-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FjdEvI9hUsumxT3kCgmbAciqaS7uTj2+mBDeodke9UQl+xTAzbORETiK750hb7HK MGzbl44DGPainbNlJEtwaw== 0001157523-07-000520.txt : 20070123 0001157523-07-000520.hdr.sgml : 20070123 20070123164528 ACCESSION NUMBER: 0001157523-07-000520 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20070123 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20070123 DATE AS OF CHANGE: 20070123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YAHOO INC CENTRAL INDEX KEY: 0001011006 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 770398689 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28018 FILM NUMBER: 07547119 BUSINESS ADDRESS: STREET 1: YAHOO! INC. STREET 2: 701 FIRST AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4083493300 MAIL ADDRESS: STREET 1: 701 FIRST AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94089 8-K 1 a5316322.txt YAHOO! INC. 8-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 8-K ---------------------- Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 January 23, 2007 Date of Report (Date of Earliest Event Reported) ---------------------- Yahoo! Inc. (Exact name of Registrant as specified in its charter) ---------------------- Delaware 0-28018 77-0398689 (State or other Jurisdiction (Commission File No.) (IRS Employer of Incorporation) Identification No.) 701 First Ave. Sunnyvale, California 94089 (Address of principal executive offices, including zip code) (408) 349-3300 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 2.02 Results of Operations and Financial Condition On January 23, 2007, Yahoo! Inc., a Delaware corporation ("Yahoo!") announced its financial results for the fourth quarter and year ended December 31, 2006 and certain other information. A copy of Yahoo!'s press release announcing these financial results and certain other information is attached hereto as Exhibit 99.1. The information in this Current Report, including Exhibit 99.1, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Yahoo! under the Securities Act of 1933 or the Exchange Act. Item 9.01 Financial Statements and Exhibits (d) Exhibits. The following exhibit is furnished with this report on Form 8-K: 99.1 Yahoo! Inc. Press Release dated January 23, 2007. 2 - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. YAHOO! INC. By: /s/ Susan Decker ------------------------------------- Susan Decker Executive Vice President, Finance and Administration, and Chief Financial Officer (Principal Financial Officer) Date: January 23, 2007 3 YAHOO! INC. INDEX TO EXHIBITS Exhibit Number Description - -------------- ----------- 99.1 Yahoo! Inc. Press Release dated January 23, 2007 4 EX-99.1 2 a5316322ex99_1.txt EXHIBIT 99.1 PRESS RELEASE Exhibit 99.1 Yahoo! Reports Fourth Quarter and Full Year 2006 Financial Results Full Year Revenues -- $6,426 Million Full Year Operating Income -- $941 Million Full Year Operating Income Before Depreciation, Amortization and Stock-Based Compensation Expense -- $1,906 Million SUNNYVALE, Calif.--(BUSINESS WIRE)--Jan. 23, 2007--Yahoo! Inc. (Nasdaq:YHOO) today reported results for the fourth quarter and full year ended December 31, 2006. "I am pleased with the progress Yahoo! made in the fourth quarter. We successfully addressed many of the challenges we faced in the third quarter and made aggressive moves to deliver on a number of strategic goals that we set forth for the organization," said Terry Semel, chairman and CEO of Yahoo!. "I am confident that our new structure and concentrated focus on Yahoo!'s key priorities puts us in the best position to take advantage of the many opportunities that we see ahead for 2007 and beyond." Fourth Quarter 2006 Financial Results -- Revenues were $1,702 million for the fourth quarter of 2006, a 13 percent increase compared to $1,501 million for the same period of 2005. -- Marketing services revenue was $1,490 million for the fourth quarter of 2006, a 13 percent increase compared to $1,315 million for the same period of 2005. -- Fees revenue was $213 million for the fourth quarter of 2006, a 15 percent increase compared to $186 million for the same period of 2005. -- Revenues excluding traffic acquisition costs ("TAC") were $1,228 million for the fourth quarter of 2006, a 15 percent increase compared to $1,068 million for the same period of 2005. -- Gross profit for the fourth quarter of 2006 was $1,012 million, a 12 percent increase compared to $906 million for the same period of 2005. -- Operating income for the fourth quarter of 2006 was $308 million (including $95 million for stock-based compensation expense recorded under the fair value method), a 6 percent decrease compared to $329 million (including $19 million for stock-based compensation expense recorded under the intrinsic value method) for the same period of 2005. -- Operating income before depreciation, amortization and stock-based compensation expense for the fourth quarter of 2006 was $540 million, an 18 percent increase compared to $459 million for the same period of 2005. -- Cash flow from operating activities for the fourth quarter of 2006 was $167 million, a 65 percent decrease compared to $481 million for the same period of 2005. -- Free cash flow for the fourth quarter of 2006 was $278 million, a 16 percent decrease compared to $330 million for the same period of 2005. -- Net income for the fourth quarter of 2006 was $269 million or $0.19 per diluted share (including $56 million of stock-based compensation expense, net of tax, recorded under the fair value method) compared to $683 million or $0.46 per diluted share (including $11 million of stock-based compensation expense, net of tax, recorded under the intrinsic value method) for the same period of 2005. -- Non-GAAP net income for the fourth quarter of 2006 was $229 million or $0.16 per diluted share (including $56 million of stock-based compensation expense, net of tax, recorded under the fair value method and excluding $29 million in certain tax adjustments), compared to non-GAAP net income of $191 million or $0.13 per diluted share (including $67 million of stock-based compensation expense, net of tax, recorded under the fair value method, excluding $11 million of stock-based compensation expense, net of tax, recorded under the intrinsic value method and excluding $188 million of gains on the sale of certain investments, net of tax adjustments) for the same period of 2005. -- Non-GAAP net income for the fourth quarter of 2006 was $297 million or $0.21 per diluted share (excluding $56 million of stock-based compensation expense, net of tax, recorded under the fair value method and excluding $29 million in certain tax adjustments), compared to non-GAAP net income of $258 million or $0.17 per diluted share (excluding $11 million of stock-based compensation expense, net of tax, and excluding $188 million of gains on the sale of certain investments, net of tax adjustments) for the same period of 2005. -- The provision for income taxes for the fourth quarter of 2006 was $108 million and yielded an effective tax rate of 31 percent. The provision for income taxes for the fourth quarter of 2005 was $18 million, and yielded an effective tax rate of 3 percent as a result of a tax benefit related to a subsidiary restructuring transaction completed in that quarter. -- Explanations of the Company's non-GAAP financial measures and the related reconciliations to the GAAP financial measures the Company considers most comparable are included in the accompanying "Note to Unaudited Condensed Consolidated Statements of Income", "Reconciliations to Unaudited Condensed Consolidated Statements of Income" and "Reconciliation of GAAP Net Income and GAAP Net Income Per Share to Non-GAAP Net Income and Non-GAAP Net Income Per Share". "We generated very solid growth and profitability in the fourth quarter and full year 2006, putting the company in a strong financial position and looking forward, we are very optimistic about the potential of our search monetization initiative to improve the value of search for Yahoo! and our partners," said Susan Decker, chief financial officer, Yahoo!. "For 2007, we are organized to maximize value for Yahoo!'s key customer groups -- audiences, advertisers and publishers -- by delivering engaging products and effective solutions for consumers and marketers, both on and off the Yahoo! network." Full Year 2006 Financial Results -- Revenues were $6,426 million for 2006, a 22 percent increase compared to $5,258 million for 2005. -- Marketing services revenue was $5,627 million for 2006, a 22 percent increase compared to $4,594 million for 2005. -- Fees revenue was $798 million for 2006, a 20 percent increase compared to $664 million for 2005. -- Revenues excluding TAC were $4,560 million for 2006, a 23 percent increase compared to $3,696 million for 2005. -- Gross profit for 2006 was $3,750 million, a 19 percent increase compared to $3,161 million for 2005. -- Operating income for 2006 was $941 million (including $425 million for stock-based compensation expense recorded under the fair value method), a 15 percent decrease compared to $1,108 million (including $52 million for stock-based compensation expense recorded under the intrinsic value method) for 2005. -- Operating income before depreciation, amortization and stock-based compensation expense for 2006 was $1,906 million, a 22 percent increase compared to $1,557 million for 2005. -- Cash flow from operating activities for 2006 was $1,372 million, a 20 percent decrease compared to $1,711 million for 2005. -- Free cash flow for 2006 was $1,267 million (including $112 million for a previously disclosed land purchase), a 2 percent decrease compared to $1,292 million for 2005. -- Net income for 2006 was $751 million or $0.52 per diluted share (including $280 million of stock-based compensation expense, net of tax, recorded under the fair value method) compared to $1,896 million or $1.28 per diluted share (including $32 million of stock-based compensation expense, net of tax, recorded under the intrinsic value method) for 2005. -- Non-GAAP net income for 2006 was $723 million or $0.50 per diluted share (including $280 million of stock-based compensation expense, net of tax, recorded under the fair value method, excluding certain investment and other gains of $14 million, net of tax, and excluding $11 million in certain tax adjustments), compared to non-GAAP net income of $647 million or $0.43 per diluted share (including $239 million of stock-based compensation expense, net of tax, recorded under the fair value method, excluding $32 million of stock-based compensation expense, net of tax, recorded under the intrinsic value method and excluding $771 million of gains on the sale of certain investments, net of tax adjustments) for 2005. -- Non-GAAP net income for 2006 was $1,011 million or $0.69 per diluted share (excluding $280 million of stock-based compensation expense, net of tax, recorded under the fair value method, excluding certain investment and other gains of $14 million, net of tax, and excluding $11 million in certain tax adjustments), compared to non-GAAP net income of $886 million or $0.60 per diluted share (excluding $32 million of stock-based compensation expense, net of tax, and excluding $771 million of gains on the sale of certain investments, net of tax adjustments) for 2005. -- The provision for income taxes for 2006 was $458 million and yielded an effective tax rate of 42 percent. The provision for income taxes for 2005 was $768 million and yielded an effective tax rate of 30 percent as a result of a tax benefit related to a subsidiary restructuring transaction completed in the fourth quarter of 2005. -- Explanations of the Company's non-GAAP financial measures and the related reconciliations to the GAAP financial measures the Company considers most comparable are included in the accompanying "Note to Unaudited Condensed Consolidated Statements of Income", "Reconciliations to Unaudited Condensed Consolidated Statements of Income" and "Reconciliation of GAAP Net Income and GAAP Net Income Per Share to Non-GAAP Net Income and Non-GAAP Net Income Per Share". Segment Financial Results Fourth Quarter 2006 -- United States revenues for the fourth quarter of 2006 were $1,145 million, an 8 percent increase compared to $1,056 million for the same period of 2005. -- International revenues for the fourth quarter of 2006 were $558 million, a 25 percent increase compared to $445 million for the same period of 2005. -- United States segment operating income before depreciation, amortization and stock-based compensation expense for the fourth quarter of 2006 was $410 million, a 17 percent increase compared to $352 million for the same period of 2005. -- International segment operating income before depreciation, amortization and stock-based compensation expense for the fourth quarter of 2006 was $130 million, a 22 percent increase compared to $107 million for the same period of 2005. Full Year 2006 -- United States revenues for the year ended December 31, 2006 were $4,366 million, a 19 percent increase compared to $3,668 million for 2005. -- International revenues for the year ended December 31, 2006 were $2,060 million, a 30 percent increase compared to $1,590 million for 2005. -- United States segment operating income before depreciation, amortization and stock-based compensation expense for the year ended December 31, 2006 was $1,452 million, a 19 percent increase compared to $1,220 million for 2005. -- International segment operating income before depreciation, amortization and stock-based compensation expense for the year ended December 31, 2006 was $454 million, a 34 percent increase compared to $338 million for 2005. Cash Flow Information Free cash flow was $278 million in the fourth quarter of 2006 compared to $330 million for the same period of 2005. In addition to free cash flow, Yahoo! generated $87 million from the issuance of common stock as a result of the exercise of employee stock options, offset by $81 million used for acquisitions. Cash, cash equivalents and investments in marketable debt securities were $3,537 million at December 31, 2006 as compared to $3,230 million at September 30, 2006, an increase of $307 million. Free cash flow was $1,267 million for the year ended December 31, 2006 compared to $1,292 million for 2005. In addition to free cash flow, Yahoo! generated $318 million from the issuance of common stock as a result of the exercise of employee stock options, offset by $1,782 million used for direct stock repurchases, a net $228 million used in structured stock repurchase transactions, and $142 million used for acquisitions. Cash, cash equivalents and investments in marketable debt securities were $3,537 million at December 31, 2006 as compared to $4,000 million at December 31, 2005, a decrease of $463 million. Please refer to the "Note to Unaudited Condensed Consolidated Statements of Income" for definitions of certain key non-GAAP financial measures used here and in the "Business Outlook" attached to this press release. Quarterly Conference Call Yahoo! will host a conference call to discuss fourth quarter results at 5:00 p.m. Eastern Time today. A live webcast of the conference call, together with supplemental financial information, can be accessed through the Company's Investor Relations website at http://yhoo.client.shareholder.com/earnings.cfm. In addition, an archive of the webcast can be accessed through the same link. An audio replay of the call will be available following the conference call by calling 888-286-8010 or 617-801-6888, reservation number: 52560471 About Yahoo! Yahoo! Inc. is a leading global Internet brand and one of the most trafficked Internet destinations worldwide. Yahoo!'s mission is to connect people to their passions, their communities, and the world's knowledge. Yahoo! is headquartered in Sunnyvale, California. This press release and its attachments include the following financial measures defined as non-GAAP financial measures by the Securities and Exchange Commission: revenues excluding traffic acquisition costs or TAC, operating income before depreciation, amortization and stock-based compensation expense, free cash flow, and non-GAAP net income and non-GAAP net income per share. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles. See "Note to Unaudited Condensed Consolidated Statements of Income", "Reconciliations to Unaudited Condensed Consolidated Statements of Income" and "Reconciliation of GAAP Net Income and GAAP Net Income Per Share to Non-GAAP Net Income and Non-GAAP Net Income Per Share" included in this press release for further information regarding these non-GAAP financial measures. This press release and its attachments contain forward-looking statements that involve risks and uncertainties concerning Yahoo!'s expected financial performance (including without limitation the statements and information in the Business Outlook section and the quotations from management in this press release), as well as Yahoo!'s strategic and operational plans. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. The potential risks and uncertainties include, among others, the successful implementation, and acceptance by advertisers, of the Company's new search advertising system, the Company's ability to compete with new or existing competitors; the implementation and results of the Company's announced reorganization; reduction in spending by, or loss of, marketing services customers; the demand by customers for Yahoo!'s premium services; acceptance by users of new products and services; risks related to joint ventures and the integration of recent acquisitions; risks related to the Company's international operations; failure to manage growth and diversification; adverse results in litigation, including intellectual property infringement claims; the Company's ability to protect its intellectual property and the value of its brands; dependence on key personnel; dependence on third parties for technology, services, content and distribution; and general economic conditions. All information set forth in this release and its attachments is as of January 23, 2007. Yahoo! does not intend, and undertakes no duty, to update this information to reflect future events or circumstances. More information about potential factors that could affect the Company's business and financial results is included under the captions, "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the year ended December 31, 2005 and the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, which are on file with the SEC and available at the SEC's website at www.sec.gov. Additional information will also be set forth in those sections in Yahoo!'s Annual Report on Form 10-K for the year ended December 31, 2006, which will be filed with the SEC in the first quarter of 2007. Yahoo! and the Yahoo! logos are trademarks and/or registered trademarks of Yahoo! Inc. All other names are trademarks and/or registered trademarks of their respective owners. Yahoo! Inc. Unaudited Condensed Consolidated Statements of Income (in thousands, except per share amounts) Three Months Ended Year Ended December 31, December 31, ----------------------- ----------------------- 2005 2006 2005 2006 ----------- ----------- ----------- ----------- Revenues $1,501,000 $1,702,448 $5,257,668 $6,425,679 Cost of revenues (1) 594,738 690,893 2,096,201 2,675,723 ----------- ----------- ----------- ----------- Gross profit 906,262 1,011,555 3,161,467 3,749,956 ----------- ---------- ----------- ----------- Operating expenses: Sales and marketing (2) 286,031 334,229 1,033,947 1,322,259 Product development (2) 169,198 204,748 569,527 833,147 General and administrative (2) 93,524 137,600 341,073 528,798 Amortization of intangibles (1) 28,561 27,151 109,195 124,786 ----------- ----------- ----------- ----------- Total operating expenses 577,314 703,728 2,053,742 2,808,990 ----------- ----------- ----------- ----------- Income from operations 328,948 307,827 1,107,725 940,966 Other income, net 340,132 35,240 1,435,857 157,034 ----------- ----------- ----------- ----------- Income before income taxes, earnings in equity interests and minority interests 669,080 343,067 2,543,582 1,098,000 Provision for income taxes (17,729) (108,009) (767,816) (458,011) Earnings in equity interests 33,597 33,853 128,244 112,114 Minority interests in operations of consolidated subsidiaries (1,740) (238) (7,780) (712) ----------- ----------- ----------- ----------- Net income $ 683,208 $ 268,673 $1,896,230 $ 751,391 =========== =========== =========== =========== Net income per share - diluted $ 0.46 $ 0.19 $ 1.28 $ 0.52 =========== =========== =========== =========== Shares used in per share calculation - diluted 1,496,942 1,419,143 1,485,591 1,457,686 =========== =========== =========== =========== (2) Stock-based compensation expense was allocated as follows: Cost of revenues $ - $ 1,665 $ - $ 6,621 Sales and marketing 3,421 35,258 8,698 155,084 Product development 8,570 32,660 22,390 144,807 General and administrative 6,542 25,492 21,383 118,418 ----------- ----------- ----------- ----------- Total stock-based compensation expense $ 18,533 $ 95,075 $ 52,471 $ 424,930 =========== =========== =========== =========== - ---------------------------------------------------------------------- Supplemental Financial Data (See Note) - ---------------------- Revenues excluding TAC $1,067,949 $1,227,935 $3,695,931 $4,559,755 Operating income before depreciation, amortization and stock-based compensation expense $ 458,714 $ 540,389 $1,557,338 $1,905,917 Free cash flow $ 329,702 $ 277,959 $1,291,779 $1,266,650 Non-GAAP net income per diluted share including fair value stock-based compensation expense and excluding other items $ 0.13 $ 0.16 $ 0.43 $ 0.50 Non-GAAP net income per diluted share excluding stock-based compensation expense and other items $ 0.17 $ 0.21 $ 0.60 $ 0.69 - ---------------------------------------------------------------------- (1) Yahoo! has changed its classification of amortization expense related to developed technology and patents acquired through acquisitions. Amortization expense of $22 million and $64 million for the three months and year ended December 31, 2005, respectively, has been reclassified to cost of revenues from operating expenses. (2) Prior to January 1, 2006, Yahoo! accounted for stock-based compensation under Accounting Principles Board, Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB 25, Yahoo! historically used the intrinsic value method to account for stock-based compensation expense. As of January 1, 2006, Yahoo! accounts for stock-based compensation expense under the fair value method in accordance with Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"). As Yahoo! adopted the modified prospective transition method, results for prior periods have not been restated under the fair value method for GAAP purposes. Yahoo! is presenting non-GAAP net income and non-GAAP net income per diluted share financial measures which include stock-based compensation expense calculated under the fair value method and exclude other items, for all periods presented. Yahoo! is also presenting non-GAAP net income and non-GAAP net income per diluted share financial measures which exclude stock-based compensation expense and other items for all periods presented. Yahoo! Inc. Note to Unaudited Condensed Consolidated Statements of Income This press release and its attachments include the non-GAAP financial measures of revenues excluding traffic acquisition costs or TAC, operating income before depreciation, amortization and stock-based compensation expense, free cash flow and non-GAAP net income and non- GAAP net income per share, which are reconciled to gross profit, income from operations, cash flow from operating activities, and net income and net income per share, respectively, which we believe are the most comparable GAAP measures. We use these non-GAAP financial measures for internal managerial purposes, when publicly providing our business outlook, and to facilitate period-to-period comparisons. We describe limitations specific to each non-GAAP financial measure below. Management generally compensates for limitations in the use of non-GAAP financial measures by relying on comparable GAAP financial measures and providing investors with a reconciliation of the non- GAAP financial measure to the most directly comparable GAAP financial measure or measures. Further, management uses non-GAAP financial measures only in addition to and in conjunction with results presented in accordance with GAAP. We believe that these non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, gross profit, income from operations, cash flow from operating activities, and net income and net income per share calculated in accordance with generally accepted accounting principles. Revenues excluding TAC is defined as gross profit plus other cost of revenues. Under GAAP, both our revenues and cost of revenues include TAC. In defining revenues excluding TAC as our non-GAAP gross profit measure, we have removed TAC from both revenues and cost of revenues. TAC consists of payments made to affiliates that have integrated our sponsored search offerings into their websites and payments made to companies that direct consumer and business traffic to the Yahoo! website. We present revenues excluding TAC: (1) to provide a metric for our investors to analyze and value our Company and (2) to provide investors one of the primary metrics used by the Company for evaluation and decision-making purposes. We provide revenues excluding TAC because we believe it is useful to investors in valuing our Company. One of the ways investors value companies is to apply a multiple to revenues. Since a significant portion of the GAAP revenues associated with our sponsored search offerings is paid to our third party affiliates, we believe investors find it more meaningful to apply multiples to revenues excluding TAC to assess our value as this avoids "double counting" revenues that are paid to, and being reported by, our third party affiliates. Further, management uses revenues excluding TAC for evaluating the performance of our business, making operating decisions, budgeting purposes, and as a factor in determining management compensation. A limitation of revenues excluding TAC is that it is a measure which we have defined for internal and investor purposes that may be unique to the Company and therefore it may not enhance the comparability of our results to other companies in our industry who have similar business arrangements but address the impact of TAC differently. Management compensates for these limitations by also relying on the comparable GAAP financial measures of revenues, cost of revenues and gross profit, each of which includes TAC. Operating income before depreciation, amortization and stock-based compensation expense is defined as income from operations before depreciation, amortization of intangible assets and stock-based compensation expense (including the compensation of our Chief Executive Officer, which currently consists solely of stock-based compensation). We consider this measure to be an important indicator of the operational strength of the Company. We exclude depreciation and amortization because while tangible and intangible assets support our businesses, we do not believe the related depreciation and amortization costs are directly attributable to the operating performance of our business. This measure is used by some investors when assessing the performance of our Company. In addition, because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense, and the subjective assumptions involved in those determinations, we believe excluding stock-based compensation enhances the ability of management and investors to understand the impact of stock-based compensation expense on our operating income. We do not include depreciation, amortization and stock-based compensation expense in our internal measures or in the measures used by the Company to formulate our business outlook presented with our quarterly financial information to investors. A limitation associated with this non-GAAP measure, operating income before depreciation, amortization and stock-based compensation expense, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures. A further limitation associated with this measure is that it does not include stock-based compensation expense related to the Company's workforce. Management compensates for these limitations by also relying on the comparable GAAP financial measure of income from operations, which includes depreciation, amortization and stock-based compensation expense. Free cash flow is defined as cash flow from operating activities, less net capital expenditures and dividends received and including the excess tax benefits from stock-based compensation. We consider free cash flow to be a liquidity measure which provides useful information to management and investors about the amount of cash generated by the business after the acquisition of property and equipment, which can then be used for strategic opportunities including, among others, investing in the Company's business, making strategic acquisitions, strengthening the balance sheet and repurchasing stock. A limitation of free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. Management compensates for this limitation by also relying on the net change in cash and cash equivalents as presented in the Company's unaudited condensed consolidated statements of cash flows prepared in accordance with GAAP which incorporates all cash movements during the period. Non-GAAP net income is defined as net income excluding certain gains, losses and expenses and their related tax effects that we do not believe are indicative of our ongoing operating results and further adjusted for stock-based compensation expense under two different methods. Effective January 1, 2006, we adopted SFAS 123R under the modified prospective transition method and therefore have recorded stock-based compensation expense under the fair value method for the three months and year ended December 31, 2006. Prior to January 1, 2006, including the three months and year ended December 31, 2005, we recorded stock-based compensation expense under the intrinsic value method. We have included two non-GAAP measures for non-GAAP net income and non-GAAP net income per share. In one calculation of non- GAAP net income and non-GAAP net income per share, we have excluded stock-based compensation expense in addition to certain gains, losses and expenses and their related tax effects. In the alternative calculation of non-GAAP net income and non-GAAP net income per share, we have included stock-based compensation expense calculated under the fair value method (as previously disclosed) for the three months and year ended December 31, 2005, in addition to excluding certain gains, losses and expenses and their related tax effects, so that both presented periods include stock-based compensation expense under the fair value method. We consider non-GAAP net income and non-GAAP net income per share to be profitability measures which facilitate the forecasting of our operating results for future periods and allow for the comparison of our results to historical periods. A limitation of non-GAAP net income and non-GAAP net income per share is that they do not include all items that impact our net income and net income per share for the period. Management compensates for this limitation by also relying on the comparable GAAP financial measures of net income and net income per share, both of which include the gains, losses, expenses and related tax effects that are excluded from non- GAAP net income and non-GAAP net income per share. Yahoo! Inc. Reconciliations to Unaudited Condensed Consolidated Statements of Income (in thousands) Three Months Ended Year Ended December 31, December 31, ----------------------- ------------------------ 2005 2006 2005 2006 ----------- ----------- ----------- ----------- Revenues for groups of similar services: Marketing services $1,315,303 $1,489,734 $4,593,972 $5,627,207 Fees 185,697 212,714 663,696 798,472 ----------- ----------- ----------- ------------ Total revenues $1,501,000 $1,702,448 $5,257,668 $6,425,679 =========== =========== =========== ============ Revenues by segment: United States $1,056,406 $1,144,702 $3,667,509 $4,365,922 International 444,594 557,746 1,590,159 2,059,757 ----------- ----------- ----------- ------------ Total revenues $1,501,000 $1,702,448 $5,257,668 $6,425,679 =========== =========== =========== ============ Cost of revenues: Traffic acquisition costs ("TAC") $ 433,051 $ 474,513 $1,561,737 $1,865,924 Other cost of revenues 161,687 216,380 534,464 809,799 ----------- ----------- ----------- ------------ Total cost of revenues $ 594,738 $ 690,893 $2,096,201 $2,675,723 =========== =========== =========== ============ Revenues excluding TAC: Gross profit $ 906,262 $1,011,555 $3,161,467 $3,749,956 Other cost of revenues 161,687 216,380 534,464 809,799 ----------- ----------- ----------- ------------ Revenues excluding TAC $1,067,949 $1,227,935 $3,695,931 $4,559,755 =========== =========== =========== ============ Revenues excluding TAC by segment: United States: Gross profit $ 675,652 $ 746,119 $2,363,218 $2,761,829 Other cost of revenues 132,885 175,786 427,873 659,841 ----------- ----------- ----------- ------------ Revenues excluding TAC $ 808,537 $ 921,905 $2,791,091 $3,421,670 =========== =========== =========== ============ International: Gross profit $ 230,610 $ 265,436 $ 798,249 $ 988,127 Other cost of revenues 28,802 40,594 106,591 149,958 ----------- ----------- ----------- ------------ Revenues excluding TAC $ 259,412 $ 306,030 $ 904,840 $1,138,085 =========== =========== =========== ============ Operating income before depreciation, amortization and stock-based compensation expense: Income from operations $ 328,948 $ 307,827 $1,107,725 $ 940,966 Depreciation and amortization 111,233 137,487 397,142 540,021 Stock-based compensation expense 18,533 95,075 52,471 424,930 ----------- ----------- ----------- ------------ Operating income before depreciation, amortization and stock-based compensation expense $ 458,714 $ 540,389 $1,557,338 $1,905,917 =========== =========== =========== ============ Operating income before depreciation, amortization and stock-based compensation expense by segment: Operating income before depreciation, amortization and stock-based compensation expense - United States $ 351,849 $ 410,239 $1,219,539 $1,451,656 Operating income before depreciation, amortization and stock-based compensation expense - International 106,865 130,150 337,799 454,261 ----------- ----------- ----------- ------------ Operating income before depreciation, amortization and stock-based compensation expense $ 458,714 $ 540,389 $1,557,338 $1,905,917 =========== =========== =========== ============ United States: Income from operations $ 242,594 $ 215,500 $ 844,622 $ 632,895 Depreciation and amortization 91,552 110,279 325,159 437,080 Stock-based compensation expense 17,703 84,460 49,758 381,681 ----------- ----------- ----------- ------------ Operating income before depreciation, amortization and stock-based compensation expense - United States $ 351,849 $ 410,239 $1,219,539 $1,451,656 =========== =========== =========== ============ International: Income from operations $ 86,354 $ 92,327 $ 263,103 $ 308,071 Depreciation and amortization 19,681 27,208 71,983 102,941 Stock-based compensation expense 830 10,615 2,713 43,249 ----------- ----------- ----------- ------------ Operating income before depreciation, amortization and stock-based compensation expense - International $ 106,865 $ 130,150 $ 337,799 $ 454,261 =========== =========== =========== ============ Free cash flow: Cash flow from operating activities $ 481,342 $ 167,357 $1,711,383 $1,371,576 Acquisition of property and equipment, net (151,640) (131,550) (408,934) (689,136) Dividends received - - (10,670) (12,908) Excess tax benefits from stock-based compensation - 242,152 - 597,118 ----------- ----------- ----------- ------------ Free cash flow $ 329,702 $ 277,959 $1,291,779 $1,266,650 =========== =========== =========== ============ Yahoo! Inc. Reconciliation of GAAP Net Income and GAAP Net Income Per Share to Non-GAAP Net Income and Non-GAAP Net Income per share - including stock-based compensation expense (in thousands, except per share amounts) Three Months Ended Year Ended December 31, December 31, ----------------------- ----------------------- 2005 2006 2005 2006 ----------- ----------- ----------- ----------- GAAP Net income $ 683,208 $ 268,673 $1,896,230 $ 751,391 =========== =========== =========== =========== (a) To include fair value stock-based compensation expense, using the fair value method under Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation," ("SFAS 123"), as previously disclosed and exclude recorded stock-based compensation, using the intrinsic value method under APB 25 of the three and twelve months ended December 31, 2005 (84,044) - (320,900) - (b) (Gains)/Losses on the sale of certain investments and settlements 28,177 - (973,613) - (c) Reversal of an earn-out accrual - - - (10,000) (d) Non-cash gain arising from increased dilution of our ownership in Alibaba, resulting in the recognition of a further gain on the sale of Yahoo! China (337,965) - (337,965) (14,316) (e) To adjust the provision for income taxes to eliminate tax charges and credits related to tax adjustments recorded in the current period - (28,690) - (11,341) (f) To adjust the provision for income taxes to reflect an effective tax rate of approximately 42 percent in 2005 and approximately 43 percent in 2006 and to reflect tax impact of items (a) - (d) (98,228) (10,820) 382,750 7,668 ----------- ----------- ----------- ----------- Non-GAAP Net income including stock-based compensation expense $ 191,148 $ 229,163 $ 646,502 $ 723,402 =========== =========== =========== =========== Net income per share - diluted $ 0.46 $ 0.19 $ 1.28 $ 0.52 =========== =========== =========== =========== Non-GAAP Net income including stock-based compensation expense per share - diluted $ 0.13 $ 0.16 $ 0.43 $ 0.50 =========== =========== =========== =========== Shares used in per share calculation - diluted 1,496,942 1,419,143 1,485,591 1,457,686 =========== =========== =========== =========== (g) Adjust number of shares used in diluted share count for the impact of applying SFAS 123 994 - 3,076 - Shares used in Non- GAAP per share calculation - diluted 1,497,936 1,419,143 1,488,667 1,457,686 =========== =========== =========== =========== Yahoo! Inc. Reconciliation of GAAP Net Income and GAAP Net Income Per Share to Non-GAAP Net Income and Non-GAAP Net Income per share - excluding stock-based compensation expense (in thousands, except per share amounts) Three Months Ended Year Ended December 31, December 31, ----------------------- ----------------------- 2005 2006 2005 2006 ----------- ----------- ----------- ----------- GAAP Net income $ 683,208 $ 268,673 $1,896,230 $ 751,391 =========== =========== =========== =========== (a) Stock-based compensation as measured using the intrinsic value method under APB 25 18,533 - 52,471 - (b) Stock-based compensation as measured using the fair value method under SFAS 123R - 95,075 - 424,930 (c) (Gains)/Losses on the sale of certain investments and settlements 28,177 - (973,613) - (d) Reversal of an earn-out accrual - - - (10,000) (e) Non-cash gain arising from increased dilution of our ownership in Alibaba, resulting in the recognition of a further gain on the sale of Yahoo! China (337,965) - (337,965) (14,316) (f) To adjust the provision for income taxes to eliminate tax charges and credits related to tax adjustments recorded in the current period - (28,690) - (11,341) (g) To adjust the provision for income taxes to reflect an effective tax rate of approximately 40 percent and to reflect tax impact of items (a) - (e) (134,160) (38,558) 248,787 (130,094) ----------- ----------- ----------- ----------- Non-GAAP Net income excluding stock-based compensation expense $ 257,793 $ 296,500 $ 885,910 $1,010,570 =========== =========== =========== =========== GAAP Net income per share - diluted $ 0.46 $ 0.19 $ 1.28 $ 0.52 =========== =========== =========== =========== Non-GAAP Net income excluding stock-based compensation expense per share - diluted $ 0.17 $ 0.21 $ 0.60 $ 0.69 =========== =========== =========== =========== Shares used in per share calculations - diluted 1,496,942 1,419,143 1,485,591 1,457,686 =========== =========== =========== =========== Yahoo! Inc. Business Outlook Business Outlook The following business outlook is based on current information and expectations as of January 23, 2007. Yahoo!'s business outlook as of today is expected to be available on the Company's Investor Relations website throughout the current quarter. Yahoo! does not expect, and undertakes no obligation, to update the business outlook prior to the release of the Company's next quarterly earnings announcement, notwithstanding subsequent developments; however, Yahoo! may update the business outlook or any portion thereof at any time at its discretion. Three Months Year Ending Ending March 31, December 31, 2007 2007 ---------------- ---------------- Revenues excluding TAC (3) outlook (in millions): Gross profit $900 - $980 $3,960 - $4,340 Other cost of revenues 220 - 250 990 - 1,110 ---------------- ---------------- Revenues excluding TAC $1,120 - $1,230 $4,950 - $5,450 ================ ================ Operating income before depreciation, amortization and stock-based compensation expense (3) outlook (in millions): Income from operations $138 - $163 $810 - $920 Depreciation and Amortization 140 - 160 615 - 695 Stock-based compensation expense 142 - 157 525 - 585 ---------------- ---------------- Operating income before depreciation, amortization and stock-based compensation expense $420 - $480 $1,950 - $2,200 ================ ================ (3) Refer to Note to Unaudited Condensed Consolidated Statements of Income. Yahoo! Inc. Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) Three Months Ended Year Ended December 31, December 31, ------------------------ ------------------------- 2005 2006 2005 2006 ------------ ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 683,208 $ 268,673 $ 1,896,230 $ 751,391 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 60,820 84,431 224,065 302,161 Amortization of intangible assets 50,413 53,056 173,077 237,860 Stock-based compensation expense 18,533 95,075 52,471 424,930 Tax benefits from stock- based compensation 35,782 255,460 759,530 626,009 Excess tax benefits from stock-based compensation - (242,152) - (597,118) Earnings in equity interests (33,597) (33,853) (128,244) (112,114) Dividends received - - 10,670 12,908 Minority interests in operations of consolidated subsidiaries 1,740 238 7,780 712 (Gain)/loss from sale of investments, assets and other, net (301,573) 686 (1,278,311) (15,125) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable, net (143,466) (138,416) (272,387) (185,196) Prepaid expenses, current and long-term deferred taxes and other (43,080) (161,639) (35,344) (285,347) Accounts payable 36,928 (36,572) 31,574 30,413 Accrued expenses and other liabilities 100,716 37,126 212,112 175,913 Deferred revenue 14,918 (14,756) 58,160 4,179 ------------ ----------- ------------ ------------ Net cash provided by operating activities 481,342 167,357 1,711,383 1,371,576 ------------ ----------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment, net (151,640) (131,550) (408,934) (689,136) Purchases of marketable debt securities (391,383) (439,492) (7,023,802) (1,328,515) Proceeds from sales and maturities of marketable debt securities 552,453 520,117 7,341,974 1,951,323 Acquisitions, net of cash acquired (1,570,701) (80,972) (1,698,164) (142,272) Proceeds from sales of marketable equity securities - - 1,006,142 - Other investing activities, net (116) (3,557) (39,146) 14,919 ------------ ----------- ------------ ------------ Net cash used in investing activities (1,561,387) (135,454) (821,930) (193,681) ------------ ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net 369,056 86,652 746,807 318,103 Repurchases of common stock (14,383) - (387,735) (1,782,140) Structured stock repurchases, net 141,296 - (611,421) (227,705) Excess tax benefits from stock-based compensation - 242,152 - 597,118 Other financing activities, net - - 1,749 - ------------ ----------- ------------ ------------ Net cash provided by (used in) financing activities 495,969 328,804 (250,600) (1,094,624) ------------ ----------- ------------ ------------ Effect of exchange rate changes on cash and cash equivalents (13,234) 23,905 (32,883) 56,907 Net change in cash and cash equivalents (597,310) 384,612 605,970 140,178 Cash and cash equivalents, beginning of period 2,027,003 1,185,259 823,723 1,429,693 ------------ ----------- ------------ ------------ Cash and cash equivalents, end of period $ 1,429,693 $1,569,871 $ 1,429,693 $ 1,569,871 ============ =========== ============ ============ Supplemental schedule of acquisition- related activities: Supplemental noncash financing activity: Cash paid for acquisitions $ 1,572,306 $ 81,882 $ 1,700,898 $ 150,859 Cash acquired in acquisitions (1,605) (910) (2,734) (8,587) ------------ ----------- ------------ ------------ $ 1,570,701 $ 80,972 $ 1,698,164 $ 142,272 ============ =========== ============ ============ Common stock, restricted stock and stock options issued in connection with acquisitions $ 392 $ 3,256 $ 44,773 $ 3,256 ============ =========== ============ ============ Yahoo! Inc. Unaudited Condensed Consolidated Balance Sheets (in thousands) December 31, December 31, 2005 2006 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1,429,693 $ 1,569,871 Marketable debt securities 1,131,141 1,031,528 Accounts receivable, net 721,723 930,964 Prepaid expenses and other current assets 166,976 217,779 ------------ ------------ Total current assets 3,449,533 3,750,142 Long-term marketable debt securities 1,439,014 935,886 Property and equipment, net 697,522 1,101,379 Goodwill 2,895,557 2,992,103 Intangible assets, net 534,615 405,822 Other long-term assets 57,192 459,988 Investments in equity interests 1,758,401 1,891,834 ------------ ------------ Total assets $10,831,834 $11,537,154 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 70,291 $ 109,130 Accrued expenses and other current liabilities 827,589 1,048,229 Deferred revenue 306,172 317,982 ------------ ------------ Total current liabilities 1,204,052 1,475,341 Long-term deferred revenue 67,792 64,939 Long-term debt 749,995 749,915 Other long-term liabilities 243,580 50,501 Minority interests in consolidated subsidiaries - 8,056 Stockholders' equity 8,566,415 9,188,402 ------------ ------------ Total liabilities and stockholders' equity $10,831,834 $11,537,154 ============ ============ CONTACT: Yahoo! Inc. Kelly Delaney, 408-349-2579 (Media Relations) kellyd@yahoo-inc.com Cathy La Rocca, 408-349-5188 (Investor Relations) cathy@yahoo-inc.com or OutCast Communications Kim Milosevich, 415-345-4734 (Media Relations) kim@outcastpr.com -----END PRIVACY-ENHANCED MESSAGE-----