, Aabaco filed its initial Registration Statement on Form N-2 with the U.S. Securities and Exchange Commission (the “SEC”). Following the completion of the transaction, Aabaco will own all of Yahoo’s remaining 384 million Alibaba Group shares, and a 100 percent ownership interest in Aabaco Small Business, LLC, a newly formed entity which will own Yahoo Small Business, a current operating business of Yahoo that will also be transferred to Aabaco as part of the transaction.

The completion of the transaction is expected to occur in the fourth quarter of 2015. The transaction is subject to certain conditions, including final approval by the Company’s Board of Directors, receipt of a favorable ruling from the Internal Revenue Service regarding certain aspects of the transaction and a legal opinion with respect to the tax-free treatment of the transaction, under U.S. federal tax laws and regulations, the effectiveness of an applicable registration statement with the SEC and compliance with the requirements under the Investment Company Act of 1940, and other customary conditions. Each of the conditions may be waived, in whole or in part (to the extent permitted by law), by the Company in its sole discretion. The Company has reserved the right, in its sole and absolute discretion, to abandon or modify the terms of the transaction at any time prior to the distribution date, even if the conditions to the transaction have been satisfied.

The composition of Aabaco’s independent board of directors and management team, and other details of the transaction, including the distribution ratio, will be determined prior to the completion of the transaction.

Upon completion of the transaction, which is subject to the satisfaction or waiver of the conditions specified above, the Company’s consolidated financial position will be materially impacted as the Alibaba Group shares and related deferred tax liabilities will be removed from the Company’s consolidated balance sheet with a corresponding reduction of its stockholders’ equity balance. The Company would no longer hold any Alibaba Group shares and would no longer record changes in fair value within comprehensive income (loss).

Note 9    Foreign Currency Derivative Financial Instruments

 

 

The Company uses derivative financial instruments, primarily forward contracts and option contracts, to mitigate risk associated with adverse movements in foreign currency exchange rates.

The Company records all derivatives in the condensed consolidated balance sheets at fair value, with assets included in prepaid expenses and other current assets or other long-term assets, and liabilities included in accrued expenses and other current liabilities or other long-term liabilities. The Company’s accounting treatment for these instruments is based on whether or not the instruments are designated as a hedging instrument. The effective portions of net investment hedges are recorded in other comprehensive income as a part of the cumulative translation adjustment. The effective portions of cash flow hedges are recorded in accumulated other comprehensive income until the hedged item is recognized in revenue on the condensed consolidated statements of operations when the underlying hedged revenue is recognized. Any ineffective portions of net investment hedges and cash flow hedges are recorded in other income, net on the Company’s condensed consolidated statements of operations. For balance sheet hedges, changes in the fair value are recorded in other income, net on the Company’s condensed consolidated statements of operations.

The Company enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. The Company presents its derivative assets and liabilities at their gross fair values on the condensed consolidated balance sheets. However, under the master netting arrangements with the respective counterparties of the foreign exchange contracts, subject to applicable requirements, the Company is allowed to net settle transactions. The Company is not required to pledge, and is not entitled to receive, cash collateral related to these derivative transactions.

 

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Table of Contents

Designated as Hedging Instruments

Net Investment Hedges. The Company hedges, on an after-tax basis, a portion of its net investment in Yahoo Japan with forward contracts and option contracts to reduce the risk that its investment in Yahoo Japan will be adversely affected by foreign currency exchange rate fluctuations. The total of the after-tax net investment hedge was less than the Yahoo Japan investment balance as of both December 31, 2014 and June 30, 2015. As such, the net investment hedge was considered to be effective.

Cash Flow Hedges.     The Company entered into foreign currency forward contracts designated as cash flow hedges of varying maturities through December 31, 2015. All of the forward contracts designated as cash flow hedges that were settled were reclassified to revenue during the three and six months ended June 30, 2014 and 2015, respectively. All current outstanding cash flow hedges are expected to be reclassified into revenue during 2015. For the three and six months ended June 30, 2014 and 2015, the amounts recorded in other income (expense), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring was not material.

Not Designated as Hedging Instruments

Balance Sheet Hedges.     The Company hedges certain of its net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that its earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities, including intercompany transactions, which are denominated in foreign currencies.

Notional amounts of the Company’s outstanding derivative contracts were as follows (in millions):

 

     

December 31,

 

2014

 

    

    June 30,    

 

2015

 

 

 Derivatives designated as hedging instruments:

 

     

Net investment hedge forward and option contracts

 

   $

 

1,647

 

  

 

   $

 

1,802 

 

  

 

Cash flow hedge forwards

 

   $

 

222

 

  

 

   $

 

117 

 

  

 

 Derivatives not designated as hedging instruments:

 

     

Balance sheet hedges

 

   $

 

243

 

  

 

   $

 

415 

 

  

 

Foreign currency derivative activity for the six months ended June 30, 2014 was as follows (in millions):

 

     

 Beginning 

 

Fair Value

 

    

  Settlement  

 

Payment

 

(Receipt)

 

   

Gain (Loss)

 

Recorded in

 

Other Income,

 

Net

 

   

Gain (Loss)

 

Recorded in

 

Other

 

  Comprehensive  

 

Income

 

    

Gain

 

(Loss)

 

  Recorded  

 

in

 

Revenue

 

    

Ending Fair

 

Value

 

 

Derivatives designated as hedging instruments:

 

               

Net investment hedges

 

   $

 

209

 

  

 

   $

 

(17

 

0) 

 

  $

 

-    

 

  

 

  $

 

(41)  (*)  

 

  

 

   $

 

-    

 

  

 

   $

 

(2

 

 

Cash flow hedges

 

   $

 

4

 

  

 

   $

 

(

 

2) 

 

  $

 

(1

 

 

  $

 

(4)      

 

  

 

   $

 

2

 

  

 

   $

 

(1

 

 

Derivatives not designated as hedging instruments:

 

               

Balance sheet hedges

 

   $

 

-    

 

  

 

   $

 

 

 

 

  $

 

(1

 

 

  $

 

-       

 

  

 

   $

 

-    

 

  

 

   $

 

2

 

  

 

(*)  This amount does not reflect the tax impact of $15 million recorded during the six months ended June 30, 2014. The $26 million after tax impact of the loss recorded within other comprehensive income was included in accumulated other comprehensive income on the Company’s condensed consolidated balance sheets.

 

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Foreign currency derivative activity for the six months ended June 30, 2015 was as follows (in millions):

 

                         

Gain (Loss)

 

  

Gain

 

       
                

Gain (Loss)

 

   

Recorded in

 

  

(Loss)

 

       
         

    Settlement    

 

    

Recorded in

 

   

Other

 

  

    Recorded    

 

       
  

Beginning

 

    

Payment

 

    

Other Income,

 

   

Comprehensive

 

  

in

 

   

Ending Fair

 

 
  

Fair Value

 

    

(Receipt)

 

    

Net

 

   

Income

 

  

Revenue

 

   

Value

 

 
Derivatives designated as hedging instruments:                

Net investment hedges

   $ 185       $ (38)       $ (2   29   (*)    $ -      $ 174    

Cash flow hedges

 

   $ 8       $ (1)       $ (1   $            (3)        $       (1)    $   
Derivatives not designated as hedging instruments:                

Balance sheet hedges

 

   $ 4       $ (22)       $ 14      $              -          $ -      $ (4)   

(*)  This amount does not reflect the tax impact of $11 million recorded during the six months ended June 30, 2015. The $18 million after tax impact of the gain recorded within other comprehensive income was included in accumulated other comprehensive income on the Company’s condensed consolidated balance sheets.

Foreign currency derivative contracts balance sheet location and ending fair value was as follows (in millions):

 

     

Balance Sheet    

 

Location

 

 

December 31,

 

2014

 

   

    June 30,    

 

2015

 

 

Derivatives designated as hedging instruments:

 

      

Net investment hedges

 

    Asset (1)

 

  $

 

190

 

  

 

  $

 

176

 

  

 

    Liability (2)

 

  $

 

(5

 

 

  $

 

(2

 

 

Cash flow hedges

 

    Asset (1)

 

  $

 

8

 

  

 

  $

 

4

 

  

 

    Liability (2)

 

  $

 

-     

 

  

 

  $

 

(2

 

 

      

Derivatives not designated as hedging instruments:

 

      

Balance sheet hedges

 

    Asset (1)

 

  $

 

5

 

  

 

  $

 

1

 

  

 

      Liability (2)

 

  $

 

(1

 

 

  $

 

(5

 

 

 

(1)

Included in prepaid expenses and other current assets or other long-term assets and investments on the condensed consolidated balance sheets.

(2)

Included in accrued expenses and other current liabilities or other long-term liabilities on the condensed consolidated balance sheets.

Note 10  Credit Agreement

 

The Company’s credit agreement with Citibank, N.A., as Administrative Agent entered into on October 19, 2012 (as amended on October 10, 2013 and October 9, 2014, the “Credit Agreement”) provides for a $750 million unsecured revolving credit facility, subject to increase of up to $250 million in accordance with its terms. The Credit Agreement terminates on October 8, 2015, unless extended by the parties. As of June 30, 2015, the Company was in compliance with the financial covenants in the Credit Agreement and no amounts were outstanding. See Note 18 — “Subsequent Events” for additional information.

 

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Table of Contents

Note 11  Convertible Notes

 

0.00% Convertible Senior Notes

As of June 30, 2015, the Company had $1.4 billion principal amount of Notes outstanding. The Notes are senior unsecured obligations of Yahoo, the Notes do not bear regular interest, and the principal amount of the Notes does not accrete. The Notes mature on December 1, 2018, unless previously purchased or converted in accordance with their terms prior to such date. The Company may not redeem the Notes prior to maturity. However, holders of the Notes may convert them at certain times and upon the occurrence of certain events in the future, as outlined in the indenture governing the Notes (the “Indenture”). Holders of the Notes who convert in connection with a “make-whole fundamental change,” as defined in the Indenture, may require Yahoo to purchase for cash all or any portion of their Notes at a purchase price equal to 100 percent of the principal amount, plus accrued and unpaid special interest as defined in the Indenture, if any. The Notes are convertible, subject to certain conditions, into shares of Yahoo common stock at an initial conversion rate of 18.7161 shares per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $53.43 per share), subject to adjustment upon the occurrence of certain events. Upon conversion of the Notes, holders will receive cash, shares of Yahoo’s common stock or a combination thereof, at Yahoo’s election. The Company’s intent is to settle the principal amount of the Notes in cash upon conversion. If the conversion value exceeds the principal amount, the Company would deliver shares of its common stock with respect to the remainder of its conversion obligation in excess of the aggregate principal amount (conversion spread). As of June 30, 2015, none of the conditions allowing holders of the Notes to convert had been met.

The Notes consist of the following (in thousands):

 

     

December 31,

 

2014

 

          

June 30,

 

2015

 

 
Liability component:         

Principal

   $       1,437,500           $      1,437,500    

Less: note discount

     (267,077)            (235,960)   
  

 

 

       

 

 

 
Net carrying amount    $ 1,170,423           $ 1,201,540    
  

 

 

       

 

 

 
Equity component (*)    $ 305,569           $ 305,569    
  

 

 

       

 

 

 
                        

 

(*)

Recorded on the condensed consolidated balance sheets within additional paid-in capital.

The following table sets forth total interest expense recognized related to the Notes (in thousands):

 

   

Three Months Ended

 

        

Six Months Ended

 

 
    

    June 30,    

 

2014

 

    

    June 30,    

 

2015

 

         

    June 30,    

 

2014

 

    

    June 30,    

 

2015

 

 

Accretion of convertible note discount

 

  $

 

14,860

 

  

 

   $

 

15,660

 

  

 

       $

 

29,526

 

  

 

   $

 

31,117

 

  

 

 

The estimated fair value of the Notes, which was determined based on inputs that are observable in the market (Level 2), and the carrying value of debt instruments (carrying value excludes the equity component of the Notes classified in equity) was as follows (in thousands):

 

    

   

December 31, 2014

 

        

June 30, 2015

 

 
    

  Fair Value  

 

    

Carrying Value

 

         

  Fair Value  

 

    

Carrying Value

 

 
Convertible senior notes   $ 1,175,240       $ 1,170,423           $ 1,226,670       $ 1,201,540   

 

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Note 12 Commitments And Contingencies

 

Lease Commitments .   The Company leases office space and data centers under operating and capital lease agreements with original lease periods of up to 12 years which expire between 2015 and 2025. A summary of gross and net lease commitments as of June 30, 2015 was as follows (in millions):

 

 

    

Gross

 

                         
    

Operating

 

                     

Net Operating

 

 
    

Lease

 

         

Sublease

 

         

Lease

 

 
     

Commitments

 

          

Income

 

          

Commitments

 

 
Six months ending December 31, 2015    $ 69          $ (8)          $ 61   
Years ending December 31,               
2016    $ 110          $ (12)          $ 98   
2017    $ 82          $ (10)          $ 72   
2018    $ 59          $ (7)          $ 52   
2019    $ 48          $ (5)          $ 43   
2020    $ 35          $ (2)          $ 33   
Due after 5 years    $ 109          $ (3)          $ 106   
                                
Total gross and net lease commitments    $                 512          $                 (47)          $                 465   
                                
                                      

 

 

                                   

Capital Lease

 

 
              

  Commitments  

 

 
Six months ending December 31, 2015                $ 9   
Years ending December 31,               
2016                  15   
2017                  10   
2018                  9   
2019                  5   
2020                  -       
Due after 5 years                  -       
                    
Gross lease commitments                  48   
Less: interest                  9   
                    
Net lease commitments included in other long-term liabilities                $                         39   
                    
                                  

Affiliate Commitments .   The Company is obligated to make payments, which represent traffic acquisition costs (“TAC”), to its Affiliates. As of June 30, 2015, these commitments totaled $1,800 million, of which $218 million will be payable in the remainder of 2015, $401 million will be payable in 2016, $400 million will be payable in 2017, $375 million will be payable in 2018, $375 million will be payable in 2019, and $31 million will be payable thereafter.

Non-cancelable Obligations .   The Company is obligated to make payments under various non-cancelable arrangements with vendors and other business partners, principally for marketing, bandwidth, co-location, and content arrangements. As of June 30, 2015, these commitments totaled $502 million, of which $115 million will be payable in the remainder of 2015, $183 million will be payable in 2016, $125 million will be payable in 2017, $77 million will be payable in 2018, and $2 million will be payable in 2019.

Intellectual Property Rights .   The Company is committed to make certain payments under various intellectual property arrangements of up to $19 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, lease, or assignment of assets, or the sale of a subsidiary, matters related to the Company’s conduct of the business and tax matters prior to the sale, lease or assignment. 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 current and former 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 material liabilities related to such indemnification obligations in the Company’s condensed consolidated financial statements.

 

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As of June 30, 2015, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, the Company is not exposed to any financing, liquidity, market, or credit risk that could arise if the Company had such relationships. In addition, the Company identified no variable interests currently held in entities for which it is the primary beneficiary.

Legal Contingencies

General.   The Company is regularly involved in claims, suits, government investigations, and proceedings arising from the ordinary course of the Company’s business, including actions with respect to intellectual property claims, privacy, consumer protection, information security, data protection or law enforcement matters, tax matters, labor and employment claims, commercial claims, as well as actions involving content generated by users, stockholder derivative actions, purported class action lawsuits, and other matters.

Patent Matters.   From time to time, third parties assert patent infringement claims against the Company. Currently, the Company is engaged in lawsuits regarding patent issues and has been notified of other potential patent disputes.

Stockholder and Securities Matters.   Since May 31, 2011, several related stockholder derivative suits were filed in the Santa Clara County Superior Court (“California Derivative Litigation”) and the U.S. District Court for the Northern District of California (“Federal Derivative Litigation”) purportedly on behalf of the Company against certain officers and directors of the Company and third parties. The California Derivative Litigation was filed by plaintiffs Cinotto, Lassoff, Zucker, and Koo, and consolidated under the caption In re Yahoo! Inc. Derivative Shareholder Litigation on June 24, 2011 and September 12, 2011. The Federal Derivative Litigation was filed by plaintiffs Salzman, Tawila, and Iron Workers Mid-South Pension Fund and consolidated under the caption In re Yahoo! Inc. Shareholder Derivative Litigation on October 3, 2011. The plaintiffs allege breaches of fiduciary duties, corporate waste, mismanagement, abuse of control, unjust enrichment, misappropriation of corporate assets, or contribution, and seek damages, equitable relief, disgorgement, and corporate governance changes in connection with Alibaba Group’s restructuring of its subsidiary Alipay.com Co., Ltd. (“Alipay”) and related disclosures. On June 7, 2012, the courts approved stipulations staying the California Derivative Litigation pending resolution of the Federal Derivative Litigation, and deferring the Federal Derivative Litigation pending a ruling on the motion to dismiss filed by the defendants in the related stockholder class actions, which are discussed below. The Federal Derivative Litigation was stayed pending resolution of the appeal filed by the plaintiffs in the related stockholder class actions, which now has concluded as described below. The Company plans to file a motion to dismiss the Federal Derivative Litigation.

Since June 6, 2011, two purported stockholder class actions were filed in the U.S. District Court for the Northern District of California against the Company and certain officers and directors of the Company by plaintiffs Bonato and the Twin Cities Pipe Trades Pension Trust. In October 2011, the District Court consolidated the two actions under the caption In re Yahoo! Inc. Securities Litigation and appointed the Pension Trust Fund for Operating Engineers as lead plaintiff. In a consolidated amended complaint filed December 15, 2011, the lead plaintiff purported to represent a class of investors who purchased the Company’s common stock between April 19, 2011 and July 29, 2011, and alleged that during that class period, defendants issued statements that were materially false or misleading because they did not disclose information relating to Alibaba Group’s restructuring of Alipay. The complaint purported to assert claims for relief for violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and for violation of Rule 10b-5 thereunder, and sought unspecified damages, injunctive and equitable relief, fees, and costs. On August 10, 2012, the District Court granted defendants’ motion to dismiss the consolidated amended complaint. Plaintiffs appealed. On May 15, 2015, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal.

On April 22, 2015, a stockholder action captioned Cathy Buch v. David Filo, et al. , was filed in the Delaware Court of Chancery against Yahoo and all current members of the Board of Directors. The complaint asserts both derivative claims, purportedly on behalf of Yahoo, and class action claims, purportedly on behalf of the plaintiff and all similarly situated stockholders, relating to the termination of, and severance payments made to, our former chief operating officer, Henrique de Castro. The plaintiff alleges that the board members breached their fiduciary duties by enabling or acquiescing in the payment of severance to Mr. de Castro, and by allowing Yahoo to make allegedly false and misleading statements regarding the value of his severance. The plaintiff has also asserted claims against Mr. de Castro. The plaintiff seeks to recoup the severance paid to Mr. de Castro, an equitable accounting, disgorgement in favor of Yahoo, monetary damages, declaratory relief, injunctive relief, and an award of attorneys’ fees and costs. The Company has filed a motion to dismiss the action.

 

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Mexico Matters .   On November 16, 2011, plaintiffs Worldwide Directories, S.A. de C.V. (“WWD”), and Ideas Interactivas, S.A. de C.V. (“Ideas”) filed an action in the 49th Civil Court of Mexico against the Company, Yahoo! de Mexico, S.A. de C.V. (“Yahoo! Mexico”), Yahoo International Subsidiary Holdings, Inc., and Yahoo Hispanic Americas LLC. The complaint alleged claims of breach of contract, breach of promise, and lost profits in connection with various commercial contracts entered into among the parties between 2002 and 2004, relating to a business listings service, and alleged total damages of approximately $2.75 billion. On December 7, 2011, Yahoo! Mexico filed a counterclaim against WWD for payments of approximately $2.6 million owed to Yahoo! Mexico for services rendered. On April 10, 2012, plaintiffs withdrew their claim filed against Yahoo International Subsidiary Holdings, Inc. and Yahoo Hispanic Americas LLC.

On November 28, 2012, the 49th Civil Court of Mexico entered a non-final judgment against the Company and Yahoo! Mexico in the amount of USD $2.75 billion and a non-final judgment in favor of Yahoo! Mexico on its counterclaim against WWD in the amount of $2.6 million. The judgment against the Company and Yahoo! Mexico purported to leave open for determination in future proceedings certain other alleged damages that were not quantified in the judgment.

On December 12, 2012 and December 13, 2012, respectively, Yahoo! Mexico and the Company appealed the judgment to a three-magistrate panel of the Superior Court of Justice for the Federal District (the “Superior Court”). On May 15, 2013, the Superior Court reversed the judgment, overturned all monetary awards against the Company and reduced the monetary award against Yahoo! Mexico to $172,500. The Superior Court affirmed the award of $2.6 million in favor of Yahoo! Mexico on its counterclaim.

Plaintiffs appealed the Superior Court’s decision to the Mexican Federal Civil Collegiate Court for the First Circuit (“Civil Collegiate Court”). The Company appealed the Superior Court’s decision not to award it statutory costs in the underlying proceeding. Yahoo! Mexico appealed the Superior Court’s award of $172,500, the Superior Court’s decision not to award it additional moneys beyond the $2.6 million award on its counterclaims, and the Superior Court’s decision not to award it statutory costs. On January 14, 2015, the Civil Collegiate Court denied all of the appeals.

On February 16, 2015, plaintiffs filed a petition for review by the Supreme Court of Mexico, where review is limited to constitutional questions under Mexican law. The plaintiff’s petition was denied. Plaintiffs are seeking to reverse the denial through further review by the Supreme Court of Mexico. The Company believes there is no basis to reverse the denial in the matter; however, we cannot assure the ultimate outcome of the matter.

On September 10, 2014, the same plaintiffs in the Mexico litigation described above filed an action in U.S. District Court for the Southern District of New York against Yahoo! Inc., Yahoo! Mexico, Baker & McKenzie, and Baker & McKenzie, S.C. Plaintiffs allege that defendants conspired to influence the Mexican courts and “illegally obtain a favorable judgment” in the above litigation. Plaintiffs advance claims for relief under the Racketeer Influenced and Corrupt Organizations Act of 1970 (“RICO”), which provides for treble damages in certain cases, conspiracy to violate RICO, common-law fraud, and civil conspiracy. Their operative amended complaint seeks unspecified damages. The Company and Yahoo! Mexico have filed a motion to dismiss the amended complaint. The Company believes the plaintiffs’ claims in this action are without merit.

The Company has determined, based on current knowledge, that the amount or range of reasonably possible losses, including reasonably possible losses in excess of amounts already accrued, is not reasonably estimable with respect to certain matters described above. The Company has also determined, based on current knowledge, that the aggregate amount or range of losses that are estimable with respect to the Company’s legal proceedings, including the matters described above other than the Mexico matters, would not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Amounts accrued as of June 30, 2015 were not material. The Company did not accrue for the judgment in Mexico, which was reversed as explained above. The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties, and cannot be predicted with certainty. In the event of a determination adverse to Yahoo, its subsidiaries, directors, or officers in these matters, the Company may incur substantial monetary liability, and be required to change its business practices. Either of these events could have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company may also incur substantial legal fees, which are expensed as incurred, in defending against these claims.

 

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Note 13    Stockholders’ Equity And Employee Benefits

 

Stock Options .   The Company’s Stock Plan, the Directors’ Plan, and stock-based awards assumed through acquisitions (including stock-based commitments related to continued service of acquired employees, such as the holdback by Yahoo of shares of Yahoo common stock issued to Tumblr’s founder in connection with the Company’s acquisition of Tumblr in June 2013) are collectively referred to as the “Plans.” Stock option activity under the Company’s Plans for the six months ended June 30, 2015 is summarized as follows (in thousands, except per share amounts):

 

                

  Weighted Average  

 

 
                

Exercise Price Per

 

 
     

          Shares          

 

          

Share

 

 
Outstanding at December 31, 2014 (1)      9,225          $ 18.57    
Options granted               $ -        
Options assumed in acquisitions               $ -        
Options exercised (2)      (1,328)          $ 17.19    
Options expired      (562)          $ 19.18    
Options cancelled/forfeited      (105)          $ 15.55    
              
Outstanding at June 30, 2015 (1)      7,230          $                         18.82    
              
                        

 

(1)  

Includes shares subject to performance-based stock options for which performance goals had not been set as of the date shown.

 

(2)  

The Company generally issues new shares to satisfy stock option exercises.

As of June 30, 2015, there was $36 million of unamortized stock-based compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 1.6 years.

Restricted Stock Units

Restricted stock unit (“RSU”) activity under the Plans for the six months ended June 30, 2015 is summarized as follows (in thousands, except per share amounts):

 

 

                 

  Weighted Average  

 

 
              

Grant Date

 

 
              

Fair Value

 

 
     

          Shares          

 

       

Per Share

 

 
Awarded and unvested at December 31, 2014 (1)      40,677           $ 32.38    
Granted (2)      12,767           $ 43.82    
Assumed in acquisitions      -               $ -        
Vested      (9,100)          $ 27.88    
Forfeited      (7,243)          $ 32.67    
              
Awarded and unvested at June 30, 2015 (1)      37,101           $                         37.37    
              
                        

 

(1)  

Includes the maximum number of shares issuable under the Company’s performance-based restricted stock unit awards (including future-year tranches for which performance goals had not been set) as of the date shown.

 

(2)  

Includes the maximum number of shares issuable under the performance-based restricted stock unit awards granted during the six months ended June 30, 2015 (including future-year tranches for which performance goals had not been set during the period); excludes tranches of previously granted performance-based restricted stock units for which performance goals were set during the six months ended June 30, 2015.

As of June 30, 2015, there was $847 million of unamortized stock-based compensation expense related to unvested restricted stock units and restricted stock, which is expected to be recognized over a weighted average period of 2.5 years.

During the six months ended June 30, 2014 and 2015, 11.4 million shares and 9.1 million shares, respectively, that were subject to previously granted restricted stock units, vested. These vested restricted stock units were net share settled. During the six months ended June 30, 2014 and 2015, the Company withheld 4.2 million shares and 3.4 million shares, respectively, based upon the Company’s closing stock price on the vesting date, to satisfy the Company’s tax withholding obligation relating to the employees’ minimum statutory obligation for the applicable income and other employment taxes. The Company then remitted cash to the appropriate taxing authorities.

 

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Total payments for the employees’ tax obligations to the relevant taxing authorities were $160 million and $150 million, respectively, for the six months ended June 30, 2014 and 2015 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.

Performance Options .   The financial performance stock options awarded by the Company in November 2012 to Ms. Mayer and Mr. Goldman include multiple performance periods. The number of stock options that ultimately vest for each performance period will range from 0 percent to 100 percent of the target amount for such period stated in each executive’s award agreement based on the Company’s performance relative to goals. The financial performance goals are established at the beginning of each performance period and the portion (or “tranche”) of the award related to each performance period is treated as a separate grant for accounting purposes. In March 2015, the Compensation Committee established performance goals under these stock options for the 2015 performance year. The 2015 financial performance metrics (and their weightings) under the performance stock options are GAAP revenue (one-third), revenue ex-TAC (one-third), and adjusted EBITDA (one-third). The grant date fair value of the 2015 tranche of the November 2012 financial performance stock options was $31 million, and is being recognized over the twelve-month service period. The Company began recording stock-based compensation expense for this tranche in March 2015, when the financial performance goals were established.

Performance RSUs .   In March 2015, the Compensation Committee approved additional annual financial performance-based RSU awards to Ms. Mayer and other senior officers, and established the 2015 annual performance goals for these awards as well as for the similar performance-based RSUs granted in February 2013 and February 2014. The 2013, 2014, and 2015 performance-based RSU awards are generally eligible to vest in equal annual target amounts over four years (three years for Ms. Mayer) based on the Company’s attainment of annual financial performance goals as well as the executive’s continued employment through each vesting date. The number of shares that ultimately vest each year will range from 0 percent to 200 percent of the annual target amount, based on the Company’s performance. Annual financial performance metrics and goals are established for these RSU awards at the beginning of each year and the tranche of each RSU award related to that year’s performance goal is treated as a separate annual grant for accounting purposes. The 2015 financial performance metrics (and their weightings) established for the performance RSUs are: GAAP revenue (one-third), revenue ex-TAC (one-third), and adjusted EBITDA (one-third). The grant date fair value of the first tranche of the March 2015 performance RSUs was $9 million, the grant date fair value of the second tranche of the February 2014 performance RSUs was $11 million, and the grant date fair value of the third tranche of the February 2013 performance RSUs was $19 million. These values are being recognized over the tranches’ twelve-month service periods. The Company began recording stock-based compensation expense for these tranches in March 2015, when the financial performance goals were established.

Stock Repurchases .   In November 2013, the Board authorized a stock repurchase program with an authorized level of $5 billion. The November 2013 program, according to its terms, will expire in December 2016. The aggregate amount available under the November 2013 repurchase program was approximately $726 million at June 30, 2015. In March 2015, the Board authorized an additional stock repurchase program with an authorized level of $2 billion. The March 2015 program, according to its terms, will expire in March 2018. The aggregate amount available under the March 2015 repurchase program was $2 billion at June 30, 2015. Repurchases under the repurchase programs may take place in the open market or in privately negotiated transactions, including structured and derivative transactions such as accelerated share repurchase transactions, and may be made under a Rule 10b5-1 plan. During the six months ended June 30, 2015, the Company repurchased approximately 4 million shares of its common stock under its November 2013 program at an average price of $47.65 per share for a total of $204 million.

 

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Note 14     Restructuring Charges, Net

 

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

 

     Three Months Ended          Six Months Ended  
     

June 30,

 

2014

 

         

June 30,

 

2015

 

         

June 30,

 

2014

 

         

June 30,

 

2015

 

 
Employee severance pay and related costs    $ 82         $ 7,149         $ 3,673         $ 51,149   
Non-cancelable lease, contract termination, and other charges      61,906           13,403           68,438           22,020   
Reversals of previous charges      (2,336        (790        (2,972        (4,021
Non-cash accelerations of stock-based compensation expense      -               -               -               2,705   
Other non-cash credits      (7,031        (74        (7,031        (933
                                         

Restructuring charges, net

   $             52,621         $             19,688         $             62,108         $             70,920   
                                         
                                                 

The Company has implemented various restructuring plans to reduce its cost structure, align resources with its product strategy and improve efficiency, which have resulted in workforce reductions and the consolidation of certain real estate facilities and data centers. For the three months ended June 30, 2014, the Company recorded expense of $50 million and $3 million related to the Americas and EMEA segments, respectively. For the six months ended June 30, 2014, the Company recorded expense of $55 million and $7 million related to the Americas and EMEA segments, respectively. For the three months ended June 30, 2015, the Company recorded expense of $12 million, $7 million, and $1 million related to the Americas, EMEA, and Asia Pacific segments, respectively. For the six months ended June 30, 2015, the Company recorded expense of $53 million, $14 million, and $4 million related to the Americas, EMEA, and Asia Pacific segments, respectively. The amounts recorded during the six months ended June 30, 2015 were primarily related to severance, facility and other related costs pursuant to restructuring plans initiated by the Company in the fourth quarter of 2014 and the first quarter of 2015.

The Company’s restructuring accrual activity for the six months ended June 30, 2015 is summarized as follows (in thousands):

 

Accrual balance as of December 31, 2014    $ 83,608   
Restructuring charges      70,920   
Cash paid      (82,766
Non-cash accelerations of stock-based compensation expense      (2,705
Foreign currency translation and other adjustments      292   
        
Accrual balance as of June 30, 2015    $         69,349   
        
          

The $69 million restructuring liability as of June 30, 2015 consisted of $8 million for employee severance pay expenses, which the Company expects to pay out by the end of the second quarter of 2016, and $61 million relating to non-cancelable lease costs, which the Company expects to pay over the terms of the related obligations through the third quarter of 2022, less estimated sublease income.

The restructuring accrual by reportable segment consisted of the following (in thousands):

 

     

December 31,

 

2014

 

          

June 30,

 

2015

 

 
Americas    $ 65,949          $ 58,210   
EMEA      16,797            11,058   
Asia Pacific      862            81   
                    
Total restructuring accruals    $             83,608          $             69,349   
                    
                        

 

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Note 15 Income Taxes

 

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

The Company recorded income tax expense of $8 million and $58 million for the three months ended June 30, 2014 and 2015, respectively. The Company recorded income tax expense of $12 million and $18 million for the six months ended June 30, 2014 and 2015, respectively. Despite the pre-tax loss, the Company recorded income tax expense for the three and six months ended June 30, 2015, based on forecasted tax expense for fiscal year 2015 as a result of tax expense in profitable jurisdictions being higher than tax benefits anticipated in loss jurisdictions. The tax provision increased in the three and six months ended June 30, 2015 compared to the same period last year primarily due to non-deductible acquisition costs plus limited tax benefits in loss jurisdictions combined with tax expense in profitable jurisdictions.

As of June 30, 2015, the Company does not anticipate repatriating its undistributed foreign earnings of approximately $3.0 billion. Those earnings are principally related to its equity method investment in Yahoo Japan. If those earnings were to be repatriated in the future, the Company may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits). It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated.

The Company’s gross amount of unrecognized tax benefits as of June 30, 2015 was $1,041 million, of which $987 million is recorded on the condensed consolidated balance sheets. The gross unrecognized tax benefits as of June 30, 2015 increased by $17 million from the recorded balance as of December 31, 2014.

The Company is in various stages of examination and appeal in connection with its taxes both in the U.S. and in foreign jurisdictions. Those audits generally span tax years 2005 through 2013. As of June 30, 2015, the Company’s 2011 through 2013 U.S. federal income tax returns are currently under examination. The Company has protested the proposed California Franchise Tax Board’s adjustments to the 2005 through 2008 returns, but no conclusions have been reached to date. While it is difficult to determine when the examinations will be settled or their final outcomes, certain audits in various jurisdictions are expected to be resolved in the foreseeable future. As a result, it is reasonably possible that the Company’s unrecognized tax benefits could be reduced by up to approximately $153 million in the next twelve months. The Company believes that it has adequately provided for any reasonably foreseeable adjustment and that any settlement will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

The Company may have additional tax liabilities in China related to the sale to Alibaba Group of 523 million Alibaba Group shares that took place during the year ended December 31, 2012 and related to the sale of the 140 million Alibaba Group ADSs sold in the Alibaba Group IPO that took place during the year ended December 31, 2014. Any taxes assessed and paid in China are expected to be ultimately offset and recovered in the U.S. through the use of foreign tax credits.

Tax authorities from the Brazilian State of Sao Paulo have assessed certain indirect taxes against the Company’s Brazilian subsidiary, Yahoo! do Brasil Internet Ltda., related to online advertising services. The assessment is for calendar years 2008 through 2011 and, translated into U.S. dollars as of June 30, 2015, totals approximately $110 million. The Company currently believes the assessment is without merit. The Company believes the risk of loss is remote and has not recorded an accrual for the assessment.

Note 16    Segments

 

The Company continues to manage its business geographically. The primary areas of measurement and decision-making are Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific. Management relies on an internal reporting process that provides revenue, revenue ex-TAC (which is defined as revenue less cost of revenue – TAC), direct costs excluding TAC by segment, and consolidated income from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, the Company’s segments.

 

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

 

     Three Months Ended          Six Months Ended
     

June 30,

 

2014

 

         

June 30,

 

2015

 

         

June 30,

 

2014

 

         

June 30,

 

2015

 

Revenue by segment:

 

                 

Americas

 

   $

 

805,535

 

  

 

     $

 

992,210

 

  

 

     $

 

1,672,463

 

  

 

    

$      1,976,931  

 

EMEA

 

    

 

97,847

 

  

 

      

 

85,830

 

  

 

      

 

189,417

 

  

 

    

166,916  

 

Asia Pacific

 

    

 

180,809

 

  

 

      

 

165,225

 

  

 

      

 

355,041

 

  

 

    

325,388  

 

                                     

Total Revenue

 

   $

 

      1,084,191

 

  

 

     $

 

      1,243,265

 

  

 

     $

 

      2,216,921

 

  

 

    

$      2,469,235  

 

                                     
TAC by segment:                  

Americas

 

   $

 

30,296

 

  

 

     $

 

180,822

 

  

 

     $

 

64,390

 

  

 

    

$         347,477  

 

EMEA

 

    

 

10,212

 

  

 

      

 

12,950

 

  

 

      

 

19,405

 

  

 

    

24,654  

 

Asia Pacific

 

    

 

3,318

 

  

 

      

 

6,458

 

  

 

      

 

5,940

 

  

 

    

11,238  

 

                                     

Total TAC

 

   $

 

43,826

 

  

 

     $

 

200,230

 

  

 

     $

 

89,735

 

  

 

    

$         383,369  

 

                                     

Revenue ex-TAC by segment:

 

                 

Americas

 

   $

 

775,239

 

  

 

     $

 

811,388

 

  

 

     $

 

1,608,073

 

  

 

    

$      1,629,454  

 

EMEA

 

    

 

87,635

 

  

 

      

 

72,880

 

  

 

      

 

170,012

 

  

 

    

142,262  

 

Asia Pacific

 

    

 

177,491

 

  

 

      

 

158,767

 

  

 

      

 

349,101

 

  

 

    

314,150  

 

                                     

Total Revenue ex-TAC

 

    

 

1,040,365

 

  

 

      

 

1,043,035

 

  

 

      

 

2,127,186

 

  

 

    

2,085,866  

 

                                     
Direct costs by segment (1) :                  

Americas

 

    

 

60,167

 

  

 

      

 

76,148

 

  

 

      

 

120,977

 

  

 

    

134,892  

 

EMEA

 

    

 

21,395

 

  

 

      

 

20,551

 

  

 

      

 

43,339

 

  

 

    

40,702  

 

Asia Pacific

 

    

 

48,139

 

  

 

      

 

51,818

 

  

 

      

 

94,967

 

  

 

    

102,550  

 

Global operating costs (2)     

 

631,801

 

  

 

      

 

649,915

 

  

 

      

 

1,282,659

 

  

 

    

1,334,006  

 

Gain on sale of patents

 

    

 

(61,500

 

 

      

 

(9,100

 

 

      

 

(61,500

 

 

    

(11,100) 

 

Depreciation and amortization

 

    

 

146,860

 

  

 

      

 

153,679

 

  

 

      

 

304,394

 

  

 

    

305,218  

 

Stock-based compensation expense

 

    

 

102,445

 

  

 

      

 

125,130

 

  

 

      

 

211,626

 

  

 

    

240,826  

 

Restructuring charges, net

 

    

 

52,621

 

  

 

      

 

19,688

 

  

 

      

 

62,108

 

  

 

    

70,920  

 

                                     

Income from (loss) operations

 

   $

 

38,437

 

  

 

     $

 

(44,794

 

 

     $

 

68,616

 

  

 

    

$        (132,148) 

 

                                     
                                             

 

(1)      Direct costs for each segment include costs associated with the local sales teams and other cost of revenue. Prior to the fourth quarter of 2014, marketing, media, costs associated with Yahoo Properties and ad operation costs were managed locally and included as direct costs for each segment. Such costs are now included in global operating costs. Prior period amounts have been revised to conform to the current presentation.

 

(2)      Global operating costs include product development, marketing, real estate workplace, general and administrative, and other corporate expenses that are managed on a global basis and that are not directly attributable to any particular segment. Beginning in the fourth quarter of 2014, marketing, media, costs associated with Yahoo Properties and other ad operation costs are managed globally and included as global costs. Prior period amounts have been revised to conform to the current presentation.

 

     Three Months Ended          Six Months Ended
     

June 30,

 

2014

 

         

June 30,

 

2015

 

         

June 30,

 

2014

 

         

June 30,

 

2015

 

Capital expenditures, net:

 

                 

Americas

 

   $

 

100,340

 

  

 

     $

 

139,935

 

  

 

     $

 

164,317

 

  

 

    

$         262,188  

 

EMEA

 

    

 

3,274

 

  

 

      

 

6,978

 

  

 

      

 

19,036

 

  

 

    

14,648  

 

Asia Pacific

 

    

 

3,744

 

  

 

      

 

8,529

 

  

 

      

 

8,660

 

  

 

    

13,527  

 

                                     

Total capital expenditures, net

 

   $

 

107,358

 

  

 

     $

 

155,442

 

  

 

     $

 

192,013

 

  

 

    

$         290,363  

 

                                     
                                             

 

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December 31,

 

2014

 

          

    June 30,    

 

    2015    

 

 
Property and equipment, net:         

Americas:

        

U.S.

   $         1,382,597          $         1,416,724   

Other

     787            590   
                    

Total Americas

   $ 1,383,384          $ 1,417,314   
                    

EMEA

     34,649            39,841   

Asia Pacific

     69,651            67,384   
                    

Total property and equipment, net

   $ 1,487,684          $ 1,524,539   
                    
                        

See Note 5 — “Goodwill” and Note 14 — “Restructuring Charges, Net” for additional information regarding segments.

Enterprise Wide Disclosures

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

 

     Three Months Ended           Six Months Ended  
     

June 30,

 

2014

 

          

June 30,

 

2015

 

          

June 30,

 

2014

 

          

June 30,

 

2015

 

 
Search    $ 428,418          $ 521,126          $ 873,185          $ 1,052,792   
Display      436,053            500,376            889,277            964,109   
Other      219,720            221,763            454,459            452,334   
                                            

Total revenue

   $     1,084,191          $     1,243,265          $     2,216,921          $     2,469,235   
                                            
                                                  
     Three Months Ended           Six Months Ended  
     

June 30,

 

2014

 

          

June 30,

 

2015

 

          

June 30,

 

2014

 

          

June 30,

 

2015

 

 
Revenue:                     

U.S.

   $ 771,959          $ 965,228          $ 1,605,616          $ 1,928,739   

International

     312,232            278,037            611,305            540,496   
                                            

Total revenue

   $ 1,084,191          $ 1,243,265          $ 2,216,921          $ 2,469,235   
                                            
               

Revenue is attributed to individual countries according to the online property that generated the revenue. No single foreign country was material to revenue for the three or six months ended June 30, 2014 and 2015.

Note 17     Search Agreement With Microsoft Corporation

 

On December 4, 2009, the Company entered into the Search Agreement with Microsoft. On February 18, 2010, the Company received regulatory clearance from both the U.S. Department of Justice and the European Commission and on February 23, 2010 the Company commenced implementation of the Search Agreement on a market-by-market basis.

On April 15, 2015, the Company and Microsoft entered into the Eleventh Amendment to the Search Agreement (the “Eleventh Amendment”) pursuant to which the terms of the Search Agreement were amended. Previously under the Search Agreement, Microsoft was the exclusive algorithmic and paid search services provider to Yahoo on personal computers for Yahoo Properties and for search services provided by Yahoo to Affiliate sites. Microsoft was the non-exclusive provider on mobile devices. Pursuant to the Eleventh Amendment, Microsoft will provide such services on a non-exclusive basis for Yahoo Properties and Affiliate sites on all devices. Commencing on May 1, 2015, Yahoo agrees to request paid search results from Microsoft for 51 percent of its search queries originating from personal computers accessing Yahoo Properties and its Affiliate sites (the “Volume Commitment”) and will display only Microsoft’s paid search results on such search result pages.

Previously under the Search Agreement, the Company was entitled to receive a percentage of the revenue (the “Revenue Share Rate”) generated from Microsoft’s services on Yahoo Properties and on Affiliate sites after deduction of the Affiliate sites’ share of revenue and certain Microsoft costs. The Revenue Share Rate was 88 percent for the first five years of the Search Agreement and then increased to 90 percent on February 23, 2015. Pursuant to the Eleventh Amendment, the Revenue Share Rate increased to 93 percent, but Microsoft now receives its 7 percent revenue share before deduction of the Affiliate site’s share of revenue. The Affiliate site’s share of revenue is deducted from the Company’s 93 percent Revenue Share Rate.

 

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Additionally, pursuant to the Eleventh Amendment, the Company will now have the ability in response to queries on both personal computers and mobile devices to request algorithmic listings only, paid listings only or both algorithmic and paid listings from Microsoft. To the extent the Company requests algorithmic listings only or requests paid listings but elects not to display such paid listings, the Company will pay Microsoft serving costs but not a revenue share. In other cases and with respect to the Volume Commitment, the Revenue Share Rate will apply.

Previously under the Search Agreement, Yahoo had sales exclusivity for both the Company’s and Microsoft’s premium advertisers. Pursuant to the Eleventh Amendment, this sales exclusivity terminated on July 1, 2015. The Company and Microsoft have commenced transitioning premium advertisers for Microsoft’s paid search services to Microsoft. The Eleventh Amendment requires this transition to be completed by January 31, 2016.

The term of the Search Agreement remains 10 years from its commencement date, February 23, 2010, subject to earlier termination as provided in the Search Agreement. Pursuant to the Eleventh Amendment, on or after October 1, 2015, either the Company or Microsoft may terminate the Search Agreement by delivering a written notice of termination to the other party. The Search Agreement will remain in effect for four months from the date of the termination notice to provide for a transition period; however, the Company’s Volume Commitment will not apply in the third and fourth months of this transition period.

The Company reports as revenue the revenue share it receives from Microsoft under the Search Agreement as the Company is not the primary obligor in the arrangement with the advertisers and publishers. The underlying search advertising services are provided by Microsoft. Approximately 36 percent and 37 percent of the Company’s revenue for the three months ended June 30, 2014 and 2015, respectively, was attributable to the Search Agreement, and approximately 36 percent and 38 percent of the Company’s revenue for the six months ended June 30, 2014 and 2015, respectively, was attributable to the Search Agreement.

As of December 31, 2014 and June 30, 2015, the Company had collected total amounts of $52 million and less than $1 million, respectively, on behalf of Microsoft and Microsoft’s affiliates, which was included in cash and cash equivalents with a corresponding liability in accrued expenses and other current liabilities. The Company’s uncollected revenue share in connection with the Search Agreement was $330 million and $328 million, which is included in accounts receivable, net, as of December 31, 2014 and June 30, 2015, respectively.

On December 9, 2010, in connection with entering into the Search Agreement, the Company also entered into a License Agreement with Microsoft (as amended, the “License Agreement”). Under the License Agreement, Microsoft acquired an exclusive 10-year license to the Company’s core search technology and has the ability to integrate this technology into its existing Web search platforms. Pursuant to the Eleventh Amendment, the exclusive licenses granted to Microsoft under the License Agreement became non-exclusive. The Company also agreed pursuant to the Eleventh Amendment to license certain sales tools to Microsoft to use solely in connection with Microsoft’s paid search services pursuant to the terms of the License Agreement.

Note 18    Subsequent Events

 

Credit Agreement.   On July 24, 2015, the Company entered into Amendment No. 3 to the Credit Agreement to extend the termination date of the Credit Agreement from October 8, 2015 to July 22, 2016.

 

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

Forward-Looking Statements

 

In addition to current and historical information, this Quarterly Report on Form 10-Q (“Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments, and business strategies. These statements can, in some cases, be identified by the use of terms such as “may,” “will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue,” the negative of such terms, or other comparable terminology. This Report includes, among others, forward-looking statements regarding our:

 

 

expectations regarding our proposed spin-off of our remaining holdings in Alibaba Group Holding Limited (“Alibaba Group”);

 

 

expectations about revenue, including search, display, and other revenue;

 

 

expectations about growth in users;

 

 

expectations about changes in our earnings in equity interests and net income;

 

 

expectations about changes in operating expenses;

 

 

anticipated capital expenditures;

 

 

expectations about our share repurchase activity;

 

 

expectations about the financial and operational impacts of our Search and Advertising Services and Sales Agreement (the “Search Agreement”) with Microsoft Corporation (“Microsoft”);

 

 

impact of recent acquisitions on our business and evaluation of, and expectations for, possible acquisitions of, or investments in, businesses, products, intangible assets and technologies;

 

 

expectations about the growth of, the opportunities for monetization in and revenue from, the mobile industry and mobile devices;

 

 

expectations about the growth of, the opportunities for monetization in and revenue from, our offerings in mobile, video, native, and social (“Mavens”);

 

 

projections and estimates with respect to our restructuring activities and changes to our organizational structure;

 

 

expectations about the amount of unrecognized tax benefits, the outcome of tax assessment appeals, the adequacy of our existing tax reserves, future tax expenditures, and tax rates;

 

 

expectations about positive cash flow generation and existing cash, cash equivalents, and investments being sufficient to meet normal operating requirements; and

 

 

expectations regarding the future outcome of legal proceedings in which we are involved, including the outcome of our efforts to sustain the reversal of a judgment entered against us and one of our subsidiaries in a proceeding in Mexico.

These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. You are urged to carefully review the disclosures made concerning risks and uncertainties that may affect our business or operating results, which include, among others, those listed in Part II, Item 1A. “Risk Factors” of this Report. We do not intend, and undertake no obligation, to update or revise any of our forward-looking statements after the date of this Report to reflect new information, actual results or future events or circumstances.

Overview

 

Yahoo! Inc., together with its consolidated subsidiaries (“Yahoo,” the “Company,” “we,” or “us”) is a guide focused on informing, connecting, and entertaining our users. By creating highly personalized experiences for our users, we keep people connected to what matters most to them, across devices and around the world. In turn, we create value for advertisers by connecting them with the audiences that build their businesses. For advertisers, the opportunity to be a part of users’ digital habits across products and platforms is a powerful tool to engage audiences and build brand loyalty. Advertisers can build their businesses through advertising to targeted audiences on our online properties and services (“Yahoo Properties”) or through a distribution network of third party entities (“Affiliates”) who integrate our advertising offerings into their websites or other offerings (“Affiliate sites”). Our revenue is generated principally from search and display advertising.

We continue to manage and measure our business geographically, principally in the Americas, EMEA (Europe, Middle East, and Africa) and Asia Pacific.

 

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In the following Management’s Discussion and Analysis, we provide information regarding the following areas:

 

 

Key Financial Metrics;

 

 

Non-GAAP Financial Measures;

 

 

Significant Transactions;

 

 

Results of Operations;

 

 

Liquidity and Capital Resources;

 

 

Critical Accounting Policies and Estimates; and

 

 

Recent Accounting Pronouncements.

Key Financial Metrics

 

The key financial metrics we use are as follows: revenue; revenue less traffic acquisition costs (“TAC”), or revenue ex-TAC; income (loss) from operations; adjusted EBITDA; net income (loss) attributable to Yahoo! Inc.; net cash provided by (used in) operating activities; and free cash flow. Revenue ex-TAC, adjusted EBITDA, and free cash flow are financial measures that are not defined in accordance with U.S. generally accepted accounting principles (“GAAP”). We use these non-GAAP financial measures for internal managerial purposes and to facilitate period-to-period comparisons. See “Non-GAAP Financial Measures” below for a description of each of these non-GAAP financial measures.

 

     Three Months Ended June 30,          Six Months Ended June 30,  
     

2014

 

    

2015

 

         

2014

 

    

2015

 

 
    

(in thousands)

 

 

 
Revenue    $     1,084,191       $     1,243,265         $     2,216,921       $     2,469,235   
Revenue ex-TAC    $     1,040,365       $     1,043,035         $     2,127,186       $     2,085,866   
Income (loss) from operations (1)    $ 38,437       $ (44,794      $ 68,616       $ (132,148
Adjusted EBITDA    $ 340,363       $ 261,703         $ 646,744       $ 492,816   
Net income (loss) attributable to Yahoo! Inc.    $ 269,707       $ (21,554      $ 581,285       $     (356
Net cash provided by (used in) operating activities    $ 357,414       $ 307,952         $ 496,475       $ (2,629,519
Free cash flow (2)    $ 185,915       $ (24,780        $ 299,877       $ (3,059,702
(1) Includes:              

Stock-based compensation expense

   $ 102,445       $ 125,130         $ 211,626       $ 240,826   

Restructuring charges, net

   $ 52,621       $ 19,688         $ 62,108       $ 70,920   
                                         

 

(2)  

During the six months ended June 30, 2015, we satisfied the $3.3 billion income tax liability related to the sale of Alibaba Group American Depositary Shares (“ADSs”) in September 2014.

Revenue

 

     Three Months Ended June 30,                     Six Months Ended June 30,             
     

2014

 

         

2015

 

         

% Change

 

         

2014

 

         

2015

 

         

% Change

 

 
    

(dollars in thousands)

 

 

 
Revenue        $  1,084,191              $  1,243,265            15%             $  2,216,921              $  2,469,235            11%   
Less: TAC      43,826            200,230            357%           89,735            383,369            327%   
                                                   

Revenue ex-TAC

       $  1,040,365              $  1,043,035            0%             $  2,127,186              $  2,085,866            (2)%   
                                                   
                                                                           

For the three and six months ended June 30, 2015, revenue increased $159 million, or 15 percent, and $252 million, or 11 percent, respectively, compared to the same periods of 2014. For the three and six months ended June 30, 2015, TAC increased $156 million, or 357 percent, and $294 million, or 327 percent, respectively, compared to the same periods of 2014. For the three and six months ended June 30, 2015, revenue ex-TAC (a non-GAAP financial measure) increased $3 million, or roughly flat, and decreased $41 million, or 2 percent, respectively, compared to the same periods of 2014. The increase in revenue for the three and six months ended June 30, 2015 was primarily attributable to an increase in search and display revenue resulting from an increase in revenue from distribution partners, including Mozilla Corporation (“Mozilla”), revenue from mobile devices, and incremental revenue from the Flurry and BrightRoll acquisitions. The increase in TAC for the three and six months ended June 30, 2015 was primarily driven by higher payments to distribution partners, including Mozilla, and incremental TAC related to the Flurry and BrightRoll acquisitions. Of the $159 million increase in revenue and $156 million increase in TAC for the three months ended June 30, 2015, $99 million and $94 million, respectively, were attributable to the agreement (“Mozilla Agreement”) we entered into in November 2014 to compensate Mozilla for making us the default search provider on certain of Mozilla’s products in the United States. Of the $252 million increase in revenue and $294 million increase in TAC for the six months ended June 30, 2015, $203 million and $188 million, respectively, were attributable to the Mozilla Agreement.

 

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During the remainder of fiscal year 2015, we expect revenue to grow faster than revenue ex-TAC, particularly in our search business, as we optimize our partner deals and innovate our search offering for our users and advertisers. We expect other revenue to be impacted in the six months ending December 31, 2015 as the royalty revenue associated with the Technology and Intellectual Property License Agreement (the “TIPLA”) with Alibaba Group will cease in the three months ending September 30, 2015. We expect to recognize $60 million in royalty revenue from the TIPLA in the three months ending September 30, 2015. No royalty revenue from the TIPLA will be recognized during the three months ending December 31, 2015, or in any periods thereafter.

Mavens Revenue

One of our primary strategies is to invest in and grow our Mavens offerings. Revenue from our Mavens offerings is generated from, without duplication, (i) mobile (as defined below), (ii) video ads and video ad packages, (iii) native ads, and (iv) Tumblr ads and fees. Mavens revenue for the three months ended June 30, 2015 increased 60 percent to $399 million, compared to $249 million for the three months ended June 30, 2014. Mavens revenue for the six months ended June 30, 2015 increased 59 percent to $762 million, compared to $478 million for the six months ended June 30, 2014. The increase in Mavens revenue for the three and six months ended June 30, 2015 was primarily related to growth in mobile advertising, and to a lesser extent, growth in native and video advertising.

We expect our Mavens revenue will continue to increase in 2015. The increase in Mavens revenue has been counteracting a decline in our legacy display offerings that include targeted display advertising, which we refer to as “audience advertising”, and premium advertising.

Mobile Revenue

With the significant platform shift to mobile devices, including smartphones and tablets, we continue to focus on mobile products and mobile ad formats. We have refreshed the user experience on mobile across a number of Yahoo Properties, including the Aviate app, Fantasy Sports, Flickr, and the Yahoo app. Mobile revenue is generated in connection with user activity on mobile devices, including smartphones and tablets (a “device-based” approach), regardless of whether the device is accessing a mobile-optimized service. Mobile revenue is primarily generated by search and display advertising. Mobile revenue also includes leads, listings and fees revenue and ecommerce revenue allocated to user activity on mobile devices.

Mobile revenue for the three months ended June 30, 2015 increased 55 percent to $252 million, compared to $163 million for the three months ended June 30, 2014. Mobile revenue for the six months ended June 30, 2015 increased 58 percent to $485 million, compared to $308 million for the six months ended June 30, 2014. The increase in mobile revenue for the three and six months ended June 30, 2015 was primarily attributable to growth in display revenue on mobile devices driven by native advertising. Mobile revenue is included within Search, Display, and Other revenue that we have reported. As of June 30, 2015, we had more than 600 million monthly mobile users (including Tumblr).

In the latter half of 2014 and in the first half of 2015, we saw a significant increase in the contribution of mobile revenue to our total revenue. We expect the contribution of mobile to continue to increase for the remainder of 2015.

Adjusted EBITDA (a Non-GAAP Financial Measure)

 

      Three Months Ended June 30,         Six Months Ended June 30,      
  

 

     

 

    
  

2014

 

2015

 

% Change

 

 

2014

 

2015

 

 

% Change

 

 
 

(dollars in thousands)

 

 

 
Net income (loss) attributable to Yahoo! Inc.     $      269,707       $       (21,554)    (108)%          $       581,285       $ (356)       (100)%     
Advisory fees -   8,000     N/M      -     8,000        N/M     
Depreciation and amortization 146,860   153,679     5%      304,394     305,218        0%     
Stock-based compensation expense 102,445   125,130     22%      211,626     240,826        14%     
Restructuring charges, net 52,621   19,688     (63)%      62,108     70,920        14%     
Other (expense) income, net 13,589   11,741     (14)%      27,042     42,804        58%     
Provision for income taxes 8,143   58,495     618%      12,360     17,595        42%     
Earnings in equity interests, net of tax (255,852)  (95,841)    (63)%      (557,254)    (195,531)       (65)%     
Net income attributable to noncontrolling interests 2,850   2,365     (17)%      5,183     3,340        (36)%     
  

 

 

 

     

 

 

 

 

    

Adjusted EBITDA

    $      340,363       $      261,703     (23)%          $      646,744       $       492,816        (24)%     
  

 

 

 

     

 

 

 

 

    
Percentage of Revenue ex-TAC (1)(2) 33%     25%     30%       24%       
  

 

 

 

     

 

 

 

 

    
                                         

N/M = Not Meaningful

 

(1)

Revenue ex-TAC is calculated as GAAP revenue less cost of revenue - TAC.

 

(2)

Net loss attributable to Yahoo! Inc. as a percentage of GAAP revenue for the three and six months ended June 30, 2015 was 2 percent and 0 percent, respectively. Net income attributable to Yahoo! Inc. as a percentage of GAAP revenue for the three and six months ended June 30, 2014 was 25 percent and 26 percent, respectively.

For the three months ended June 30, 2015, adjusted EBITDA decreased $79 million, or 23 percent, compared to 2014, mainly due to a lower benefit from patent sales year-over-year, an increase in direct costs in the Americas region, and an increase in global operating costs.

For the six months ended June 30, 2015, adjusted EBITDA decreased $154 million, or 24 percent, compared to 2014, mainly due to higher TAC that was not fully offset by higher revenue as well as a lower benefit from patent sales year-over-year, an increase in global operating costs, and an increase in direct costs in the Americas region.

Adjusted EBITDA will be impacted during the three months ending December 31, 2015 if the separation of Yahoo Small Business is completed as planned and may be impacted during the three months ending September 30, 2015 and the three months ending December 31, 2015 if our patent sales in those periods are less than our patent sales in the same periods of 2014. Further, we expect adjusted EBITDA to be impacted in the six months ending December 31, 2015 as the royalty revenue associated with the TIPLA will cease in the three months ending September 30, 2015. We expect to recognize $60 million in royalty revenue in the three months ending September 30, 2015. No royalty revenue from the TIPLA will be recognized during the three months ending December 31, 2015, or in any periods thereafter.

 

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Table of Contents

Free Cash Flow (a Non-GAAP Financial Measure)

 

     Three Months Ended June 30,           Six Months Ended June 30,  
     

2014

 

          

2015

 

          

2014

 

          

2015

 

 
    

(dollars in thousands)

 

 

 
Net cash provided by (used in) operating activities      $ 357,414             $ 307,952             $ 496,475             $ (2,629,519)   

Acquisition of property and equipment, net

     (107,358)            (155,442)            (192,013)            (290,363)   

Excess tax benefits from stock-based awards

     19,544             (35,620)            79,100             1,850    

Dividends received from equity investee

     (83,685)            (141,670)            (83,685)            (141,670)   
                                            

Free cash flow

     $       185,915             $       (24,780)            $       299,877             $       (3,059,702)