UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20142015
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common stock, $.001 par value | The NASDAQ Stock Market LLC (NASDAQ Global Select Market) |
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ¨ | |
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 by Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of June 30, 2014,2015, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of voting stock held by non-affiliates of the Registrant, based upon the closing sales price for the Registrant’s common stock, as reported on the NASDAQ Global Select Market was $32,432,060,475.$34,070,929,391. Shares of common stock held by each officer and director and by each person who owns 10 percent or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
The number of shares of the Registrant’s common stock outstanding as of February 13, 201512, 2016 was 936,120,954.946,811,547.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K:
Proxy Statement for the 20152016 Annual Meeting of Shareholders—Part III Items 10, 11, 12, 13, and 14.
YAHOO! INC.
Form 10-K
Fiscal Year Ended December 31, 20142015
The trademarks and/or registered trademarks of Yahoo! Inc. and its subsidiaries referred to herein include, but are not limited to, Yahoo!, Flickr,the Yahoo family of marks, Tumblr, Yahoo Tech, Yahoo Food, Yahoo Travel, Yahoo Beauty, Yahoo Style, Yahoo Health, Yahoo Makers, Yahoo Parenting, Yahoo Music, Yahoo Movies, Yahoo TV, Yahoo Screen, Aviate, Yahoo News, Yahoo News Digest, Yahoo Mail, Yahoo Answers, Yahoo Search, Yahoo Messenger, Yahoo Games Network, Yahoo Finance, Yahoo Weather, Yahoo Sports, Yahoo Gemini, Yahoo Premium Ads, Yahoo Ad Manager Plus, Yahoo Smart TV, Yahoo Recommends, Yahoo Groups,BrightRoll, Xobni, Flurry BrightRoll, Rivalsand Flurry Analytics, and Polyvore, and their respective logos. Other names are trademarks and/or registered trademarks of their respective owners.
Forward-Looking Statements
In addition to current and historical information, this Annual Report on Form 10-K 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 Annual Report on Form 10-K includes, among others, forward-looking statements regarding:
• | expectations related to our strategic plan announced in February 2016; |
• | our exploration of strategic alternatives; |
• | expectations about revenue, including search, display, and other revenue, as well as revenue from our offerings in mobile, video, native, and social (“Mavens”); |
• | expectations about the financial and operational impacts of our Search and Advertising Services and Sales Agreement with Microsoft Corporation and our Google Services Agreement with Google Inc.; |
• | expectations about the growth of, the opportunities for monetization in and revenue from, the mobile industry and mobile devices; |
expectations about growth in users;
• | projections and estimates with respect to our restructuring activities; |
• | expectations about changes in operating expenses; |
• | anticipated capital expenditures; |
• | expectations about changes in our earnings in equity interests and net income; |
• | 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 the sufficiency of our available sources of liquidity to meet normal operating requirements and capital expenditures; and |
• | expectations regarding the future outcome of legal proceedings in which we are involved. |
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 1, Item 1A “Risk Factors” of this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update or revise any of our forward-looking statements after the date of this Annual Report on Form 10-K to reflect new information, actual results or future events or circumstances.
PART I
Overview
Yahoo! Inc., together with its consolidated subsidiaries (“Yahoo,” the “Company,” “we,” or “us”), is a guide to digital information discovery, focused on making users’informing, connecting, and entertaining our users through our search, communications, and digital habits inspiring and entertaining.content products. By creating highly personalized experiences, for ourwe help users we keep people connected to whatdiscover the information that matters most to them across devices and around the world. This focus is driven by our commitment to creating highly personalized experiences that reach our users wherever they might be—world—on their mobile phone, tablet or PC.desktop.
We create value for advertisers with a streamlined, simplifiedsimple advertising technology stack that leverages Yahoo’s data, reachcontent, and analyticstechnology to connect advertisers with their target audiences. 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 advertisingadvertisements targeted to targeted audiences on our online properties and services (“Yahoo Properties”) and a distribution network of third partythird-party entities (“Affiliates”) who integrate our advertising offerings into their Websiteswebsites or other offerings (“Affiliate sites”; together with Yahoo Properties, the “Yahoo Network”). Our revenue is generated principally from display and search advertising.
We are proud of our storiedrich history that has evolved with the Internet, beginning in 1994 when our founders, Jerry Yang and David Filo, then graduate students at Stanford University, createdJerry and Dave’s Guide to the World Wide Web, a simple directory of websites to help people navigate the Internet. Yahoo was incorporated in 1995 and is a Delaware corporation. We completed our initial public offering on April 12, 1996, and our stock is listed on the NASDAQ Global Select Market under the symbol “YHOO.” Yahoo is a global company headquartered in Sunnyvale, California.
Executive Leadership
The current executive management team includes:
Marissa Mayer—President and Chief Executive Officer;
David Filo—Co-Founder and Chief Yahoo;
Ken Goldman—Chief Financial Officer;
Ron Bell—General Counsel and Secretary;
Jacqueline Reses—Lisa Utzschneider—Chief DevelopmentRevenue Officer;
Kathy Savitt—Chief Marketing Officer;Jeff Bonforte—Senior Vice President, Product and Engineering, Communications;
Adam Cahan—Senior Vice President, MobileProduct and Engineering, Video Design and Emerging Products;
Mike Kerns—Simon Khalaf—Senior Vice President, HomepageProduct and Verticals;Engineering, Publisher Products;
Laurence Mann—Senior Vice President, Search Products;Chief Information Officer;
Jeff Bonforte—Bryan Power—Senior Vice President, Communication Products;
Prashant Fuloria—Senior Vice President, Advertising Products;The People Team;
Jay Rossiter—Senior Vice President, Platforms;Product and Engineering, Science and Technology;
Dawn Airey—Enrique Muñoz Torres—Senior Vice President, Europe, Middle East,Product and Africa;
Rose Tsou—Senior Vice President, Asia Pacific;Engineering, Search; and
Lisa Utzschneider—Ian Weingarten—Senior Vice President, Sales, Americas.Corporate Development and Partnerships.
Our current Board of Directors is composed of:
Marissa Mayer, our President and CEO; Maynard Webb, our Chairman of the Board; David Filo; Susan James; Max Levchin; Thomas McInerney; Charles Schwab; H. Lee Scott; and Jane Shaw, Ph.D.
2014 Business Highlights: People, Products, Traffic & RevenueStrategic Plan
ForOn February 2, 2016, we announced a strategic plan to simplify Yahoo, narrowing our focus on areas of strength to fuel growth, drive revenue, and increase efficiency in 2016 and beyond. Yahoo will simplify its product portfolio to emphasize the past two years, we have focused our attention on triggering a chain reactionproducts that distinguish the Company competitively and drive the most substantial portion of growth, which starts with hiring the best people who will build beautiful, engaging products. Those products drive increased traffic. The increased traffic generates greater advertiser interest, which ultimately results in revenue growth. Throughout 2014, we continued to invest in mobile, video, native, and social (“Mavens”). Our mobile first strategy has yielded significant results for our users, revenue and market opportunities. For users, we will focus on three global platforms: Search, Mail and Tumblr, and four verticals: News, Sports, Finance and Lifestyle. For advertisers, we will focus on two core offerings: Yahoo Gemini and BrightRoll. Gemini combines our Companysearch and generated mobile revenuenative ad offerings, while BrightRoll offers programmatic buying and selling tools for video, display and native advertising.
The goals of the fourth quarter and full year of 2014 of approximately $254 million and $768 million, respectively. Our investments and energy in 2014 were dedicated to our forward-looking Mavens offerings, and we remain committed to that approach in 2015.
People:
We remain committed to hiring the best possible people and we recruited impressive talent across the Company in 2014. Our stockholders also elected several new board members in 2014.strategic plan are:
We hired Lisa Utzschneider as Senior Vice President, Sales, Americas, responsible for our advertising business across the Americas. We also hired Alex Stamos as our new Chief Information Security Officer to further our efforts to protect our users’ security. Finally, we added important technical talent to the team with Mike Kail joining as Chief Information OfficerImprove user and Senior Vice President, Infrastructure to lead ITadvertiser product quality and data center operations for the Company.grow daily active users (“DAUs”)
We launched ten digital magazinesDrive continued growth in revenue realized through Mavens (mobile, video, native and hired world class editorial voices to lead each one. Yahoo Tech is led by Editor-in-Chief David Pogue; Yahoo Food is led by Editor-in-Chief Kerry Diamond; Yahoo Travel is led by Editor-in-Chief Paula Froelich; Yahoo Movies (U.S. & U.K.) is led by Executive Editor of Entertainment, Josh Wolk; Yahoo Beauty is led by Editor-in-Chief Bobbi Brown; Yahoo Style is led by Editor-in-Chief Joe Zee; Yahoo Health is led by Editor-in-Chief Michele Promaulayko; Yahoo Makers is led by Editor-in-Chief Katie Brown; Yahoo Parenting is led by Editorial Director Lindsay Powers; and Yahoo Music is led by Executive Editor of Entertainment Josh Wolk. In addition, we hired Yahoo TV Editor-in-Chief Kristen Baldwin; and announced José Mourinho as exclusive Global Football Ambassador for 2014 in the lead up to the World Cup.
Products:
In 2014, we accelerated the pace of innovation, launching more than three dozen new product experiences to strengthen and expand our core products. We also continued our investment in original content.
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We entered into a five-year global partnership with Mozilla to make Yahoo the default search experience on Mozilla’s Firefox browser across mobile and PC. The agreement also provides a framework for exploring future product integrations and distribution opportunities to other markets. We announced a partnership with Yelp to showcase user reviews, business information, and star ratings; and we also made Yahoo Search more personal by introducing results for your upcoming, flights, events, packages, and more directly on the search results page when you’re logged in.social)
We launched Yahoo Aviate, an intelligent homescreen that simplifies your Android phone. We also added two Spaces - the Listening Space and Moving Space - our auto-categorization and contextual feature that surfaces information to your homescreen the moment it’s useful. Aviate is localized across nine languages and, in the U.S., we also launched Search on Aviate, connecting users to their apps, contacts and the Web.
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We launched a new version of Yahoo Mail for iPhone, iPad and Android; and added a personalized news experience plus travel and event notifications on the Yahoo Mail app. We also launched Paperless Post stationery designs for Yahoo Mail.Improve profitability
Additional launches included new navigation for Yahoo Answers; Yahoo Games Network; we added local news, commenting and other functions on the Yahoo App on Android and iOS in the U.S.; and added animated local weather conditions to Yahoo Weather on Android.
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We launched Yahoo News Digest for iPhone, iPad, iPod touch and Android, and rolled out international and Canadian editions. Notably, Yahoo News Digest won the Apple Design Award 2014.Reduce operating expenses
We launched Yahoo Tech, Yahoo Food, Yahoo Health, Yahoo Style, Yahoo Travel, Yahoo Beauty, Yahoo Movies (U.S. & U.K.), Yahoo Music, Yahoo Makers,Limit revenue impact of product and Yahoo Parenting; and announced support for Digital Magazines for Android and iOS.regional exits
Yahoo was the technology provider for the Quicken Loans Billion Dollar Bracket Challenge with Yahoo Sports; launched a new version of Yahoo Sports optimized for iOS 7; we launched Fantasy Football for iOSExplore non-strategic asset divestitures and Android leveraging original content from both Yahoo Sports Fantasy experts and NFL writers; Yahoo Sports World Football Pick‘em launched as the World Cup 2014 kicked off; announced a partnership with Samsung Smart TV to provide viewers with the Yahoo Fantasy Football TV experience; and we launched NFL Now on Yahoo across devices including PC, iPhone and iPad.free up cash flow
We invested inDeliver increased value to shareholders, advertisers, and the first two original comedies in our new lineup of long-form shows: “Other Space” and “Sin City Saints;” announced that Season Six of “Community” would be coming to Yahoo Screen, as well as the new Live Nation Channel on Yahoo Screen. Both Taylor Swift and Prince provided exclusive content to Yahoo in advance of their album releases. Yahoo Screen launched an integration with Roku and app for Android. Finally, along with The Weinstein Company, we announced that following a successful ten-day pre-theatrical release, the film “One Chance” would be extended on Yahoo Screen.
We introduced Yahoo Finance Contributors with a roster of new high-profile industry experts including the Najarian brothers; and announced the new Yahoo Finance app.
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Traffic:
We saw user growth over 2014. Today we have overmore than one billion monthly active users, including Tumblr. Over 575 million (including Tumblr) of those monthly users come to us via mobile.
Revenue:
We made important progress over 2014 in delivering value to our advertiserspeople who use Yahoo’s products and publishers through our new areas of investment: mobile, video, native and social. Our significant investments in mobile in particular paid off, as we are now seeing an increase in revenue. The Mavens offerings generated more than $380 million and $1.1 billion of revenue for the fourth quarter and full year of 2014, respectively.
We introduced Yahoo Advertising—a comprehensive suite of search, video, native and display ad products across Web and mobile. We also launched Yahoo Gemini, a unified marketplace for mobile search and native advertising, and Tumblr Sponsored Posts Powered by Yahoo Advertising.
We introduced image-rich native ads designed to be mobile-first, seamlessly integrated with content, and targeted to the right consumer to drive results. We also extended native ads globally. We also launched Yahoo Recommends, which brings Yahoo’s content personalization technology and native ads to publishers across the Web, including high-quality publisher sites CBSi, VOX Media and Hearst.
We closed the acquisition of Flurry, a mobile data analytics company that optimizes mobile experiences for developers, marketers, and consumers.
We closed the acquisition of BrightRoll, which will help us strengthen our video advertising platform.
We announced that U.S. advertisers with managed accounts can use Yahoo Gemini to promote their apps across the Yahoo Properties and Affiliate sites. Yahoo also expanded the cross-screen capabilities of video advertising for advertisers by integrating in-app inventory from Flurry’s Marketplace.services
Our BusinessUser Offerings
User Offerings
With hundreds of Search partners, a world-class mail platform, three industry-leading verticals (News,Yahoo is focused on informing, connecting, and entertaining our users with our search (Yahoo Search), communications (including Yahoo Mail and Yahoo Messenger), and digital content products (including Tumblr, and our 4 core verticals: Yahoo News, Yahoo Sports, Yahoo Finance, and Finance), a growing video content offering, the photo resources of Flickr and the social reach of Tumblr, we play an important role in the digital lives of our more than 1 billion monthly users on Yahoo Properties.Lifestyle).
Our user offerings include:
Search
Yahoo Search serves as a starting pointguide for users to navigatediscover the information on the Internet and discover information that matters to users,them the most. In 2015, Yahoo launched a new personalized search experience on mobile, offering rich results from the web and, if signed in, personalized contextual results surfaced from a user’s email, contacts, and calendar. The new Yahoo mobile search results ranked and organized based on their relevance to the query. Our Search continues to evolve to helpexperience helps users find and take action on all of the right information atthey are looking for on the right time.go. We plan to continue investing in a differentiated mobile search experience by allocating additional resources to develop new search technology through our Yahoo Gemini platform that surfaces personalized results for the user and anticipates the users’ needs.
Under our Search and Advertising Services and Sales Agreement (“Search Agreement”) with Microsoft Corporation (“Microsoft”), Microsoft is the exclusiveprovides algorithmic and paid search advertising services provider on a non-exclusive basis for Yahoo Properties on mobile, desktop, and Affiliate sites. This
agreement is subject to a volume commitment by the Company to request paid search results from Microsoft for 51 percent of its search queries originating from desktop computers accessing Yahoo Properties and non-exclusive provider of such services on Affiliatesits Affiliate sites and to display only Microsoft’s paid search results on such search result pages. In October 2015, Yahoo entered into the Google Services Agreement (the “Services Agreement”) with Google Inc. (“Google”) that provides Yahoo with additional flexibility to choose among suppliers of search results and ads. Google’s offerings complement the search services provided by Microsoft and Yahoo Gemini (Yahoo’s platform for mobile devices.search and native advertising). See “Advertiser Products” and “Advertising Formats” below for further information about our Yahoo Gemini platform. Yahoo continues to develop and launch features around the results to enhance the search experience for our users, whether on mobile phone, tablet, or PC. These features include rich results, contextual search results, personalized results, related topic suggestions and more.
Yahoo Answers enables users to seek, discover and share knowledge and opinions across mobile phones, tablets and PC.
Yahoo Aviate is a launcher application built for Android phones that helps users organize their phone applications and access the information that is most useful to them at the moment they need it.users.
Communications
Yahoo Mail is a primary driver of engagement across our user offerings. Yahoo Mail connects users to the people and things that arecontent most important to them across mobile phones, tablets and PC. In additiondesktop. We support connecting external mail providers (such as Gmail, AOL, and Outlook) for users to mail, we offer usersmanage multiple accounts from the Yahoo Mail client. Each Yahoo Mail account comes with one terabyte of free storage and is integrated with contacts, calendar, and messaging products, all outfitted with one terabyte of storage(see Yahoo Messenger section below). Our newly redesigned mobile app has new user-centric features including account key, compose assistant, document preview, and beautiful photo themes,smart contacts. In 2016, we plan to invest in Yahoo Mail to grow DAUs and our mobile apps bring ourincrease engagement by improving speed and stability, as well as adding features that make it easier for users personalized news streamsto share, search, and updates from our other content verticals like Sports, Finance, and Weather.connect through the platform.
Yahoo Messengeris an,our completely redesigned instant messaging service, that provides an interactive and personalized way for users to connect, communicate, and share experiences in real-time. It incorporates many of our existing platforms including Tumblr and Xobni, with features like GIF search, “hearting” messages, and unsend. Yahoo Messenger is available as a mobile app, on a real-time basis. Similarthe web, and also integrated directly into Yahoo Mail on desktop to mail, we connect users across mobile phones, tablets and PC.
Yahoo Groups allows users to join groups based on shared interests and involvements, providing access to messages, event calendars, polls and other shared information.drive deeper engagement with users.
Digital Content
Our Digital Content offerings include: Tumblr, our global social platform, and our four core verticals: News, Sports, Finance, and Lifestyle. Our Digital Content is available on mobile or desktop.
Yahoo News, which can be accessed through the Yahoo App and the Yahoo homepage atYahoo.combrings together, gives users access todiscover,consume, and engage around the news, content, and video they care about all in one place. We continue to provide current and relevanttrending news and information—includinginformation from Yahoo original contenteditorial and partner content—curated by editors from across the Web. Our homepagecontent. Yahoo News is optimized to deliverprovide a consistent, easy-to-use content discovery experience across mobile phones, tablets and PC.
Visitors on the Yahoo Homepage can see a preview of their mail inbox,desktop with breaking news, local weather, stock quotes, sports scores, comics,a personalized content stream, and more. Our Yahoo Properties, generate revenue from display and search advertising, as well as from fee-based services. Many of our Yahoo Properties are also available in mobile-optimized versions for display on mobile phones and tablets and as native applications across different operating platforms for iOS and Android phones and tablets.social sharing capabilities.
Yahoo Sportsserves one of the largest audiences of digital sports enthusiasts in the world. Yahoo Sports is anchored by Fantasy Sports, editorial reporting, real-time scores, statisticsworld and breaking news, coverage of the biggest global sports events, and premium college sports coverage through
our Rivals publisher network. With award-winning writers, a leading fantasy platform and live game tracking, Yahoo Sports delivers experiences for every fan, every day. During 2014, we delivered new enhancements to our experiences, including:
Fantasy Sports: Increased mobile offerings, such as push notifications and a unified app for all of our games. We maintained our status as the official fantasy game for the NBA, NHL, and MLB.
Mobile: Yahoo Sports app expanded into six additional countries and incorporated video highlights from our relationships with the NFL, NBA and NHL.
Global events: Launched dedicated mobile and PC sitesprovides users access to cover the Winter Olympics in Sochi and the FIFA World Cup in Brazil, featuring original and partner content, fantasy games, and live scores.Fantasy Sports.
Yahoo Finance provides a comprehensive set of financial data, information, and tools that helphelps users make informed financial decisions. Yahoo Finance features aThe robust content offering thaton Yahoo Finance is a mix of Yahoo original editorial and syndicated news via relationships with several third-party providers and is available on mobile phones, tablets and PC.partners.
Yahoo WeatherLifestyle provideswill bring together content, commerce, and community to engage users with real-time weather conditionspassionate about style and information forfashion. We are working on creating a Yahoo Lifestyle vertical that features Yahoo’s original editorial voice to deliver authoritative and authentic style and beauty content. As we continue to integrate Polyvore, Inc. (“Polyvore”), a business we acquired in September 2015, into Yahoo Lifestyle, users will have access to discover and publish their favorite cities and locations and is available internationally on mobile phones, tablets, and PC. In 2014, we brought animated weather effects and daily push notifications into our mobile apps to further bring users’ weather to life.
Yahoo News, Entertainment and Lifestyles are a collection of digital magazines focused on emergingown style trends, and subject matter that our users are most passionate about. Digital magazines available include: Yahoo Tech, Yahoo Food, Yahoo Health, Yahoo Style, Yahoo Travel, Yahoo Beauty, Yahoo Movies (U.S. & U.K.), Yahoo Music, Yahoo Makers,to buy items featured in articles and Yahoo Parenting. Each magazine features content from industry leading editors, premium partners, and select user generated content. The digital magazine designs provide experiences around a specific content topic and passion area packaged togethersets through direct integration with pictures and video that capture user’s attention across all devices. Features include visually driven content streams; trusted editorial voices; social sharing capabilities; entertaining and inspiring brand content; and elegant display across all devices. The digital magazines also include engaging native ads that are part of the experience, designed to be as engaging as the editorial content. In addition to digital magazines, the Yahoo News Digest app brings users twice-daily summaries of top new stories and breaking events on iOS and Android phones.commerce sites.
Yahoo Screen is a video destination site and application where users can easily flip through their favorite channels to stay informed and entertained. Users are also alerted to featured live events, such as concerts and breaking news. Screen is currently available on PC, iOS and Android mobile devices, and TV-based platforms such as Apple TV and Roku. We also added new channel partners such as LiveNation (which features a live concert every day for a year), Vevo, and NFL.
Flickr
Flickr is a web and mobile photo management and sharing service that makes it easy for users to upload, store, organize, and share their photos. Flickr offers all members one terabyte of free storage. Members also have the ability to purchase printed photo merchandise.
Tumblr
Tumblr offers a web platform and mobile applications (particularly on the iOS and Android platforms) that allow users to create, share, and curate content of all kinds—including images, video, audio, and
text, andcontent. Tumblr messaging enables users to consume media aroundengage with other users that share their same interests and passions in the Tumblr Dashboard stream. Tumblr’s primary form of monetization is native brand advertising to users, primarily through a variety of ad products based on Tumblr Sponsored Posts (company-sponsored blogs that are reblogged and shared across Tumblr users.) In addition, Tumblr generates revenue by enabling a marketplace for the sale of third-party developed blog themes and licensing its real-time feed of user-generated content.passions.
Advertiser Offerings
As one ofYahoo has two core advertiser products: Gemini and BrightRoll, which includes the Web’s largest publishersBrightRoll Demand Side Platform and the owner of leading properties across multiple content categories, Yahoo provides a canvas of personalized experiences where advertisers can connect with users in a meaningful way. Yahoo is a digital publisher and advertising technology provider that enables advertisers to reach their business objectives,BrightRoll Exchange. Advertisers benefit from high-impact branding campaigns that generate awareness among consumers to tactical campaigns that drive specific audiences to action. We provide a unifiedour comprehensive approach to digital advertising across search and display advertising, which includes native, video, premium, and audience premium display,ads. Gemini and video advertising—across platforms and devices, including mobile and PC. These productsBrightRoll are supported by Yahoo’s technology platform, data, and analytical tools, with insights into the digital habits of more than 1 billion people worldwide.tools.
Search AdvertisingAdvertiser Products
Yahoo Gemini is Yahoo’s proprietary marketplace for search and native advertising across devices. Yahoo Gemini helps marketers achieve measurable results with intent-driven advertising. By leveraging Yahoo’s proprietary data, Gemini helps advertisers target the audiences they are interested in reaching across Yahoo Properties and third-party publishers and engage those audiences through search and native ads. Gemini search is focused on helping advertisers reach their target audiences at the moment the user has made a relevant search query. Gemini native ads are built to match the content that a user is exploring. By using the surrounding content to establish relevancy for targeting, Gemini native ads drive higher audience engagement and brand awareness for the advertiser.
BrightRoll is Yahoo’s unified brand for programmatic advertising technology, offering a suite of media-agnostic tools to help advertisers, publishers, and partners connect with users across ad formats and devices.BrightRoll Demand Side Platform (“BrightRoll DSP”) is technology that enables brand and performance advertisers to plan, execute, optimize, and measure programmatic digital advertising campaigns. Our targeting solutions allow advertisers to reach users across Yahoo, exclusive publishing partners, and a wide variety of sites and mobile apps with the scale and efficiency of programmatic buying. BrightRoll DSP offers advertisers greater control and transparency with advanced programmatic buying capabilities and access to Yahoo’s proprietary data. Advertisers can reach the right people with custom audience definition and manage frequency on any device with independent campaign measurement and insights.BrightRoll Exchange connects programmatic, native, and video inventory from the top publishers and ad exchanges with demand from the top DSPs, agencies, ad networks, and advertisers. The BrightRoll Exchange delivers revenue to publishers with the goal of maximizing yield and offers buyers access to a variety of premium digital advertising inventory and unique data with the goal of enabling them to efficiently value supply.
Advertising Formats
Search Advertising.
Yahoo Bing NetworkGemini connects advertisers with an audience of hundreds of millions of users,the audiences across our network, with the support of strategic account teams, reporting, analytics, and extensive campaign controls. Yahoo continues to
focus on developing new search ad formats, features, and capabilities to engage users and optimize performance across devices, including personalized search retargeting, click-to-call functionality, in search ads, sitelink extensions, location extensions, and product ads. To provide the richest possible experience for our users, Yahoo also serves search ads from partners, including Microsoft and more.Google.
Display AdvertisingAdvertising.
Native AdvertisingAdvertising.. Enables advertisers to engage their audience across devices and formats on Yahoo’s network of consumer products and exclusive publishing partners. Yahoo’s native advertising offerings include Yahoo Stream Ads served within content streams across our media properties and in Yahoo Mail and within Yahoo Recommends, a personalized content recommendations and native advertising experience, as well as HD-quality image-rich ads served within native image environments and slideshows; and Tumblr Sponsored Posts—all powered by Yahoo’s advertising platforms and user data. Because native ads are a seamless part of a user’s experience they allowon Yahoo sites across devices, as well as third-party partner publisher sites and mobile apps. This natural integration helps advertisers to connect with userspeople in a compelling and impactful way, driving awareness and performance.performance, especially on mobile where native ads are the predominant ad format. Yahoo native ads are visually rich and come in a variety of formats, like text, image, and video that deliver measurable branding and sales results. Yahoo offers native ads through Yahoo Gemini and the BrightRoll DSP.
Audience TargetingVideo Advertising. . Yahoo Audience Ads allow advertisersvideo ads enable brands to benefit from the deep consumer relationships Yahoo hasalign with over 1 billion users and connect with their desired audiencepremium, contextually relevant video programming across display, video and mobile ads. Yahoo Audience Ads deliver the right messages to the right users across Yahoo, exclusive publishing partners, and public exchange-traded sites with the scale and targeting precision of real-time programmatic buying. Yahoo Audience Ads offer data-driven ad buying, optimized with enhanced analytics. Combiningour properties. In addition, we leverage Yahoo’s proprietaryunique user data with advertiser’s own data and third-party data enables Yahoo to leverage a comprehensive audience data set and provides a compelling audience buying solution.connect brands to their target audiences at scale across devices.
Premium AdvertisingAdvertising. . Yahoo Premium Adspremium ads offer a digital advertisingunique and engaging canvas for brand and performance advertisers on the Web.storytelling. We offer high-impact advertising opportunities on theYahoo.com, Yahoo Homepage; Yahoo’s leading vertical content properties; Yahoo Mail;Mail, and program sponsorships of major events;events. Brands have the ability to anchor buys within premium content and premium video placements—all with custom integrations, personalization and targeting that unite advertisers’ brands with consumers’ digital habits.
Video AdvertisingAudience Advertising. . Yahoo Video provides brands withaudience ads leverage a fullcomprehensive set of solutions for reaching their target audience at scale with digital video ads across bothproprietary data signals to identify and engage the right users on Yahoo and leadingacross the web. With audience ads, Yahoo can help brands make meaningful connections with the right users at the right time, across ad exchanges. Anchored by Yahoo’s award-winning original programmingformats and world-class partner content, Yahoo Video connects brands to their target audience at scale through a complete set of advertising opportunities including video channels, video programs, audience targeting, branded entertainment, and live events with ad placements that occur before, during, and after a video rolls. Additionally, Yahoo connects programmatically to all of the leading exchanges, offering advertisers additional scale and reach.devices.
AD PlatformsDeveloper Offerings
The Yahoo Gemini (formerly known asMobile Developer Suite gives developers the ability to measure, monetize, advertise, and improve their apps with Yahoo Ad Manager) is a simplified powerful marketplace that gives advertisers direct, hands-on access to Yahoo’s advertising products. Yahoo mobile search ads and native ads are available through Yahoo Gemini, with a simple user interface that helps advertisers get ads online in a matter of minutes, with insights and analytics built in.
Yahoo Ad Manager Plus enables larger advertisers to plan, execute and optimize complex display ad campaigns directly, giving them greater control over the performance of their ads on Yahoo and third-party programmatic inventory. Yahoo offers managed services through Yahoo Ad Manager Plus for advertisers who want custom audience definition, richer campaign measurement and insights, access to exclusive inventory, varied pricing options, and full-service campaign optimization.
APTis an internal ad management platform that handles our owned and operated premium inventory, sold in a direct, guaranteed fashion.
BrightRolloffers a video demand side platform, ad network and publisher marketplace, enabling the buying and selling of video inventory across the digital advertising ecosystem.tools.
Flurryoffers both sell and buy side platforms, focused in native advertising and mobile application publishers.
Yahoo Ad Exchange Analytics is a platformfree mobile app analytics solution that is implemented in applications on more than 2 billion devices worldwide. Flurry is integrated in third-party applications via a lightweight software developer kit (“SDK”). Flurry provides mobile app developers insight into the action their users are taking in-app, as well as their audience’s interests and demographics.
Yahoo App Publishing (“YAP”)enables advertisersthird-party app developers to easily target global audiencesmonetize their app experiences with Yahoo Gemini and BrightRoll powered native, video and display ads. Developers can integrate YAP through the Flurry SDK.
Yahoo App Marketing gives third-party app developers the ability to advertise their apps through targeted native and video advertising on Yahoo, Tumblr, and across our app network. Yahoo Properties, Affiliate sitesApp Marketing ads are powered by Yahoo Gemini and other publisher sitespriced on mobilea cost-per-click basis.
Tumblr In-App Sharing allows developers to integrate a Tumblr sharing button into their app experiences to enable their users to share content directly to Tumblr without leaving their app. The resulting content post on Tumblr has a deep-link back to the originating app, and if the Web.Tumblr user does not have that app, they will see a prompt to install it.
Product Development
Yahoo continually launches, improves, and scales products and features to meet evolving user, advertiser, and publisher needs. Most of our software products and features are developed internally by our employees. internally.
In some instances, however, we might purchase technology and license intellectual property rights if the opportunity is strategically aligned, operationally compatible, and economically advantageous. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe based on past experience and industry practice that such licenses generally could be obtained on commercially-reasonable terms. We believe our continuing innovation and product development are not materially dependent upon any single license or other agreement with a third partythird-party relating to the development of our products.
Yahoo’s product teams, which include a broad array of engineering and product talent, and support a large portion of the Yahoo product portfolio and technology infrastructure. Our product teams have expertise in consumerweb and mobile user applications, (Web/Mobile), scalable software platforms, information retrieval, machine learning and science, editorial, networking/communications technologies, and presentation layer frameworks. We take security and privacy very seriously, and continuously innovate to protect our users and their data.
Our engineering and production teams are primarily located in our Sunnyvale, California, headquarters, Bangalore, India, and Beijing, China.headquarters. Product development expenses for 2012, 2013, 2014, and 20142015 totaled approximately $886$958 million, $1 billion,$1,156 million, and $1.2 billion,$1,178 million, respectively, which included stock-based compensation expense of $74 million, $83 million, $139 million, and $139$190 million, respectively.
M&A Activity
As part of our overall strategy, we focusedevaluate and pursue potential acquisitions based on talent and technology to help accelerate our growth in mobile, video, native, or social. In 2015, we completed 2 acquisitions, in 2014 that help us achieve three different goals. The first is to grow our technical talent base. Second, isthe purpose of which was to enhance our technology and core products offerings. Third, is toproduct offerings, grow our talent base, and expand audience and engagement.
We expect tomay make additional acquisitions and strategic investments in the future.future that align with our growth strategy.
Global Operations
We manage our business geographically. The primary areas of measurement and decision-making are Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific. Additional information required by this item is incorporated herein by reference to Note 18—“Segments” of the Notes to our consolidated financial statements, which appears in Part II, Item 8 of this Annual Report on Form10-K.
We own a majority or 100 percent of all of these international operations (except in Australia, New Zealand, and Japan where we have joint ventures and/or noncontrolling interests). We support these businesses through a network of offices worldwide.
Revenue is primarily attributed to individual countries according to the international online property that generated the revenue.
Information regarding risks involving our international operations is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K and is incorporated herein by reference.
Sales
We sell our advertising services through three primary channels: field, mid-market, and reseller/small business. Our field advertising sales team sells display advertising in all markets and search advertising to both premium and non-premium advertisers using Yahoo Gemini. Previously under the Search Agreement, with Microsoft.Yahoo had sales exclusivity for both the Company’s and Microsoft’s premium
advertisers. Pursuant to the current terms of the Search Agreement, as amended on April 15, 2015 by the Eleventh Amendment to the Search Agreement (the “Eleventh Amendment”), this sales exclusivity terminated on July 1, 2015. The Company and Microsoft have been transitioning premium advertisers for Microsoft’s paid search services to Microsoft on a market-by-market basis. As of February 26, 2016, such transition was substantially complete for most markets in North America and Europe, and the parties are cooperating on transitioning the remaining markets. Our mid-market channel sells our advertising services to medium-sized businesses, while our reseller/small business channel allows us to sell advertising services to additional regional and small business advertisers. Our U.S. sales force is structured vertically which allowsallowing us to offer customers integrated customer-centric solutions. We believe this approach allows us to provide the best solutions across all of our products based on a deeper understanding of our customers’ businesses.
In the U.S., we employ sales professionals in multiple locations, including Atlanta, Boston, Burbank, Chicago, Dallas, Detroit, Hillsboro, the Los Angeles area, Miami, New York, Omaha, San Francisco, and Sunnyvale.Sunnyvale as of December 31, 2015. In international markets, we either have our own internal sales professionals or rely on our established sales agency relationships in more than 5035 countries, regions, and territories.territories as of December 31, 2015.
No individual customer represented more than 10 percent of our revenue in 2012, 2013, or 2014. Revenue under the Search Agreement represented approximately 2531 percent, 3135 percent, and 35 percent of our revenue for the years ended December 31, 2012, 2013, 2014 and, 2015, respectively, and no other individual customer represented more than 10 percent of our revenue in 2013, 2014, respectively.or 2015.
Internet usage is subject to seasonal fluctuations, typically declining during customary summer vacation periods and increasing during the fourth quarter holiday period due to higher online retail activity. These seasonal patterns have affected, and we expect will continue to affect, our business and quarterly sequential revenue growth rates.
Marketing
Yahoo is one of the most recognized brands in the world. Our products, services, and content enable us to attract, retain, and engage users, advertisers, and publishers. Our marketing teams engage in each step of the development, deployment, and management of products and services, and in content design. Our marketing team will help shape our offerings to better market them to our potential and existing users.
Competition
Our industry is characterized by rapid evolution and innovation through disruptive technologies. We face significant competition from onlinea wide range of businesses, particularly companies that seek to connect people with digital content and with each other. We compete on a global scale for audience share, marketers, and talent. Our competition includes:
General purpose search engines sites offering integrated internet products and information services social mediasuch as Alphabet’s Google and networking sites, e-commerce sites,Microsoft’s Bing.
Companies such as Facebook and broadcast and print media. We also compete with advertising networks, exchanges, demand side platformsTwitter that provide mail, photo sharing, blogging, microblogging, and other platforms, such as Google AdSense, DoubleClick Ad Exchange, AOL’s Ad.com and Microsoft Media Network, as well as traditional media companies for asocial or communication services. These areas are attracting an increasing share of advertisers’ marketing budgetsusers, users’ online time (across desktop and in the development of the toolsmobile), and systems for managing and optimizing advertising campaigns.dollars.
Our competitors include Google, Facebook, Microsoft, and AOL. Several of our competitors
Companies that offer an integrated variety of Internet products, advertising services, technologies, online services, and/or content in a manner similar to us that compete for the attention of our users, advertisers, developers, and third-party Websitewebsite publishers. We also compete with these companies to obtain agreements with third parties to promote or distribute our services. In addition,
Digital, broadcast, and print media companies with which we compete with social mediafor the attention of consumer audiences and networking sites which are attracting an increasing share of advertising dollars. This area has become increasingly competitive as traditional media companies make the shift online to compete for users, users’ online time, and online advertising dollars.dollars across desktop and mobile.
Advertising networks, exchanges, demand side and supply side platforms, and traditional media companies, with which we compete for a share of advertisers’ marketing budgets and in the development of the tools and systems for managing and optimizing advertising campaigns.
Companies that provide analytics, monetization and marketing tools for mobile and desktop developers.
In a number of international markets, especially those in Asia, Europe, the Middle East and Latin America, we face substantial competition from local Internet service providers and other entities that offer search, communications, and other commercial services and often have a competitive advantage due to dominant market share in their territories, greater local brand recognition, focus on a single market, familiarity with local tastes and preferences, or greater regulatory and operational flexibility.
Yahoo’s competitive advantage centers on the fact thatAs we are a guide focused on making user’s digital habits inspiringintroduce new products and entertaining—this includes daily activities like communicating, searching, reading and sharing information. our existing products evolve, we may become subject to additional competition.
We believe our principal competitive strengths relating to attracting users include the usefulness, accessibility, integration, and personalization of the online services that we offer; the quality, personalization, and presentation of our search results; and the overall user experience on our leading premium content properties and other Yahoo Properties.properties. Our principal competitive strengths relating to attracting advertisers and publishers are the reach, effectiveness, and efficiency of our marketing services as well as the creativity of the marketing solutions that we offer. “Reach” is the size of the audience and/or demographic that can be accessed through the Yahoo Network. “Effectiveness” for advertisers is the achievement of marketing objectives, which we support by developing campaigns, measuring the performance of these campaigns against their objectives, and optimizing their objectives across the Yahoo Network. “Effectiveness” for publishers is the monetization of their online audiences. “Efficiency” is the simplicity and ease of use of the services we offer advertisers and publishers.
Additional information regarding competition is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K and is incorporated herein by reference.
Intellectual Property
We create, own, and maintain a wide array of intellectual property assets that we believe are among our most valuable assets. Our intellectual property assets include patents and patent applications related to our innovations, products and services; trademarks related to our brands, products and services; copyrights in software and creative content; trade secrets; and other intellectual property rights and licenses of various kinds. We seek to protect our intellectual property assets through patents, copyrights, trade secrets, trademarks and laws of the U.S. and other countries, and through contractual provisions. We enter into confidentiality and invention assignment agreements with our employees and contractors, and utilize non-disclosure agreements with third parties with whom we conduct business in order to secure and protect our proprietary rights and to limit access to, and disclosure of, our proprietary information. We consider the Yahoo! trademark and our many related company brands to be among our most valuable assets, and we have registered these trademarks in the U.S. and other countries throughout the world and actively seek to protect them. We have licensed in the past, and expect that we may license in the future, certain of our technology and proprietary rights, such as trademark, patent, copyright, and trade secret rights, to third parties.
Additional information regarding certain risks related to our intellectual property is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K and is incorporated herein by reference.
Employees
As of December 31, 2014,2015, we had approximately 12,50010,400 full-time employees and fixed term860 contractors. In February 2016, we announced plans to reduce our workforce by approximately 15 percent by the end of 2016. Our future success is substantially dependent on the performance of our senior management and key technical personnel, as well as our continuing ability to attract, maintain the caliber of, and retain highly qualified technical, executive, and managerial personnel. We remain committed to our talented employees and providing the best possible workplace culture for them. Additional information regarding certain risks related to our employees is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K and is incorporated herein by reference.
Available Information
Our Websitewebsite is located at http:https://www.yahoo.com. Our investor relations Websitewebsite is located at http:https://investor.yahoo.net. We make available free of charge on our investor relations Websitewebsite under “Financial Info” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). The SEC maintains a Websitewebsite that contains reports, proxy and information statements, and other information regarding our filings at http://www.sec.gov.
We face significant competition for users, advertisers, publishers, developers, and distributors.
We face significant competition from online search engines, sites offering integrated internet products and services, social media and networking sites, e-commerceecommerce sites, companies providing analytics, monetization and marketing tools for mobile and desktop developers, and digital, broadcast and print media. In a number of international markets, especially those in Asia, Europe, the Middle East and Latin America, we face substantial competition from local Internet service providers and other entities that offer search, communications, and other commercial services.
Several of our competitors offer an integrated variety of Internet products, advertising services, technologies, online services and content in a manner similar to Yahoo. We compete against these and other companies to attract and retain users, advertisers, developers, and third-party Websitewebsite publishers as participants in our Affiliate network, and to obtain agreements with third parties to promote or distribute our services. We also compete with social media and networking sites which are increasingly used to communicate and share information, and which are attracting a substantial and increasing share of users, users’ online time, and online advertising dollars.
A key element of our strategy is focusing on increasing our revenue growth through our Mavens offerings. As part of this strategy, we are focusing on mobile products and mobile advertising formats, as well as increasing our revenue from mobile. A number of our competitors have devoted significant resources to the development of products, services and apps for mobile devices. Several of our competitors have mobile revenue significantly greater than ours. If we are unable to develop products for mobile devices that users find engaging and that help us grow our mobile revenue, our competitive position, our financial condition and operating results could be harmed.
In addition, a number of competitors offer products, services and apps that directly compete for users with our offerings, including e-mail, search, video, social, sports, news, finance, micro-blogging, and messaging. Similarly, our competitors or other participants in the online advertising marketplace
offer advertising exchanges, ad networks, demand side platforms, ad serving technologies, sponsored search offerings, and other services that directly compete for advertisers with our offerings. Additionally, as the use of programmatic advertising continues to increase, we compete with companies that have also invested in programmatic platform offerings. We also compete with traditional print and broadcast media companies to attract domestic and international advertising spending. Some of our existing competitors and possible entrants have greater brand recognition for certain products, services and apps, more expertise in particular market segments, and greater operational, strategic, technological, financial, personnel, or other resources than we do. Many of our competitors have access to considerable financial and technical resources with which to compete aggressively, including by funding future growth and expansion and investing in acquisitions, technologies, and research and development. Further, emerging start-ups may be able to innovate and provide new products, services and apps faster than we can. In addition, competitors may consolidate or collaborate with each other, and new competitors may enter the market. Some of our competitors in international markets have a substantial competitive advantage over us because they have dominant market share in their territories, have greater local brand recognition, are focused on a single market, are more familiar with local tastes and preferences, or have greater regulatory and operational flexibility due to the fact that we may be subject to both U.S. and foreign regulatory requirements.
If our competitors are more successful than we are in developing and deploying compelling products or in attracting and retaining users, advertisers, publishers, developers, or distributors, our revenue and growth rates could decline.
We generate the majority of our revenue from search and display advertising, and the reduction in spending by or loss of current or potential advertisers would cause our revenue and operating results to decline.
For the twelve months ended December 31, 2014, 792015, 84 percent of our total revenue came from search and display advertising. Our ability to retain and grow search and display revenue depends upon:
maintainingincreasing our daily active users, logged in users, page views and growing our user base and popularity as an Internet destination site;engagement;
maintaining the popularity of our existing products, introducing engaging new products and making our new and existing productsthat are popular with users and distributable on mobile and other alternative devices and platforms;
maintaining and expanding our advertiser base on PCs and mobile devices;
achieving a better traffic mix from our Yahoo Properties and Affiliates and improving our monetization rates on such traffic;
broadening our relationships with advertisers to small- and medium-sized businesses;
successfully implementing changes and improvements to our advertising management platforms and formats and obtaining the acceptance of our advertising management platforms by advertisers, Websitewebsite publishers, and online advertising networks;
successfully acquiring, investing in, and implementing new technologies and strategic partnerships;technologies;
successfully implementing changes in our sales force, sales development teams, and sales strategy;
continuing to innovate and improve the monetization capabilities of our display and native advertising and our mobile products;
effectively monetizing mobile and other search queries;
improving the quality of our user and advertiser products;
continuing to innovate and improve users’ search experiences;
maintaining and expanding our Affiliate program for search and display advertising services; and
deriving better demographic and other information about our users to enable us to offer better, more personalized and targeted experiences to both our users and advertisers.
In most cases, our agreements with advertisers have a term of one year or less, and may be terminated at any time by the advertiser or by us. Search marketingPayments under our agreements with advertisers are often have payments dependent upon usage orperformance and click-through levels. Accordingly, it is difficult to forecast search and display revenue accurately. In addition, our expense levels are based in part on expectations of future revenue, including any guaranteed minimum payments to our Affiliates in connection with search and/or display advertising, and in some cases, the expenses could exceed the revenue that we generate. The state of the global economy, growth rate of the online advertising market, and availability of capital impacts the advertising spending patterns of our existing and potential advertisers. Any reduction in spending by, or loss of, existing or potential advertisers would negatively impact our revenue and operating results. Further, we may be unable to adjust our expenses and capital expenditures quickly enough to compensate for any unexpected revenue shortfall.
As more people access our products via mobile devices rather than PCs and mobile advertising continues to evolve, if we do not continue to grow ourattract and retain mobile users and grow mobile revenue, our financial results will be adversely impacted.
The number of people who access the Internet through mobile devices rather than a PC, including mobile telephones, smartphones and tablets, is increasing and will likely continue to increase dramatically. Over 575More than 600 million (including Tumblr) of our monthly users are now joining us (including Tumblr) on mobile devices. In addition, search queries are increasingly being undertaken through mobile devices. As a result, our ability to grow advertising revenue is increasingly dependent on our ability to generate revenue from ads displayed on mobile devices.
A key element of our strategy is focusing on mobile devices, and we expect to continue to devote significant resources to the creation and support of developing new and innovative mobile products, services and apps.However, if our new mobile products, services and apps, including new forms of Internet advertising for mobile devices, do not continue to attract and retain mobile users, advertisers
and device manufacturers and to generate and grow mobile revenue, our operating and financial results will be adversely impacted. We are dependent on the interoperability of our products and services with mobile operating systems we do not control and we may not be successful in maintaining relationships with the key participants in the mobile industry that control such mobile operating systems. The manufacturer or access provider might promote a competitor’s or its own products and services, impair users’ access to our services by blocking access through their devices, make it hard for users to readily discover, install, update or access our products on their devices, or charge us for delivery of ads, or limit our ability to deliver ads or measure their effectiveness. If distributors impair access to or refuse to distribute our services or apps, or charge for or limit our ability to deliver ads or measure the effectiveness of our ads, then our user engagement and revenue could decline.
If we do not manage our operating expenses effectively, our profitability could fail to improve and could decline.
We have implemented cost reduction initiatives to reduce our operating expenses, including reducing our headcount, closing offices and exiting certain products and verticals. However, we may not realize the cost savings expected from these initiatives or the revenue impact from our exit of certain regions and products may be greater than we expect. We plan to continueseek to operate efficiently
and to manage our costs to bettereffectively. However, we are also investing in areas we believe will grow revenue and more efficiently manage our business. However, our operating expenses might increase as we expanda result of these investments. If our operations in areas of desired growth, continue to develop and extend the Yahoo brand, fund product development, expand data centers, acquire additional office space, and acquire and integrate complementary businesses and technologies. If ouroperating expenses increase at a greater pace than our revenue grows, or if we fail to effectively manage costs effectively, our profitability willcould fail to improve and could decline.
There can be no assurance that our exploration of strategic alternatives will result in any transaction being consummated, and speculation and uncertainty regarding the outcome of our exploration of strategic alternatives may adversely impact our business.
In parallel with executing our strategic plan, we are exploring strategic alternatives, including transactions to separate our remaining stake in Alibaba Group from our operating business focusing on a reverse spin transaction, as well as exploring strategic proposals for the operating business. Our Board has formed a Strategic Review Committee of independent directors to lead this process. There can be no assurance that any transaction will be consummated, and the process of exploring strategic alternatives will involve the dedication of significant resources and the incurrence of significant costs and expenses. In addition, speculation and uncertainty regarding our exploration of strategic alternatives may cause or result in:
disruption of our business;
distraction of our management and employees;
difficulty in recruiting, hiring, motivating, and retaining talented and skilled personnel;
difficulty in maintaining or negotiating and consummating new, business or strategic relationships or transactions;
increased stock price volatility; and
increased costs and advisory fees.
If we are unable to provide innovative search experiences andmitigate these or other products and services that generate significant trafficpotential risks related to the uncertainty caused by our Websites,exploration of strategic alternatives, it may disrupt our business could be harmed, causingor adversely impact our revenue, to decline.
Internet search is characterized by rapidly changing technology, significant competition, evolving industry standards,operating results, and frequent product and service enhancements. Even though we have substantially completed the transition of paid search to Microsoft’s platform, we still need to continue to invest and innovate to improve our users’ search experience to continue to attract, retain, and expand our user base and paid search advertiser base. We also need to continue to invest in and innovate on the mobile search experience. Pursuant to the Search Agreement with Microsoft, we are also dependent on Microsoft to continue to invest and innovate to maintain and improve its algorithmic and paid search services.
We generate revenue through other online products, services and apps, and continue to innovate the products, services and apps that we offer. The research and development of new, technologically advanced products is a complex process that requires significant levels of innovation and investment, as well as accurate anticipation of technology, market and consumer trends. If we are unable to provide innovative products and services which gain user acceptance and generate significant traffic to our Websites, or if we are unable to effectively monetize the traffic from new products and services, our business could be harmed, causing our revenue to decline.financial condition.
Risks associated with our Search Agreement with Microsoft may adversely affect our business and operating results.
Under our Search Agreement with Microsoft, Microsoft iswas the exclusive provider of algorithmic and paid search services provider onfor Yahoo Properties and Affiliate sites on PCspersonal computers and the non-exclusive provider of such services on mobile devices. As of April 15, 2015, Microsoft became the non-exclusive provider of such services on all devices. Commencing on May 1, 2015, the Company is required 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 for mobile devices for the transitioned markets.will display only Microsoft’s paid search results on such search result pages. Approximately 35 percent, 3135 percent, and 2531 percent of our revenue for 2015, 2014 2013 and 2012,2013, respectively, were attributable to the Search Agreement. Our business and operating results would be adversely affected by a significant decline in or loss of this revenue.
Implementation ofrevenue if we are not able to successfully replace this revenue with revenue from search results displayed through our SearchYahoo Gemini platform or our Services Agreement with Microsoft commenced on February 23, 2010. We have completedGoogle.
As a result of the transition of our algorithmic search platformVolume Commitment, we continue to Microsoft’s platform and have substantially completed transition of paid search. Pursuant to the Search Agreement with Microsoft, to maintain and grow search revenue, we arebe dependent on Microsoft continuing to invest and innovate to maintain and improve its algorithmic and paid search services and to be
competitive with other search providers. If Microsoft fails to do this, our revenue and profitability could decline and our ability to maintain and expand our relationships with Affiliates for search and paid search advertising could be negatively impacted. Further, our competitors may continue to increase revenue, profitability, and market share at a higher rate than we do.
In addition to other termination rights, as of February 23, 2015 (the fifth anniversary of the commencement dateThe term of the Search Agreement), for a period of 30 days following suchAgreement is 10 years from its commencement date, February 23, 2010, subject to earlier termination as provided in the Search Agreement. On or after October 1, 2015, either the Company has the right toor Microsoft may terminate the Search Agreement ifby delivering a written notice of termination to the trailing 12-month averageother party. The Search Agreement will remain in effect for four months from the date of the Company’s revenue per search in the United States (the “U.S. RPS”) on Yahoo Properties is less than a specified percentage of Google’s trailing 12-month estimated average U.S. RPS, excluding, in each case, mobile devices. Termination oftermination notice to provide for a transition period. If Microsoft terminated the Search Agreement and the Company was unable to rely on its own services or disputesthe Services Agreement with Microsoft related to aGoogle, the termination of the Search Agreement, could have an adverse impact on our business, revenue and operating results.
Our proposed plan to spin off all ofRisks associated with our remaining holdings in Alibaba Group is subject to certain conditionsServices Agreement with Google may adversely affect our business and there can be no assurance that the spin-off will be completed or that the expected benefits from the proposed spin-off to Yahoo and its stockholders will be realized.operating results.
Under our Services Agreement with Google, Google will provide us with search advertisements through Google’s AdSense for Search service (“AFS”), web algorithmic search services through Google’s Websearch Service, and image search services. We have announced a plan for a spin-offentered into the Services Agreement with Google in the fourth quarter of all of2015. We expect that our remaining holdings in Alibaba Group and a current operating business of Yahoo, Yahoo Small Business, into a newly formed independent registered investment company (referred to as “SpinCo”). The stock of SpinCo will be distributed pro rata to our stockholders, resulting in SpinCo becoming a separate publicly traded registered investment company.
The completion of the spin-off is subject to certain conditions, including final approval by our Board, receipt of a favorable ruling from the Internal Revenue Service with respect to 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 Securities and Exchange Commission, and compliance with the requirementsrevenues under the Investment Company ActServices Agreement with Google will increase in 2016. In addition, if Microsoft were to terminate its Search Agreement with us, we would be required to rely on the Services Agreement and our Yahoo Gemini platform to replace the search revenue we currently receive under the Search Agreement.
We are dependent on Google continuing to invest and innovate to maintain and improve its algorithmic and paid search services and to be competitive with other search providers. If Google fails to do this, our revenue and profitability could decline. Further, Google has a number of 1940. Possible delaystermination rights under the Services Agreement. If Google terminated the Services Agreement and we were unable to rely on our Yahoo Gemini platform or the failure in satisfyingSearch Agreement with Microsoft, the above-described conditions or other factors, includingtermination could have an adverse regulatory developments or determinations or adverse changes in, or interpretations of, U.S. or foreign tax laws, rules or regulations, or required third party consents, could delay or prevent completion of the proposed spin-off or cause the terms of the proposed spin-off to be materially modified. In addition, we expect that the process of completing the proposed spin-off will involve dedication of significant resourcesimpact on our business, revenue and the incurrence of significant costs and expenses. Further, there can be no assurance that the expected benefits from the proposed spin-off to Yahoo and its stockholders will be realized.operating results.
If we are unable to license or acquire compelling contentprovide innovative search experiences and other products and services at reasonable cost, develop or commission compelling content of our own or receive compelling content from our users, the number of users ofthat differentiate our services may not grow as anticipated, or may decline, orand generate significant traffic to our websites, our business could be harmed, causing our revenue to decline.
Internet search is characterized by rapidly changing technology, significant competition, evolving industry standards, and frequent product and service enhancements. Although we have agreements with Microsoft and Google to use their paid search platforms, we still need to continue to invest in our Yahoo Gemini search platform and to innovate to improve our users’ level of engagement withsearch experience (especially on mobile) to continue to differentiate our services may decline, alland attract, retain, and expand our user base and paid search advertiser base. We also generate revenue through other online products, services and apps, and continue to innovate the products, services and apps in our portfolio. The research and development of which could harm our operating results.new, technologically advanced products is a complex process that requires significant levels of innovation and investment, as well as accurate anticipation of technology, market and consumer trends.
Our future success depends in part on our ability to aggregate compelling content and deliver that content through our online properties. We license from third parties much of the content and services on our online properties, such as news, stock quotes, weather, video, and maps. In addition, our users also contribute content to us. We believe that users will increasingly demand high-quality content and services. We may need to make substantial payments to third parties from whom we
license or acquire such content or services. Our ability to maintain and build relationships with such third-party providers is critical to our success. In addition, as users increasingly access the Internet via mobile and other alternative devices, we may need to enter into amended agreements with existing third-party providers to cover the new devices. We may be unable to enter into new, or preserve existing, relationships with the third-parties whose content or services we seek to obtain. In addition, as competition for compelling content increases both domestically and internationally, our third-party providers may increase the prices at which they offer their content and services to us, stop offering their content or services to us, or offer their content and services on terms that are not agreeable to us. An increase in the prices charged to us by third-party providers could harm our operating results and financial condition. Further, because many of our content and services licenses with third parties are non-exclusive, other media providers may be able to offer similar or identical content. This increases the importance of our ability to deliver compelling editorial content and personalization of this content for users in order to differentiate Yahoo from other businesses. If we are unable to license or acquire compelling content at reasonable cost, ifprovide innovative search experiences and other companies distribute content orproducts and services that are similarwhich differentiate our services, gain user acceptance and generate significant traffic to or the same as that provided by us, if we do not develop or commission compelling editorial content (including personalized content),our websites, or if we do not receive compelling contentare unable to effectively monetize the traffic from our users, the number of users of oursuch products and services, may not grow as anticipated, or may decline, or users’ level of engagement with our services may decline, all or any of which could harm our operating results.
Acquisitions and strategic investments could result in adverse impacts on our operations and in unanticipated liabilities.
We have acquired, and have made strategic investments in, a number of companies (including through joint ventures) in the past, and we expect to make additional acquisitions and strategic investments in the future. Such transactions may result in use of our cash resources, dilutive issuances of our equity securities, or incurrence of debt. Such transactions may also result in amortization expenses related to intangible assets. Our acquisitions and strategic investments to date were accompanied by a number of risks, including:
the difficulty of integrating the operations, personnel, systems, and controls of acquired companies as a result of cultural, regulatory, systems, and operational differences;
the potential disruption of our ongoing business and distraction of management;
the incurrence of additional operating losses and operating expenses of the businesses we acquired or in which we invested;
the difficulty of integrating acquired technology and rights into our services and unanticipated expenses related to such integration;
the failure to successfully further develop an acquired business or technology and any resulting impairment of amounts currently capitalized as intangible assets;
the failure of strategic investments to perform as expected or to meet financial projections;
the potential for patent and trademark infringement and data privacy and security claims against the acquired companies, or companies in which we have invested;
litigation or other claims in connection with acquisitions, acquired companies, or companies in which we have invested;
the impairment or loss of relationships with customers and partners of the companies we acquired or in which we invested or with our customers and partners as a result of the integration of acquired operations;
the impairment of relationships with, or failure to retain, employees of acquired companies or our existing employees as a result of integration of new personnel;
our lack of, or limitations on our, control over the operations of our joint venture companies;
in the case of foreign acquisitions and investments, the impact of particular economic, tax, currency, political, legal and regulatory risks associated with specific countries; and
the impact of known potential liabilities or liabilities that may be unknown, including as a result of inadequate internal controls, associated with the companies we acquired or in which we invested.
We are likely to experience similar risks in connection with our future acquisitions and strategic investments. Our failure to be successful in addressing these risks or other problems encountered in connection with our past or future acquisitions and strategic investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally.could be harmed, causing our revenue to decline.
We may be required to record a significant charge to earnings if our goodwill, amortizable intangible assets, investments in equity interests, or other investments become impaired.
We are required under generally accepted accounting principles to test goodwill for impairment at least annually and to review our amortizable intangible assets, investments in equity interests (including investments held by any equity method investee), and our other investments, for impairment when events or changes in circumstance indicate the carrying value may not be recoverable. Factors that could lead to impairment of goodwill, amortizable intangible assets (including goodwill or assets acquired via acquisitions) and other investments include significant adverse changes in the business climate and actual or projected operating results (affecting our company as a whole or affecting any particular reporting unit) and declines in the financial condition of our business. Factors that could lead to impairment of investments in equity interests include a prolonged period of decline in the stock price or operating performance of, or an announcement of adverse changes or events by, the companies in which we invested or the investments held by those companies. Factors that could lead to an impairment of U.S. government securities, which constitute a significant portion of our current assets, include any downgrade of U.S. government debt or concern about the creditworthiness of the U.S. government. We have recorded and may be required in the future to record additional charges to earnings if our goodwill, amortizable intangible assets, investments in equity interests, including investments held by any equity method investee, or other investments become impaired. Any such charge would adversely impact our financial results.
Our business depends on a strong brand, and failing to maintain or enhance the Yahoo brands in a cost-effective manner could harm our operating results.
Maintaining and enhancing our brands is an important aspect of our efforts to attract and expand our user, advertiser, and Affiliate base. We believe that the importance of brand recognition will increase due to the relatively low barriers to entry in certain portions of the Internet market. Maintaining and enhancing our brands will depend largely on our ability to provide high-quality, innovative products, and services, which we might not do successfully. We have spent and expect to spend considerable money and resources on the establishment and maintenance of our brands, as well as advertising, marketing, and other brand-building efforts to preserve and enhance consumer awareness of our brands. Our brands may be negatively impacted by a number of factors such as service outages, product malfunctions, data protection and security issues, exploitation of our trademarks by others without permission, and poor presentation or integration of our search marketing offerings by Affiliates on their sites or in their software and services.
Further, while we attempt to ensure that the quality of our brands is maintained by our licensees, our licensees might take actions that could impair the value of our brands, our proprietary rights, or the reputation of our products and media properties. If we are unable to maintain or enhance our brands in a cost-effective manner, or if we incur excessive expenses in these efforts, our business, operating results and financial condition could be harmed.
Changes in regulations or user concerns regarding privacy and protection of user data, or any failure to comply with such laws, could adversely affect our business.
Federal, state, and international laws and regulations govern the collection, use, retention, disclosure, sharing and security of data that we receive from and about our users. The use of consumer data by online service providers and advertising networks is a topic of active interest among federal, state, and international regulatory bodies, and the regulatory environment is unsettled. Many states have passed laws requiring notification to users where there is a security breach for personal data, such as California’s Information Practices Act. We face similar risks in international markets where our products, services and apps are offered. Any failure, or perceived failure, by us to comply with or make effective modifications to our policies, or to comply with any federal, state, or international privacy, data-retention or data-protection-related laws, regulations, orders or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, a loss of user confidence, damage to the Yahoo brands, and a loss of users, advertising partners, or Affiliates, any of which could potentially have an adverse effect on our business.
In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data retention, data transfer and data protection issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our business, our brand or our reputation with users. For example, some countries are considering or have enacted laws mandating that user data regarding users in their country be maintained in their country. Having to maintain local data centers in individual countries could increase our operating costs significantly. In addition, there currently is a data protection regulation pending final approval by the European Union that may include operational requirements for companies that receive or process personal data that are different than those currently in place in the European Union, and that may also include significant penalties for non-compliance.
The European Court of Justice’s recent invalidation of the European Commission’s 2000 Safe Harbor Decision has created uncertainty around certain international transfers of data from the European Union to the U.S. A preliminary agreement has been reached between the U.S. and European Union
governments to allow for certainty regarding transfers of data. However, given the preliminary nature of the agreement, some uncertainty remains, and compliance obligations could cause us to incur additional costs, require us to change business practices in a manner adverse to our business, or affect the manner in which we provide our services.
The interpretation and application of privacy, data protection, data transfer and data retention laws and regulations are often uncertain and in flux in the U.S. and internationally. These laws may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices, complicating long-range business planning decisions. If privacy, data protection, data transfer or data retention laws are interpreted and applied in a manner that is inconsistent with our current policies and practices we may be fined or ordered to change our business practices in a manner that adversely impacts our operating results. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business and operating results.
If our security measures are breached, our products and services may be perceived as not being secure, users and customers may curtail or stop using our products and services, and we may incur significant legal and financial exposure.
Our products and services involve the storage and transmission of Yahoo’s users’ and customers’ personal and proprietary information in our facilities and on our equipment, networks and corporate systems. Security breaches expose us to a risk of loss of this information, litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation, and potential liability. Outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information to gain access to our data or our users’ or customers’ data. In addition, hardware, software or applications we procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise network and data security. Additionally, some third parties, such as our distribution partners, service providers and vendors, and app developers, may receive or store information provided by us or by our users through applications integrated with Yahoo. If these third parties fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our users’ data may be improperly accessed, used or disclosed. Security breaches or unauthorized access have resulted in and may in the future result in a combination of significant legal and financial exposure, increased remediation and other costs, damage to our reputation and a loss of confidence in the security of our products, services and networks that could have an adverse effect on our business. We take steps to prevent unauthorized access to our corporate systems, however, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a triggering event, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose users and customers.
If we are unable to attract, sustain, and renew distribution arrangements on favorable terms, our revenue may decline.
We enter into distribution arrangements with third parties to promote or supply our services to their users. For example:
We maintain search and display advertising relationships with Affiliate sites, which integrate our advertising offerings into their websites.
We enter into distribution alliances with Internet service providers (including providers of cable and broadband Internet access) and software distributors to promote our services to their users.
We enter into agreements with mobile phone, tablet, television, and other device manufacturers, electronics companies and carriers to promote our software and services on their devices.
In some markets, we depend on a limited number of distribution arrangements for a significant percentage of our user activity. A failure by our distributors to attract or retain their user bases would negatively impact our user activity and, in turn, reduce our revenue. For mobile app distribution, we depend on a limited number of distributors, primarily the developers of the operating systems or device manufacturers. If we are unable to reach agreements with these distributors for distribution of our mobile apps or they refuse to distribute or block our mobile apps, our operating results will be harmed. In the future, as new methods for accessing the Internet and our services become available, including through alternative devices, we may need to enter into amended distribution agreements with existing access providers, distributors, and manufacturers to cover the new devices and new arrangements. We face a risk that existing and potential new access providers, distributors, and manufacturers may decide not to offer distribution of our services on reasonable terms, or at all.
Distribution agreements often involve revenue sharing. Competition to enter into distribution arrangements has caused and may in the future cause our traffic acquisition costs to increase. In some cases, we guarantee distributors a minimum level of revenue and, as a result, run a risk that the distributors’ performance (in terms of ad impressions, toolbar installations, etc.) might not be sufficient to otherwise earn their minimum payments, in which case our payments could exceed the revenue that we receive. In other cases, we agree that if the distributor does not realize specified minimum revenue we will adjust the distributor’s revenue-share percentage or provide make-whole arrangements.
Some of our distribution agreements are not exclusive, have a short term, are terminable at will, or are subject to early termination provisions. The loss of distributors, increased distribution costs, or the renewal of distribution agreements on significantly less favorable terms may cause our revenue to decline.
If we are unable to license, acquire, create or aggregate compelling content and services at reasonable cost, or receive compelling content, the number of users of our services may not grow as anticipated, or may decline, or users’ level of engagement with our services may decline, all of which could harm our operating results.
Our future success depends in part on our ability to aggregate compelling content and deliver that content through our online properties. We license from third parties much of the content and services on our online properties, such as news, stock quotes, weather, sports, video, and photos. In addition, our users also contribute content to us. We believe that users will increasingly demand high-quality content and services. We may need to make substantial payments to third parties from whom we license or acquire such content or services. Our ability to maintain and build relationships with such third-party providers is critical to our success. In addition, as users increasingly access the Internet via mobile and other alternative devices, we may need to enter into amended agreements with existing third-party providers to cover new devices. We may be unable to enter into new, or preserve existing, relationships with the third-parties whose content or services we seek to obtain. In addition, as competition for compelling content increases both domestically and internationally, our third-party providers may increase the prices at which they offer their content and services to us, stop offering their content or services to us, or offer their content and services on terms that are not agreeable to us. An increase in the prices charged to us by third-party providers could harm our operating results and financial condition. Further, because many of our licenses for our content and services with third parties are non-exclusive, other media providers may be able to offer similar or identical content. This increases the importance of our ability to deliver compelling editorial content and personalization of this content for users in order to differentiate Yahoo from other businesses. If
we are unable to license or acquire compelling content at reasonable cost, if other companies distribute content or services that are similar to or the same as that provided by us, or if we do not receive compelling content from our users, the number of users of our services may not grow as anticipated, or may decline, users’ level of engagement with our services may decline, clicks on our ads may decrease, or advertisers may reduce future purchases of our ads, all or any of which could harm our operating results.
Interruptions, delays, or failures in the provision of our services could damage our reputation and harm our operating results.
Delays or disruptions to our service, or the loss or compromise of data, could result from a variety of causes, including the following:
Our operations are susceptible to outages and interruptions due to fire, flood, earthquake, tsunami, other natural disasters, power loss, equipment or telecommunications failures, cyber attacks, terrorist attacks, political or social unrest, and other events over which we have little or no control. We do not have multiple site capacity for all of our services and some of our systems are not fully redundant in the event of delays or disruptions to service, so some data or systems may not be fully recoverable after such events.
The systems through which we provide our products and services are highly technical, complex, and interdependent. Design errors might exist in these systems, or might be introduced when we make modifications, which might cause service malfunctions or require services to be taken offline while corrective responses are developed.
Despite our implementation of network security measures, our servers are vulnerable to computer viruses, malware, worms, hacking, physical and electronic break-ins, router disruption, sabotage or espionage, and other disruptions from unauthorized access and tampering, as well as coordinated denial-of-service attacks. We may not be in a position to promptly address attacks or to implement adequate preventative measures if we are unable to immediately detect such attacks. Such events could result in large expenditures to investigate or remediate, to recover data, to repair or replace networks or information systems, including changes to security measures, to deploy additional personnel, to defend litigation or to protect against similar future events, and may cause damage to our reputation or loss of revenue.
We rely on third-party providers over which we have little or no control for our principal Internet connections and co-location of a significant portion of our data servers, as well as for our payment processing capabilities and key components or features of certain of our products and services. Any disruption of the services they provide us or any failure of these third-party providers to handle higher volumes of use could, in turn, cause delays or disruptions in our services and loss of revenue. In addition, if our agreements with these third-party providers are terminated for any reason, we might not have a readily available alternative.
Prolonged delays or disruptions to our service could result in a loss of users, damage to our brands, legal costs or liability, and harm to our operating results.
Technologies, tools, software, and applications could block our advertisements, impair our ability to deliver interest-based advertising, or shift the location in which advertising appears, which could harm our operating results.
Technologies, tools, software, and applications (including new and enhanced browsers) have been developed and are likely to continue to be developed that can block or allow users to opt out of display, search, and interest-based advertising and content, delete or block the cookies used to
deliver such advertising, or shift the location in which advertising appears on pages so that our advertisements do not show up in the most monetizable places on our pages or are obscured. Most of our revenue is derived from fees paid by advertisers in connection with the display of graphical and non-graphical advertisements or clicks on search advertisements on web pages. As a result, the adoption of such technologies, tools, software, and applications could reduce the number of search and display advertisements that we are able to deliver and/or our ability to deliver interest-based advertising and this, in turn, could reduce our advertising revenue and operating results.
If we are unable to recruit, hire, motivate, and retain key personnel, we may not be able to execute our business plan.
Our business is dependent on our ability to recruit, hire, motivate, and retain talented, highly skilled personnel. Achieving this objective may be difficult due to many factors, including the intense competition for such highly skilled personnel in the San Francisco Bay Area and other metropolitan areas where our offices are located; uncertainty due to our exploration of strategic alternatives, our new strategic plan and announced reduction in our workforce; competitors’ hiring practices; the effectiveness of our compensation programs; and fluctuations in global economic and industry conditions. If we do not succeed in retaining and motivating our existing key employees, and in attracting new key personnel, we may be unable to meet our business plan and as a result, our revenue and profitability may decline.
We are regularly involved in claims, suits, government investigations, and other proceedings that may result in adverse outcomes.
We are regularly involved in claims, suits, government investigations, and proceedings arising from the ordinary course of our 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 our users, stockholder derivative actions, purported class action and class action lawsuits, and other matters. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in reputational harm, liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, operating results, and financial condition. See Note 12—“Commitments and Contingencies” in the Notes to our consolidated financial statements.
On May 15, 2013, the Superior Court of Justice for the Federal District of Mexico reversed a judgment of U.S. $2.75 billion that had been entered against us and our subsidiary, Yahoo! Mexico, in a lawsuit brought by plaintiffs Worldwide Directories S.A. de C.V. and Ideas Interactivas, S.A. de C.V. On January 14, 2015, the plaintiffs’ appeal of that decision was denied. On February 16, 2015, the plaintiffs filed a petition for review by the Supreme Court of Mexico, where review is limited to constitutional questions under Mexican law. We believe there is no basis for such review in the matter; however, we cannot assure the ultimate outcome of the matter. If we are ultimately required to pay all or a significant portion of the judgment, together with any potential additional damages, interests and costs, it would have a material adverse effect on our financial condition, results of operations and cash flows. We will also be required to record an accrual for the judgment if we should determine in the future that it is probable that we will be required to pay the judgment.
Our intellectual property rights are valuable, and any failure or inability to sufficiently protect them could harm our business and our operating results.
We create, own, and maintain a wide array of copyrights, patents, trademarks, trade dress, trade secrets, rights to domain names and other intellectual property assets which we believe are collectively among our most valuable assets. We seek to protect our intellectual property assets through patent, copyright, trade secret, trademark, and other laws of the U.S. and other countries of the world, and through contractual provisions. However, the efforts we have taken to protect our intellectual property and proprietary rights might not be sufficient or effective at stopping unauthorized use of those rights. Protection of the distinctive elements of Yahoo might not always be available under copyright law or trademark law, or we might not discover or determine the full extent of any unauthorized use of our copyrights and trademarks in order to protect our rights. In addition,
effective trademark, patent, copyright, and trade secret protection might not be available or cost-effective in every country in which our products and media properties are distributed or made available through the Internet. Changes in patent law, such as changes in the law regarding patentable subject matter, could also impact our ability to obtain patent protection for our
innovations. In particular, recent amendments to the U.S. patent law may affect our ability to protect our innovations and defend against claims of patent infringement. Further, given the costs of obtaining patent protection, we might choose not to protect (or not to protect in some jurisdictions) certain innovations that later turn out to be important. There is also a risk that the scope of protection under our patents may not be sufficient in some cases or that existing patents may be deemed invalid or unenforceable. To help maintain our trade secrets, we have entered into confidentiality agreements with most of our employees and contractors, and confidentiality agreements with many of the parties with whom we conduct business, in order to limit access to and disclosure of our proprietary information. If these confidentiality agreements are breached it could compromise our trade secrets and cause us to lose any competitive advantage provided by those trade secrets.
If we are unable to protect our proprietary rights from unauthorized use, the value of our intellectual property assets may be reduced. In addition, protecting our intellectual property and other proprietary rights is expensive and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and consequently harm our operating results.
We are, and may in the future be, subject to intellectual property infringement or other third-party claims, which are costly to defend, could result in significant damage awards, and could limit our ability to provide certain content or use certain technologies in the future.
Internet, technology, media, and patent holding companies often possess a significant number of patents. Further, many of these companies and other parties are actively developing or purchasing search, indexing, electronic commerce, and other Internet-related technologies, as well as a variety of online business models and methods.
We believe that these parties will continue to take steps such as seeking patent protection to protect these technologies. In addition, patent holding companies may continue to seek to monetize patents they have purchased or otherwise obtained. As a result, disputes regarding the ownership of technologies and rights associated with online businesses are likely to continue to arise in the future. From time to time, parties assert patent infringement claims against us. Currently, we are engaged in a number of lawsuits regarding patent issues and have been notified of a number of other potential disputes.
In addition to patent claims, third parties have asserted, and are likely in the future to assert, claims against us alleging infringement of copyrights, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition, violation of federal or state statutes or other claims, including alleged violation of international statutory and common law. In addition, third parties have made, and may continue to make, infringement and related claims against us over the display of content or search results triggered by search terms, including the display of advertising, that include trademark terms.
As we expand our business and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement and other claims, including those that may arise under international laws. In the event that there is a determination that we have infringed third-party proprietary rights such as patents, copyrights, trademark rights, trade secret rights, or other third-party rights such as publicity and privacy rights, we could incur substantial monetary liability, or
be required to enter into costly royalty or licensing agreements or be prevented from using such rights, which could require us to change our business practices in the future, hinder us from offering certain features, functionalities, products or services, require us to develop non-infringing products or technologies, and limit our ability to compete effectively. We may also incur substantial expenses in
defending against third-party claims regardless of the merit of such claims. In addition, many of our agreements with our customers or Affiliates require us to indemnify them for some types of third-party intellectual property infringement claims, which could increase our costs in defending such claims and our damages. Furthermore, such customers and Affiliates may discontinue the use of our products, services, and technologies either as a result of injunctions or otherwise. The occurrence of any of these results could harm our brands or have an adverse effect on our business, financial position, operating results, and cash flows.
If our security measures are breached, our products and servicesWe may be perceived as not being secure, users and customers may curtailrequired to record a significant charge to earnings if our goodwill, intangible assets, investments in equity interests, or stop using our products and services, and we may incur significant legal and financial exposure.other investments become impaired.
Our products and services involve the storage and transmission of Yahoo’s users’ and customers’ personal and proprietary informationWe have previously recorded charges to earnings when our goodwill, intangible assets, investments in our facilities and on our equipment, networks and corporate systems. Security breaches expose us to a risk of loss of this information, litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation, and potential liability. Outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information to gain access to our data or our users’ or customers’ data. In addition, hardware, software or applications we procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise network and data security. Security breaches or unauthorized access have resulted in and may in the future result in a combination of significant legal and financial exposure, increased remediationequity interests, including investments held by any equity method investee, and other costs, damage to our reputation and a loss of confidence in the security of our products, services and networks that could have an adverse effect on our business. We take steps to prevent unauthorized access to our corporate systems, however, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a triggering event, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose users and customers.
Changes in regulations or user concerns regarding privacy and protection of user data, or any failure to comply with such laws, could adversely affect our business.
Federal, state, and international laws and regulations govern the collection, use, retention, disclosure, sharing and security of data that we receive from and about our users. The use of consumer data by online service providers and advertising networks is a topic of active interest among federal, state, and international regulatory bodies, and the regulatory environment is unsettled. Many states have passed laws requiring notification to users where there is a security breach for personal data, such as California’s Information Practices Act. We face similar risks in international markets where our products, services and apps are offered. Any failure, or perceived failure, by us to comply with or make effective modifications to our policies, or to comply with any federal, state, or international privacy, data-retention or data-protection-related laws, regulations, orders or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, a loss of user confidence, damage to the Yahoo brands, and a loss of users, advertising partners, or Affiliates, any of which could potentially have an adverse effect on our business.
In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our business, our brand or our reputation with users.investments became impaired. For example, some countrieswe recorded a $4.461 billion non-cash goodwill impairment charge during the fourth quarter of 2015. We are considering laws mandating that user data regarding usersrequired under generally accepted accounting principles to test goodwill for impairment at least annually and to review our intangible assets, investments in their
country be maintainedequity interests (including investments held by any equity method investee), and our other investments, for impairment when events or changes in their country. Having to maintain local data centers in individual countries could increase our operating costs significantly. The interpretation and application of privacy, data protection and data retention laws and regulations are often uncertain and in flux incircumstance indicate the U.S. and internationally. These laws may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices, complicating long-range business planning decisions. If privacy, data protection or data retention laws are interpreted and applied in a manner that is inconsistent with our current policies and practices we may be fined or ordered to change our business practices in a manner that adversely impacts our operating results. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business and operating results.
Interruptions, delays, or failures in the provision of our services could damage our reputation and harm our operating results.
Delays or disruptions to our service, or the loss or compromise of data, could result from a variety of causes, including the following:
Our operations are susceptible to outages and interruptions due to fire, flood, earthquake, tsunami, other natural disasters, power loss, equipment or telecommunications failures, cyber attacks, terrorist attacks, political or social unrest, and other events over which we have little or no control. We do not have multiple site capacity for all of our services and some of our systems are not fully redundant in the event of delays or disruptions to service, so some data or systemscarrying value may not be fully recoverable after such events.
The systems throughrecoverable. Factors that could lead to impairment of goodwill, intangible assets (including goodwill or assets acquired via acquisitions) and other investments include significant adverse changes in the business climate and actual or projected operating results (affecting our company as a whole or affecting any particular reporting unit) and declines in the financial condition of our business. Factors that could lead to impairment of investments in equity interests include a prolonged period of decline in the stock price or operating performance of, or an announcement of adverse changes or events by, the companies in which we provide our products and services are highly technical, complex, and interdependent. Design errors might exist in these systems,invested or might be introduced when we make modifications,the investments held by those companies. Factors that could lead to an impairment of U.S. government securities, which might cause service malfunctions or require services to be taken offline while corrective responses are developed.
Despite our implementation of network security measures, our servers are vulnerable to computer viruses, malware, worms, hacking, physical and electronic break-ins, router disruption, sabotage or espionage, and other disruptions from unauthorized access and tampering, as well as coordinated denial-of-service attacks. We may not be in a position to promptly address attacks or to implement adequate preventative measures if we are unable to immediately detect such attacks. Such events could result in large expenditures to investigate or remediate, to recover data, to repair or replace networks or information systems, including changes to security measures, to deploy additional personnel, to defend litigation or to protect against similar future events, and may cause damage to our reputation or loss of revenue.
We rely on third-party providers over which we have little or no control for our principal Internet connections and co-location ofconstitute a significant portion of our data servers,current assets, include any downgrade of U.S. government debt or concern about the creditworthiness of the U.S. government. We may be required in the future to record additional charges to earnings if our goodwill, intangible assets, investments in equity interests, including investments held by any equity method investee, or other investments become impaired. Any such charge would adversely impact our financial results.
Fluctuations in foreign currency exchange rates may adversely affect our operating results and financial condition.
Revenue generated and expenses incurred by our international subsidiaries and any equity method investee are often denominated in the currencies of the local countries. As a result, our consolidated U.S. dollar financial statements are subject to fluctuations due to changes in exchange rates as well as for our payment processing capabilities and key components or features of certainthe financial results of our productsinternational subsidiaries and services.any equity method investee are translated from local currencies into U.S. dollars. Our financial results are also subject to changes in exchange rates that impact the settlement of transactions in non-local currencies. The carrying values of our equity investments in any equity investee are also subject to fluctuations in the exchange rates of foreign currencies.
We use derivative instruments, such as foreign currency forward contracts and options, to partially offset certain exposures to fluctuations in foreign currency exchange rates. The use of such instruments may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign currency exchange rates. Any losses on these instruments that we
experience may adversely impact our financial results, cash flows and financial condition. Further, we hedge a portion of our net investment in Yahoo Japan Corporation (“Yahoo Japan”) with currency forward contracts and option contracts. If the Japanese yen has appreciated at maturity beyond the contract execution rate, we would be required to settle the contract by making a cash payment which could be material and could adversely impact our cash flows and financial condition. See Part I, Item 3—“Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report.
Acquisitions and strategic investments could result in adverse impacts on our operations and in unanticipated liabilities.
We have acquired, and have made strategic investments in, a number of companies (including through joint ventures) in the past, and we may make additional acquisitions and strategic investments in the future. Such transactions may result in use of our cash resources, dilutive issuances of our equity securities, or incurrence of debt. Such transactions may also result in amortization expenses related to intangible assets. Our acquisitions and strategic investments to date were accompanied by a number of risks, including:
the difficulty of integrating the operations, personnel, systems, and controls of acquired companies as a result of cultural, regulatory, systems, and operational differences;
the potential disruption of our ongoing business and distraction of management;
the services they provide usincurrence of additional operating losses and operating expenses of the businesses we acquired or any failurein which we invested;
the difficulty of these third-party providers to handle higher volumes of use could, in turn, cause delays or disruptions inintegrating acquired technology and rights into our services and unanticipated expenses related to such integration;
the failure to successfully further develop an acquired business or technology and any resulting impairment of amounts currently capitalized as intangible assets;
the failure of strategic investments to perform as expected or to meet financial projections;
the potential for patent and trademark infringement and data privacy and security claims against the acquired companies, or companies in which we have invested;
litigation or other claims in connection with acquisitions, acquired companies, or companies in which we have invested;
the impairment or loss of revenue. In addition, ifrelationships with customers and partners of the companies we acquired or in which we invested or with our agreementscustomers and partners as a result of the integration of acquired operations;
the impairment of relationships with, these third-party providers are terminated for any reason, we might not haveor failure to retain, employees of acquired companies or our existing employees as a readily available alternative.result of integration of new personnel;
Prolonged delays
our lack of, or disruptionslimitations on our, control over the operations of our joint venture companies;
in the case of foreign acquisitions and investments, the impact of particular economic, tax, currency, political, legal and regulatory risks associated with specific countries; and
the impact of known potential liabilities or liabilities that may be unknown, including as a result of inadequate internal controls, associated with the companies we acquired or in which we invested.
We are likely to experience similar risks in connection with our servicefuture acquisitions and strategic investments. Our failure to be successful in addressing these risks or other problems encountered in connection with our past or future acquisitions and strategic investments could result in a losscause us to fail to realize the anticipated benefits of users, damage to our brands, legal costssuch acquisitions or liability,investments, incur unanticipated liabilities, and harm to our operating results.business generally.
A variety of new and existing U.S. and foreign government laws and regulations could subject us to claims, judgments, monetary liabilities and other remedies, and to limitations on our business practices.
We are subject to numerous U.S. and foreign laws and regulations covering a wide variety of subject matters. New laws and regulations, changes in existing laws and regulations or the interpretation of them, our introduction of new products or forms of advertising (such as native advertising), or an extension of our business into new areas, could increase our future compliance costs, make our products and services less attractive to our users, or cause us to change or limit our business practices. We may incur substantial expenses to comply with laws and regulations or defend against a claim that we have not complied with them. Further, any failure on our part to comply with any relevant laws or regulations may subject us to significant civil or criminal liabilities, penalties, and negative publicity.
The application of existing domestic and international laws and regulations to us relating to issues such as user privacy and data protection, data transfer, security, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, billing, real estate, fantasy sports, consumer protection, accessibility, content regulation, quality of services, law enforcement demands, telecommunications, mobile, television, and intellectual property ownership and infringement in many instances is unclear or unsettled. Further, the application to us or our subsidiaries of existing laws regulating or requiring licenses for certain businesses of our advertisers can be unclear. For example, paid fantasy sports contests are an area of current regulatory uncertainty, with various government authorities having taken positions that some types of contests are unlawful and/or subject to licensing requirements. U.S. export control laws and regulations also impose requirements and restrictions on exports to certain nations and persons and on our business. Internationally, we may also be subject to laws regulating our activities in foreign countries and to foreign laws and regulations that are inconsistent from country to country.
The Digital Millennium Copyright Act (“DMCA”) is intended, in part, to limit the liability of eligible online service providers for caching, hosting, listing or linking to, third-party Websiteswebsites or user content that include materials that give rise to copyright infringement. Portions of the Communications Decency Act (“CDA”) are intended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both the DMCA and the CDA in conducting our business, and may be adversely impacted by future legislation and future judicial decisions altering these safe harbors or if international jurisdictions refuse to apply similar protections.
Various U.S. and international laws restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. These laws currently impose restrictions and requirements on our business, and future federal, state or international laws and legislative efforts designed to protect children on the Internet may impose additional requirements on us.
Fluctuations in foreign currency exchange rates may adversely affect our operating results and financial condition.
Revenue generated and expenses incurred by our international subsidiaries and any equity method investee are often denominated in the currencies of the local countries. As a result, our consolidated U.S. dollar financial statements are subject to fluctuations due to changes in exchange rates as the financial results of our international subsidiaries and any equity method investee are translated from local currencies into U.S. dollars. Our financial results are also subject to changes in exchange rates that impact the settlement of transactions in non-local currencies. The carrying values of our equity investments in any equity investee are also subject to fluctuations in the exchange rates of foreign currencies.
We use derivative instruments, such as foreign currency forward contracts and options, to partially offset certain exposures to fluctuations in foreign currency exchange rates. The use of such instruments may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign currency exchange rates. Any losses on these instruments that we experience may adversely impact our financial results, cash flows and financial condition. Further, we hedge a portion of our net investment in Yahoo Japan Corporation (“Yahoo Japan”) with currency forward contracts and option contracts. If the Japanese yen has appreciated at maturity beyond the contract execution rate, we would be required to settle the contract by making a cash payment which could be material and could adversely impact our cash flows and financial condition. See Part II, Item 7A—“Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report.
Our international operations expose us to additional risks that could harm our business, operating results, and financial condition.
In addition to uncertainty about our ability to continue to generate revenue from our foreign operations and expand our international market position, there are additional risks inherent in doing business internationally (including through our international joint ventures), including:
tariffs, trade barriers, customs classifications and changes in trade regulations;
difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;
stringent local labor laws and regulations;
longer payment cycles;
credit risk and higher levels of payment fraud;
profit repatriation restrictions and foreign currency exchange restrictions;
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political or social unrest, economic instability, repression, or human rights issues;
geopolitical events, including natural disasters, acts of war and terrorism;
import or export regulations;
compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting bribery and corrupt payments to government officials;
antitrust and competition regulations;
potentially adverse tax developments;
seasonal volatility in business activity and local economic conditions;
economic uncertainties relating to volatility in emerging markets and global economic uncertainty;
laws, regulations, licensing requirements, and business practices that favor local competitors or prohibit foreign ownership or investments;
different, uncertain or more stringent user protection, content, data protection, privacy, intellectual property and other laws; and
risks related to other government regulation (including the potential for actions restricting access to our products), required compliance with local laws or lack of legal precedent.
We are subject to numerous and sometimes conflicting U.S. and foreign laws and regulations which increase our cost of doing business. Violations of these complex laws and regulations that apply to
our international operations could result in damage awards, fines, criminal actions, sanctions, or penalties against us, our officers or our employees, prohibitions on the conduct of our business and our ability to offer products and services, and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies. These risks inherent in our international operations and expansion increase our costs of doing business internationally and could result in harm to our business, operating results, and financial condition.
We may be subject to legal liability associated with providing online services or content.
We host and provide a wide variety of services and technology products that enable and encourage individuals and businesses to exchange information; upload or otherwise generate photos, videos, text, and other content; advertise products and services; conduct business; and engage in various online activities both domestically and internationally. The law relating to the liability of providers of online services and products for activities of their users is currently unsettled both within the U.S. and internationally. As a publisher and producer of original content, we may be subject to claims such as copyright, libel, defamation or improper use of publicity rights, as well as other infringement claims such as plagiarism. Claims have been threatened and brought against us for defamation, negligence, breaches of contract, plagiarism, copyright and trademark infringement, unfair competition, unlawful
activity, tort, including personal injury, fraud, or other theories based on the nature and content of information which we publish or to which we provide links or that may be posted online or generated by us or by third parties, including our users. In addition, we have been and may again in the future be subject to domestic or international actions alleging that certain content we have generated or third-party content that we have made available within our services violates laws in domestic and international jurisdictions. We arrange for the distribution of third-party advertisements to third-party publishers and advertising networks, and we offer third-party products, services, or content, such as stock quotes and trading information, under the Yahoo brand or via distribution on Yahoo Properties. We may be subject to claims concerning these products, services, or content by virtue of our involvement in marketing, branding, broadcasting, or providing access to them, even if we do not ourselves host, operate, provide, or provide access to these products, services, or content. While our agreements with respect to these products, services, and content may provide that we will be indemnified against such liabilities, the ability to receive such indemnification may be disputed, could result in substantial costs to enforce or defend, and depends on the financial resources of the other party to the agreement, and any amounts received might not be adequate to cover our liabilities or the costs associated with defense of such proceedings. Defense of any such actions could be costly and involve significant time and attention of our management and other resources, may result in monetary liabilities or penalties, and may require us to change our business in an adverse manner.
It is also possible that if any information provided directly by us contains errors or is otherwise wrongfully provided to users, third parties could make claims against us. For example, we offer Web-basedweb-based e-mail services, which expose us to potential risks, such as liabilities or claims, by our users and third parties, resulting from unsolicited e-mail, lost or misdirected messages, illegal or fraudulent use of e-mail, alleged violations of policies, property interests, or privacy protections, including civil or criminal laws, or interruptions or delays in e-mail service. We may also face purported consumer class actions or state actions relating to our online services, including our fee-based services (particularly in connection with any decision to discontinue a fee-based service). In addition, our customers, third parties, or government entities may assert claims or actions against us if our online services or technologies are used to spread or facilitate malicious or harmful code or applications.
Investigating and defending these types of claims are expensive, even if the claims are without merit or do not ultimately result in liability, and could subject us to significant monetary liability or cause a change in business practices that could negatively impact our ability to compete.
If we are unable to recruit, hire, motivate, and retain key personnel, we may not be able to execute our business plan.
Our business is dependent on our ability to recruit, hire, motivate, and retain talented, highly skilled personnel. Achieving this objective may be difficult due to many factors, including the intense competition for such highly skilled personnel in the San Francisco Bay Area and other metropolitan areas where our offices are located; fluctuations in global economic and industry conditions; competitors’ hiring practices; and the effectiveness of our compensation programs. If we do not succeed in retaining and motivating our existing key employees, and in attracting new key personnel, we may be unable to meet our business plan and as a result, our revenue and profitability may decline.
If we are unable to attract, sustain, and renew distribution arrangements on favorable terms, our revenue may decline.
We enter into distribution arrangements with third parties such as operators of third-party Websites, online networks, software companies, electronics companies, computer manufacturers, Internet service providers and others to promote or supply our services to their users. For example:
We maintain search and display advertising relationships with Affiliate sites, which integrate our advertising offerings into their Websites.
We enter into distribution alliances with Internet service providers (including providers of cable and broadband Internet access) and software distributors to promote our services to their users.
We enter into agreements with mobile phone, tablet, television, and other device manufacturers, electronics companies and carriers to promote our software and services on their devices.
In some markets, we depend on a limited number of distribution arrangements for a significant percentage of our user activity. A failure by our distributors to attract or retain their user bases would negatively impact our user activity and, in turn, reduce our revenue. In some cases, device manufacturers may be unwilling to pay fees to Yahoo in order to distribute Yahoo services or may be unwilling to distribute Yahoo services.
In the future, as new methods for accessing the Internet and our services become available, including through alternative devices, we may need to enter into amended distribution agreements with existing access providers, distributors, and manufacturers to cover the new devices and new arrangements. We face a risk that existing and potential new access providers, distributors, and manufacturers may decide not to offer distribution of our services on reasonable terms, or at all.
Distribution agreements often involve revenue sharing. Competition to enter into distribution arrangements has caused and may in the future cause our traffic acquisition costs to increase. In some cases, we guarantee distributors a minimum level of revenue and, as a result, run a risk that the distributors’ performance (in terms of ad impressions, toolbar installations, etc.) might not be sufficient to otherwise earn their minimum payments, in which case our payments could exceed the revenue that we receive. In other cases, we agree that if the distributor does not realize specified minimum revenue we will adjust the distributor’s revenue-share percentage or provide make-whole arrangements.
Some of our distribution agreements are not exclusive, have a short term, are terminable at will, or are subject to early termination provisions. The loss of distributors, increased distribution costs, or the renewal of distribution agreements on significantly less favorable terms may cause our revenue to decline.
Certain of our metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We present key metrics such as unique users, number of Ads Sold, number of Paid Clicks, Search click-driven revenue, Price-per-Click and Price-per-Ad that are calculated using internal company data. We periodically review, refine and update our methodologies for monitoring, gathering, and calculating these metrics.
While our metrics are based on what we believe to be reasonable measurements and methodologies, there are inherent challenges in deriving our metrics across large online and mobile populations around the world. In addition, our user metrics may differ from estimates published by third parties or from similar metrics of our competitors due to differences in methodology. Furthermore, over time we may revise or cease reporting certain metrics that we no longer believe are useful or meaningful measures of our performance and add new metrics which we believe are better measurements of performance.
If advertisers or publishers do not perceive our metrics to be accurate, or if we discover material inaccuracies in our metrics, it could negatively affect our reputation, business and financial results.
Any failure to scale and adapt our existing technology architecture to manage expansion of user-facing services and to respond to rapid technological change could adversely affect our business.
As some of the most visited sites on the Internet, Yahoo Properties deliver a significant number of products, services, page views, and advertising impressions to users around the world. We expect our products and services to continue to expand and change significantly and rapidly in the future to accommodate new technologies, new devices, new Internet advertising solutions, and new means of content delivery.
In addition, widespread adoption of new Internet, networking or telecommunications technologies, or other technological or platform changes, could require substantial expenditures to modify or adapt our services or infrastructure. The technology architectures and platforms utilized for our services are highly complex and may not provide satisfactory security features or support in the future, as usage increases and products and services expand, change, and become more complex. In the future, we may make additional changes to our existing, or move to completely new, architectures, platforms and systems, such as the changes we have made in response to the increased use of mobile devices such as tablets and smartphones. Such changes may be technologically challenging to develop and implement, may take time to test and deploy, may cause us to incur substantial costs or data loss, and may cause changes, delays or interruptions in service. These changes, delays, or interruptions in our service may cause our users, Affiliates and other advertising platform participants to become dissatisfied with our service or to move to competing providers or seek remedial actions or compensation. Further, to the extent that demands for our services increase, we will need to expand our infrastructure, including the capacity of our hardware servers and the sophistication of our software. This expansion is likely to be expensive and complex and require additional technical expertise. As we acquire users who rely upon us for a wide variety of services, it becomes more technologically complex and costly to retrieve, store, and integrate data that will enable us to track each user’s preferences. Any difficulties experienced in adapting our architectures, platforms and infrastructure to accommodate increased traffic, to store user data, and track user preferences, together with the associated costs and potential loss of traffic, could harm our operating results, cash flows from operations, and financial condition.
We rely on third parties to provide the technologies necessary to deliver content, advertising, and services to our users, and any change in the licensing terms, costs, availability, or acceptance of these formats and technologies could adversely affect our business.
We rely on third parties to provide the technologies that we use to deliver the majority of the content, advertising, and services to our users. There can be no assurance that these providers will continue to license their technologies or intellectual property to us on reasonable terms, or at all. Providers may change the fees they charge users or otherwise change their business model in a manner that slows the widespread acceptance of their technologies. In order for our services to be successful, there must be a large base of users of the technologies necessary to deliver our content, advertising, and services. We have limited or no control over the availability or acceptance of those technologies, and any change in the licensing terms, costs, availability, or user acceptance of these technologies could adversely affect our business.
Our business depends on continued and unimpeded access to the Internet by us and our users. Internet access providers may be able to block, degrade, or charge for access to certain of our products and services, which could lead to additional expenses and the loss of users and advertisers.
Our products and services depend on the ability of our users to access the Internet, and certain of our products require significant bandwidth to work effectively. Currently, this access is provided by companies that have significant market power in the broadband and internet access marketplace,
including incumbent telephone companies, cable companies, mobile communications companies, and government-owned service providers. Some of these providers may take, or have stated that they may take, measures that could degrade, disrupt, or increase the cost of user access to certain of our products by restricting or prohibiting the use of their infrastructure to support or facilitate our offerings, or by charging increased fees to us or our users to provide our offerings. Such interference could result in a loss of existing users and advertisers, and increased costs, and could impair our ability to attract new users and advertisers, thereby harming our revenues and growth. The adoption of any laws or regulations that limit access to the Internet by blocking, degrading or charging access fees to us or our users for certain services could decrease the demand for, or the usage of, our products, services and apps, increase our cost of doing business and adversely affect our operating results.
Technologies, tools, software, and applications could block our advertisements, impair our ability to deliver interest-based advertising, or shift the location in which advertising appears, which could harm our operating results.
Technologies, tools, software, and applications (including new and enhanced Web browsers) have been developed and are likely to continue to be developed that can block or allow users to opt out of display, search, and interest-based advertising and content, delete or block the cookies used to deliver such advertising, or shift the location in which advertising appears on pages so that our advertisements do not show up in the most monetizable places on our pages or are obscured. Most of our revenue is derived from fees paid by advertisers in connection with the display of graphical and non-graphical advertisements or clicks on search advertisements on Web pages. As a result, the adoption of such technologies, tools, software, and applications could reduce the number of search and display advertisements that we are able to deliver and/or our ability to deliver interest-based advertising and this, in turn, could reduce our advertising revenue and operating results.
Any failure to manage expansion and changes to our business could adversely affect our operating results.
If we are unable to effectively manage a large and geographically dispersed group of employees or to anticipate our future growth, our business may be adversely affected. As we change and expand our business, we must also expand and adapt our operational infrastructure. Our business relies on data systems, billing systems, and financial reporting and control systems, among others. All of these systems have become increasingly complex in the recent past due to the growing complexity of our business, acquisitions of new businesses with different systems, and increased regulation over controls and procedures. To manage our business in a cost-effective manner, we will need to continue to upgrade and improve our data systems, billing systems, and other operational and financial systems, procedures, and controls. In some cases, we are outsourcing administrative functions to lower-cost providers. These upgrades, improvements and outsourcing changes will require a dedication of resources and in some cases are likely to be complex. If we are unable to adapt our systems and put adequate controls in place in a timely manner, our business may be adversely affected. In particular, sustained failures of our billing systems to accommodate increasing numbers of transactions, to accurately bill users and advertisers, or to accurately compensate Affiliates could adversely affect the viability of our business model.
We have dedicated resources to provide a variety of premium enhancements to our products, services and apps, which might not prove to be successful in generating significant revenue for us.
We offer fee-based enhancements for many of our free services. The development cycles for these technologies are long and generally require investment by us. We have invested and will continue to invest in premium products, services and apps. Some of these premium products, services and apps might not generate anticipated revenue or might not meet anticipated user adoption rates. We have previously discontinued some non-profitable premium services and may discontinue others. General economic conditions as well as the rapidly evolving competitive landscape may affect users’ willingness to pay for such premium services. If we cannot generate revenue from our premium services that are greater than the cost of providing such services, our operating results could be harmed.
We may have exposure to additional tax liabilities which could negatively impact our income tax provision, net income, and cash flow.
We are subject to income taxes and other taxes in both the U.S. and the foreign jurisdictions in which we currently operate or have historically operated. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. Our income taxes could be adversely affected by earnings being lower than anticipated in
jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles.
In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. As a U.S. multinational corporation, we are subject to changing tax laws both within and outside of the U.S. We cannot predict the form or timing of potential legislative changes, but any newly enacted tax law could have a material adverse impact on our tax expense and cash flow. For example, several jurisdictions have sought to increase revenues by imposing new taxes on internet advertising or increasing general business taxes. In addition, the Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries, is supporting changes to numerous long-standing tax principles through its base erosion and profit shifting (BEPS) project, which is focused on a number of issues, including the shifting of profits between affiliated entities in different tax jurisdictions. To the extent any of these proposals are enacted into legislation by OECD member countries, or if other international, consensus-based tax policies and principles are amended or implemented, they could adversely affect the amount of tax we pay and thereby our financial position and results of operations.
We earn a material amount of our income from outside the U.S. As of December 31, 2014,2015, we had undistributed foreign earnings of approximately $2.9$3.3 billion, principally related to our equity method
investment in Yahoo Japan. While we do not currently anticipate repatriating these earnings, any repatriation of funds in foreign jurisdictions to the U.S. could result in higher effective tax rates for us and subject us to significant additional U.S. income tax liabilities.
We are subject to regular review and audit by both domestic and foreign tax authorities as well as subject to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our consolidated financial statements and may materially affect our income tax provision, net income, or cash flows in the period or periods for which such determination and settlement is made.
Proprietary document formats may limit the effectiveness of our search technology by preventing our technology from accessing the content of documents in such formats, which could limit the effectiveness of our products and services.
A large amount of information on the Internet is provided in proprietary document formats. These proprietary document formats may limit the effectiveness of search technology by preventing the technology from accessing the content of such documents. The providers of the software applications used to create these documents could engineer the document format to prevent or interfere with the process of indexing the document contents with search technology. This would mean that the document contents would not be included in search results even if the contents were directly relevant to a search. The software providers may also seek to require us to pay them royalties in exchange for giving us the ability to search documents in their format. If the search platform technology we employ is unable to index proprietary format Webweb documents as effectively as our competitors’ technology, usage of our search services might decline, which could cause our revenue to fall.
Adverse macroeconomic conditions could cause decreases or delays in spending by our advertisers and could harm our ability to generate revenue and our results of operations.
Advertising expenditures tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Since we derive most of our revenue from advertising, adverse macroeconomic
conditions have caused, and future adverse macroeconomic conditions could cause, decreases or delays in advertising spending and negatively impact our advertising revenue and short-term ability to grow our revenue. Further, any decreased collectability of accounts receivable or early termination of agreements, whether resulting from customer bankruptcies or otherwise due to adverse macroeconomic conditions, could negatively impact our results of operations.
Our stock price has been volatile historically and may continue to be volatile regardless of our operating performance.
The trading price of our common stock has been and may continue to be subject to broad fluctuations. During the twelve months ended December 31, 2014,2015, the closing sale price of our common stock on the NASDAQ Global Select Market ranged from $32.87$27.60 to $52.37$50.23 per share and the closing sale price on February 13, 201512, 2016 was $44.42$27.04 per share. Our stock price may fluctuate in response to a number of events and factors, such as variations in quarterly operating results or announcements of technological innovations, significant transactions, or new features, products or services by us or our competitors; changes in financial estimates and recommendations by securities analysts; the operating and stock price performance of, or other developments involving, other companies that investors may deem comparable to us; trends in our industry; general economic conditions; and the operating performance and market valuation of Alibaba Group Holding Limited (“Alibaba Group”) and Yahoo Japan Corporation in which we have investments. The equity valuation of our investment in Yahoo Japan Corporation may be impacted due to fluctuations in foreign currency exchange rates. We present our
investment in Alibaba Group on our consolidated balance sheet as an available-for-sale marketable security. Consequently, the carrying value of this investment on our consolidated balance sheet will vary over time and fluctuations in its valuation may cause our stock price to fluctuate.
In addition, the stock market in general, and the market prices for companies in our industry, have experienced volatility that often has been unrelated to operating performance. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. A decrease in the market price of our common stock would likely adversely impact the trading price of the 0.00% Convertible Senior Notes due 2018 that we issued in November 2013 (the “Notes”). Volatility or a lack of positive performance in our stock price may also adversely affect our ability to retain key employees who have been granted stock options or other stock-based awards. A sustained decline in our stock price and market capitalization could lead to an impairment charge to our long-lived assets.
Delaware statutes and certain provisions in our charter documents could make it more difficult for a third-party to acquire us.
Our Board has the authority to issue up to 10 million shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change in control of Yahoo without further action by the stockholders and may adversely affect the voting and other rights of the holders of our common stock.
Some provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or changes in our management, which could have an adverse effect on the market price of our stock and the value of the $1.4375 billion aggregate principal amount of
the Notes we issued in November 2013. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third-party to gain control of our Board. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change in control of us.
Any of these provisions could, under certain circumstances, depress the market price of our common stock and the Notes.
Risks Relating to the Notes
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert
their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
We may not have the ability to raise the funds necessary to settle conversions of the Notes in cash or to repurchase the Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of the Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid special interest, if any. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefore, or pay cash with respect to Notes being converted if we elect not to issue shares, which could harm our reputation and affect the trading price of our common stock.
The note hedge and warrant transactions may affect the value of the Notes and our common stock.
In connection with the pricing of the Notes, we entered into note hedge transactions with the option counterparties. The note hedge transactions are generally expected to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be. We also entered into warrant transactions with the option counterparties. However, the warrant transactions could separately have a dilutive effect to the extent that the market price per share of our common stock exceeds the applicable strike price of the warrants.
In connection with establishing their initial hedge of the note hedge and warrant transactions, the option counterparties or their respective affiliates have purchased shares of our common stock
and/or entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Notes. In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of Notes or following any repurchase of Notes by us on any fundamental repurchase date or otherwise). This activity could cause or avoid an increase or a decrease in the market price of our common stock or the Notes.
Any adverse change in the rating of the Notes or the Company may cause their trading price to decline.
While we did not solicit a credit rating on the Company or on the Notes, one rating service has rated both the Notes and the Company. If that rating service announces its intention to put the Company or the Notes on credit watch or lowers its rating on the Company or the Notes below any rating initially assigned to the Company or the Notes, the trading price of the Notes could decline.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options, which we refer to asASC 470-20. Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or
partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes. We will report lower net income in our financial results because ASC 470-20 will require interest to include the current period’s amortization of the debt discount, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Our headquarters is located in Sunnyvale, California and consists of owned space aggregating approximately one million square feet. We also lease office space in Argentina, Australia, Brazil, Canada, China, France, Germany, Hong Kong, Hungary, India, Ireland, Israel, Italy, Japan, Jordan, Mexico, New Zealand, Norway, the Philippines, Singapore, Spain, Switzerland, Taiwan, the United Arab Emirates, and the United Kingdom. In the United States, we lease offices in various locations, including Atlanta, Beaverton, Boston, Champaign, Chicago, Dallas, Detroit, Hillsboro, the Los Angeles Area, Miami, Mountain View, New York, Omaha, San Francisco, and Washington, D.C. Our data centers are operated in locations in the United States, Brazil, Europe, and Asia. In connection with our strategic plan, we are exploring contract terminations and subleases where we feel we no longer need office space.
We believe that our existing facilities arewill be adequate to meet current requirements, and that suitable additional or substitute space will be available as needed to accommodate any further physical expansion of operations and for any additional sales offices.
For a description of our material legal proceedings, see “Legal Contingencies” in Note 12—“Commitments and Contingencies” in the Notes to our consolidated financial statements, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Yahoo! Inc. common stock is quoted on the NASDAQ Global Select Market under the symbol “YHOO.” The following table sets forth the range of high and low per share sales prices as reported for each period indicated:
2013 | 2014 | 2014 | 2015 | |||||||||||||||||||||||||||||
High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||||
First quarter | $ | 23.88 | $ | 18.89 | $ | 41.72 | $ | 34.45 | $ | 41.72 | $ | 34.45 | $ | 50.78 | $ | 41.80 | ||||||||||||||||
Second quarter | $ | 27.68 | $ | 22.70 | $ | 37.30 | $ | 32.15 | $ | 37.30 | $ | 32.15 | $ | 46.17 | $ | 38.85 | ||||||||||||||||
Third quarter | $ | 33.85 | $ | 24.82 | $ | 44.01 | $ | 32.93 | $ | 44.01 | $ | 32.93 | $ | 39.98 | $ | 27.20 | ||||||||||||||||
Fourth quarter | $ | 41.05 | $ | 31.70 | $ | 52.62 | $ | 36.20 | $ | 52.62 | $ | 36.20 | $ | 36.39 | $ | 28.43 |
Stockholders
We had 9,3838,846 stockholders of record as of February 13, 2015.12, 2016.
Dividends
We have not declared or paid any cash dividends on our common stock. We presently do not have plans to pay any cash dividends in the near future.
Issuer Repurchases of Equity Securities
Share repurchase activityWe did not purchase any shares of our common stock during the three months ended December 31, 2014 was as follows:
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Program | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in 000s)(1) | ||||||||||||
October 1—October 31, 2014: Open Market Purchases | 10,349,272 | $ | 41.24 | 10,349,272 | $ | 2,116,111 | ||||||||||
October 1—October 31, 2014: September 2014 ASR(2) | 8,449,524 | (2) | 8,449,524 | $ | 2,283,317 | |||||||||||
October 1—October 31, 2014: October 2014 ASR(3) | 14,712,644 | (3) | 14,712,644 | $ | 1,283,317 | |||||||||||
November 1—November 30, 2014: Open Market Purchases | 4,829,338 | $ | 47.40 | 4,829,338 | $ | 1,054,413 | ||||||||||
December 1—December 31, 2014: Open Market Purchases | 6,478,600 | $ | 50.09 | 6,478,600 | $ | 729,883 | ||||||||||
December 1—December 31, 2014: October 2014 ASR(3) | 1,651,834 | (3) | 1,651,834 | $ | 929,883 | |||||||||||
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Total | 46,471,212 | $ | 45.26 | 46,471,212 | ||||||||||||
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See Part II, Item 7 “Management’s Discussion and Analysisfourth quarter of Financial Condition and Results of Operations” of this Annual Report on Form 10-K for additional information regarding share repurchases. See also Note 13—“Stockholders’ Equity” in the Notes to our consolidated financial statements for additional information.2015.
Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (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! Inc. under the Securities Act or the Exchange Act.
The following graph compares, for the five-year period ended December 31, 2014,2015, the cumulative total stockholder return for Yahoo’s common stock, the NASDAQ 100 Index, the Standard & Poor’s North American Technology-Internet Index (the “S&P Internet”), and the Standard & Poor’s 500 Stock Index (the “S&P 500”). Measurement points are the last trading day of each of Yahoo’s fiscal years ended December 31, 2010, December 31, 2011, December 31, 2012, December 31, 2013, 2014, and December 31, 2014.2015. The graph assumes that $100 was invested at the market close on December 31, 20092010 in the common stock of Yahoo, the NASDAQ 100 Index, the S&P Internet, and the S&P 500 and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The consolidated statements of incomeoperations data and the consolidated balance sheets data for the years ended, and as of, December 31, 2010, 2011, 2012, 2013, 2014, and 20142015 are derived from our audited consolidated financial statements.
Consolidated Statements of IncomeOperations Data:
Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2010(3) | 2011(4) | 2012(5) | 2013(6) | 2014(7) | 2011(3) | 2012(4) | 2013(5) | 2014(6) | 2015(7) | |||||||||||||||||||||||||||||||
(in thousands, except per share amounts) | (in thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||||||
Revenue | $ | 6,324,651 | $ | 4,984,199 | $ | 4,986,566 | $ | 4,680,380 | $ | 4,618,133 | $ | 4,984,199 | $ | 4,986,566 | $ | 4,680,380 | $ | 4,618,133 | $ | 4,968,301 | ||||||||||||||||||||
Total operating expenses | $ | 5,552,127 | $ | 4,183,858 | $ | 4,420,198 | $ | 4,090,454 | $ | 4,475,191 | $ | 4,183,858 | $ | 4,420,198 | $ | 4,090,454 | $ | 4,475,191 | $ | 9,716,795 | ||||||||||||||||||||
Income from operations(1) | $ | 772,524 | $ | 800,341 | $ | 566,368 | $ | 589,926 | $ | 142,942 | ||||||||||||||||||||||||||||||
Other income, net(2) | $ | 297,869 | $ | 27,175 | $ | 4,647,839 | $ | 43,357 | $ | 10,369,439 | ||||||||||||||||||||||||||||||
Provision for income taxes | $ | (221,523 | ) | $ | (241,767 | ) | $ | (1,940,043 | ) | $ | (153,392 | ) | $ | (4,038,102 | ) | |||||||||||||||||||||||||
Income (loss) from operations(1) | $ | 800,341 | $ | 566,368 | $ | 589,926 | $ | 142,942 | $ | (4,748,494 | ) | |||||||||||||||||||||||||||||
Other income (expense), net(2) | $ | 27,175 | $ | 4,647,839 | $ | 43,357 | $ | 10,369,439 | $ | (75,782 | ) | |||||||||||||||||||||||||||||
(Provision) benefit for income taxes | $ | (241,767 | ) | $ | (1,940,043 | ) | $ | (153,392 | ) | $ | (4,038,102 | ) | $ | 89,598 | ||||||||||||||||||||||||||
Earnings in equity interests | $ | 395,758 | $ | 476,920 | $ | 676,438 | $ | 896,675 | $ | 1,057,863 | $ | 476,920 | $ | 676,438 | $ | 896,675 | $ | 1,057,863 | $ | 383,571 | ||||||||||||||||||||
Net income attributable to Yahoo! Inc. | $ | 1,231,663 | $ | 1,048,827 | $ | 3,945,479 | $ | 1,366,281 | $ | 7,521,731 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to Yahoo! Inc. | $ | 1,048,827 | $ | 3,945,479 | $ | 1,366,281 | $ | 7,521,731 | $ | (4,359,082 | ) | |||||||||||||||||||||||||||||
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Net income attributable to Yahoo! Inc. common stockholders per share—basic | $ | 0.91 | $ | 0.82 | $ | 3.31 | $ | 1.30 | $ | 7.61 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to Yahoo! Inc. common stockholders per share—basic | $ | 0.82 | $ | 3.31 | $ | 1.30 | $ | 7.61 | $ | (4.64 | ) | |||||||||||||||||||||||||||||
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Net income attributable to Yahoo! Inc. common stockholders per share—diluted | $ | 0.90 | $ | 0.82 | $ | 3.28 | $ | 1.26 | $ | 7.45 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to Yahoo! Inc. common stockholders per share—diluted | $ | 0.82 | $ | 3.28 | $ | 1.26 | $ | 7.45 | $ | (4.64 | ) | |||||||||||||||||||||||||||||
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Shares used in per share calculation—basic | 1,354,118 | 1,274,240 | 1,192,775 | 1,052,705 | 987,819 | 1,274,240 | 1,192,775 | 1,052,705 | 987,819 | 939,141 | ||||||||||||||||||||||||||||||
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Shares used in per share calculation—diluted | 1,364,612 | 1,282,282 | 1,202,906 | 1,070,811 | 1,004,108 | 1,282,282 | 1,202,906 | 1,070,811 | 1,004,108 | 939,141 | ||||||||||||||||||||||||||||||
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(1) Includes: | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | $ | 223,478 | $ | 203,958 | $ | 224,365 | $ | 278,220 | $ | 420,174 | $ | 203,958 | $ | 224,365 | $ | 278,220 | $ | 420,174 | $ | 457,153 | ||||||||||||||||||||
Restructuring charges, net | $ | 57,957 | $ | 24,420 | $ | 236,170 | $ | 3,766 | $ | 103,450 | $ | 24,420 | $ | 236,170 | $ | 3,766 | $ | 103,450 | $ | 104,019 | ||||||||||||||||||||
(2) Includes: | ||||||||||||||||||||||||||||||||||||||||
Gain on sale of Alibaba Group shares | $ | — | $ | — | $ | 4,603,322 | $ | — | $ | — | $ | — | $ | 4,603,322 | $ | — | $ | — | $ | — | ||||||||||||||||||||
Gain on sale of Alibaba Group ADSs | $ | — | $ | — | $ | — | $ | — | $ | 10,319,437 | $ | — | $ | — | $ | — | $ | 10,319,437 | $ | — |
(3) |
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Our net income attributable to Yahoo! Inc. for the year ended December 31, 2012 included a pre-tax gain of approximately $4.6 billion and an after-tax gain of $2.8 billion related to our sale to Alibaba Group |
Our net income attributable to Yahoo! Inc. for the year ended December 31, 2013 included pre-tax gains of approximately $80 million related to sales of patents and a goodwill impairment charge of $64 million. In the year ended December 31, 2013, we recorded net restructuring charges of $4 million related to our cost reduction initiatives. The tax impact of the items referred to above was $22 million, and in the aggregate, these items had a net negative impact of $10 million on net income attributable to Yahoo! Inc., or $0.01 per both basic and diluted share, for the year ended December 31, 2013. |
Our net income attributable to Yahoo! Inc. for the year ended December 31, 2014 included a pre-tax gain of approximately $10.3 billion and an after-tax gain of $6.3 billion related to our sale of American Depositary Shares (“ADSs”) of Alibaba Group in Alibaba Group’s initial public offering |
(7) | Our net income (loss) attributable to Yahoo! Inc. for the year ended December 31, 2015, included a goodwill impairment charge of $4,461 million, net restructuring charges of $104 million related to our cost reduction initiatives, an asset impairment charge of $44 million related to originally developed and acquired content, a loss on the Hortonworks warrants of $19 million, an intangibles impairment charge of $15 million and gains of approximately $11 million related to sales of patents. The tax impact of the items referred to above was a $129 million benefit, and in the aggregate, these items had a net negative impact of $4,503 million on net income attributable to Yahoo! Inc., or $4.79 per both basic share and diluted share, for the year ended December 31, 2015. |
Consolidated Balance Sheets Data:
December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||
2010 | 2011 | 2012(1) | 2013(2) | 2014(3) | 2011 | 2012(1) | 2013(2) | 2014(3) | 2015(4) | |||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 1,526,427 | $ | 1,562,390 | $ | 2,667,778 | $ | 2,077,590 | $ | 2,667,916 | $ | 1,562,390 | $ | 2,667,778 | $ | 2,077,590 | $ | 2,664,098 | $ | 1,631,911 | ||||||||||||||||||||
Marketable securities | $ | 2,102,255 | $ | 967,527 | $ | 3,354,600 | $ | 2,919,804 | $ | 7,558,304 | $ | 967,527 | $ | 3,354,600 | $ | 2,919,804 | $ | 7,558,304 | $ | 5,201,073 | ||||||||||||||||||||
Alibaba Group equity securities | $ | — | $ | — | $ | — | $ | — | $ | 39,867,789 | $ | — | $ | — | $ | — | $ | 39,867,789 | $ | 31,172,361 | ||||||||||||||||||||
Alibaba Group Preference Shares | $ | — | $ | — | $ | 816,261 | $ | — | $ | — | $ | — | $ | 816,261 | $ | — | $ | — | $ | — | ||||||||||||||||||||
Working capital | $ | 2,719,676 | $ | 2,245,175 | $ | 4,362,481 | $ | 3,685,545 | $ | 5,170,526 | $ | 2,245,175 | $ | 4,362,481 | $ | 3,685,545 | $ | 4,929,438 | $ | 6,229,939 | ||||||||||||||||||||
Goodwill | $ | 3,900,752 | $ | 3,826,749 | $ | 4,679,648 | $ | 5,152,570 | $ | 808,114 | ||||||||||||||||||||||||||||||
Investments in equity interests | $ | 4,011,889 | $ | 4,749,044 | $ | 2,840,157 | $ | 3,426,347 | $ | 2,489,578 | $ | 4,749,044 | $ | 2,840,157 | $ | 3,426,347 | $ | 2,489,578 | $ | 2,503,229 | ||||||||||||||||||||
Total assets | $ | 14,928,104 | $ | 14,782,786 | $ | 17,103,253 | $ | 16,804,959 | $ | 61,960,344 | $ | 14,782,786 | $ | 17,103,253 | $ | 16,804,959 | $ | 61,707,336 | $ | 45,203,966 | ||||||||||||||||||||
Income taxes payable related to the sale of Alibaba Group ADSs | $ | — | $ | — | $ | — | $ | — | $ | 3,282,293 | $ | — | $ | — | $ | — | $ | 3,282,293 | $ | — | ||||||||||||||||||||
Long-term deferred tax liabilities related to Alibaba Group equity securities | $ | — | $ | — | $ | — | $ | — | $ | 16,154,906 | $ | — | $ | — | $ | — | $ | 16,154,906 | $ | 12,611,867 | ||||||||||||||||||||
Long-term liabilities | $ | 705,822 | $ | 994,078 | $ | 1,207,418 | $ | 2,334,050 | $ | 2,491,265 | $ | 994,078 | $ | 1,207,418 | $ | 2,334,050 | $ | 2,251,855 | $ | 2,235,299 | ||||||||||||||||||||
Total Yahoo! Inc. stockholders’ equity | $ | 12,558,129 | $ | 12,541,067 | $ | 14,560,200 | $ | 13,074,909 | $ | 38,785,592 | $ | 12,541,067 | $ | 14,560,200 | $ | 13,074,909 | $ | 38,785,592 | $ | 29,079,420 |
(1) | During the year ended December 31, 2012, we received $13.54 per Share, or approximately $7.1 billion in total consideration, for the 523 million Alibaba Group shares we sold back to Alibaba Group. Approximately $6.3 billion of the consideration was received in cash and $800 million was received in Alibaba Group Preference Shares. We paid cash taxes of $2.3 billion related to the transaction. |
(2) | During the year ended December 31, 2013, we received net proceeds of $1.4 billion from the issuance of the $1.4375 billion of 0.00% Convertible Notes due 2018 (the “Notes”) issued in November 2013. See Note 11—“Convertible Notes” in the Notes to our consolidated financial statements for additional information. |
(3) | During the year ended December 31, 2014, we received net proceeds of $9.4 billion from the sale of Alibaba Group ADSs in Alibaba Group’s IPO. As a result of the IPO, we no longer account for Alibaba Group using the equity method of accounting, and reflect our remaining investment as an equity security rather than in investments in equity interests. |
(4) | During the year ended December 31, 2015, we satisfied the $3.3 billion income tax liability related to the sale of ADSs in |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
In addition to current and historical information, this Annual Report on Form 10-K 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 Annual Report on Form 10-K includes, among others, forward-looking statements regarding our:
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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 1, Item 1A “Risk Factors” of this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update or revise any of our forward-looking statements after the date of this Annual Report on Form 10-K 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 to digital information discovery, focused on making users’informing, connecting, and entertaining our users through our search, communications, and digital habits inspiring and entertaining.content products. By creating highly personalized experiences, for ourwe help users we keep people connected to whatdiscover the information that matters most to them across devices and around the world. In turn, weworld –– on mobile or desktop. We create value for advertisers by connecting them with the audiencesa streamlined, simple advertising technology stack that buildleverages Yahoo’s data, content, and technology to connect advertisers with 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.target audiences. Advertisers can build their businesses bythrough advertising to targeted audiences on our online properties and services (“Yahoo Properties”) or throughand a distribution network of third-partythird party entities (“Affiliates”) who integrate our advertising offerings into their Websiteswebsites 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.
In the following Management’s Discussion and Analysis, we provide information regarding the following areas:
Key Financial Metrics;
Non-GAAP Financial Measures;Recent Developments;
Significant Transactions;
Results of Operations;
Segment Reporting;
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, and limitations specific to, each of these non-GAAP financial measures.
Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
2012 | 2013 | 2014 | 2013 | 2014 | 2015 | |||||||||||||||||||
(dollars in thousands) | (in thousands) | |||||||||||||||||||||||
Revenue | $ | 4,986,566 | $ | 4,680,380 | $ | 4,618,133 | $ | 4,680,380 | $ | 4,618,133 | $ | 4,968,301 | ||||||||||||
Revenue ex-TAC | $ | 4,467,660 | $ | 4,425,938 | $ | 4,400,602 | $ | 4,425,938 | $ | 4,400,602 | $ | 4,090,787 | ||||||||||||
Income from operations(1) | $ | 566,368 | $ | 589,926 | $ | 142,942 | ||||||||||||||||||
Income (loss) from operations(1) | $ | 589,926 | $ | 142,942 | $ | (4,748,494 | ) | |||||||||||||||||
Adjusted EBITDA | $ | 1,698,727 | $ | 1,564,245 | $ | 1,361,548 | $ | 1,564,245 | $ | 1,361,548 | $ | 951,740 | ||||||||||||
Net income attributable to Yahoo! Inc. | $ | 3,945,479 | $ | 1,366,281 | $ | 7,521,731 | ||||||||||||||||||
Net income (loss) attributable to Yahoo! Inc. | $ | 1,366,281 | $ | 7,521,731 | $ | (4,359,082 | ) | |||||||||||||||||
Net cash provided by (used in) operating activities | $ | (281,554 | ) | $ | 1,195,247 | $ | 896,700 | $ | 1,195,247 | $ | 916,350 | $ | (2,383,422 | ) | ||||||||||
Free cash flow(2) | $ | (834,865 | ) | $ | 786,465 | $ | 590,450 | $ | 786,465 | $ | 586,632 | $ | (3,010,172 | ) | ||||||||||
(1) Includes: | ||||||||||||||||||||||||
Stock-based compensation expense | $ | 224,365 | $ | 278,220 | $ | 420,174 | $ | 278,220 | $ | 420,174 | $ | 457,153 | ||||||||||||
Restructuring charges, net | $ | 236,170 | $ | 3,766 | $ | 103,450 | $ | 3,766 | $ | 103,450 | $ | 104,019 | ||||||||||||
Asset impairment charge | $ | — | $ | — | $ | 44,381 | ||||||||||||||||||
Goodwill impairment charge | $ | 63,555 | $ | 88,414 | $ | 4,460,837 | ||||||||||||||||||
Intangibles impairment charge | $ | — | $ | — | $ | 15,423 |
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Revenue ex-TAC (a non-GAAP financial measure)
Years Ended December 31, | 2012-2013 % Change | 2013-2014 % Change | ||||||||||||||||||
2012 | 2013 | 2014 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Revenue | $ | 4,986,566 | $ | 4,680,380 | $ | 4,618,133 | (6 | )% | (1 | )% | ||||||||||
Less: TAC | 518,906 | 254,442 | 217,531 | (51 | )% | (15 | )% | |||||||||||||
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Revenue ex-TAC | $ | 4,467,660 | $ | 4,425,938 | $ | 4,400,602 | (1 | )% | (1 | )% | ||||||||||
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For the year ended December 31, 2014, revenue ex-TAC decreased $25 million, or 1 percent, due to a decline in display revenue ex-TAC and other revenue ex-TAC, partially offset by an increase in search revenue ex-TAC. For the year ended December 31, 2013, revenue ex-TAC decreased $42 million, or 1 percent, due to a decrease in display revenue ex-TAC partially offset by an increase in search revenue ex-TAC and other revenue ex-TAC.
The decline in TAC for the year ended December 31, 2014 was primarily driven by the impact of the transition of paid search to Microsoft’s platform. The decline in TAC for the year ended December 31, 2013 was primarily driven by the impact of the closure of our Korea business and the transition of paid search to Microsoft’s platform.
Adjusted EBITDA (a non-GAAP financial measure)
Years Ended December 31, | 2012-2013 % Change | 2013-2014 % Change | ||||||||||||||||||
2012 | 2013 | 2014 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Net income attributable to Yahoo! Inc. | $ | 3,945,479 | $ | 1,366,281 | $ | 7,521,731 | (65 | )% | N/M | |||||||||||
Costs associated with the Korea business and its closure | 99,485 | — | — | (100 | )% | 0 | % | |||||||||||||
Deal-related costs related to the sale of Alibaba Group shares | 6,500 | — | — | (100 | )% | 0 | % | |||||||||||||
Depreciation and amortization | 649,267 | 628,778 | 606,568 | (3 | )% | (4 | )% | |||||||||||||
Stock-based compensation expense | 224,365 | 278,220 | 420,174 | 24 | % | 51 | % | |||||||||||||
Goodwill impairment charge | — | 63,555 | 88,414 | 100 | % | 39 | % | |||||||||||||
Restructuring charges, net, as adjusted(1) | 152,742 | 3,766 | 103,450 | (98 | )% | N/M | ||||||||||||||
Other income, net | (4,647,839 | ) | (43,357 | ) | (10,369,439 | ) | N/M | N/M | ||||||||||||
Provision for income taxes | 1,940,043 | 153,392 | 4,038,102 | N/M | N/M | |||||||||||||||
Earnings in equity interests | (676,438 | ) | (896,675 | ) | (1,057,863 | ) | 33 | % | 18 | % | ||||||||||
Net income attributable to noncontrolling interests | 5,123 | 10,285 | 10,411 | 101 | % | 1 | % | |||||||||||||
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Adjusted EBITDA | $ | 1,698,727 | $ | 1,564,245 | $ | 1,361,548 | (8 | )% | (13 | )% | ||||||||||
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Percentage of revenue ex-TAC(2)(3) | 38 | % | 35 | % | 31 | % | ||||||||||||||
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N/M = Not Meaningful
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For the years ended December 31, 2014 and 2013, adjusted EBITDA decreased $203 million, or 13 percent, and $134 million, or 8 percent, compared to 2013 and 2012, respectively, mainly due to an increase in global operating costs to support our growth initiatives.
Free Cash Flow (a non-GAAP financial measure)
Years Ended December 31, | ||||||||||||
2012 | 2013 | 2014 | ||||||||||
(dollars in thousands) | ||||||||||||
Net cash provided by (used in) operating activities | $ | (281,554 | ) | $ | 1,195,247 | $ | 896,700 | |||||
Acquisition of property and equipment, net | (505,507 | ) | (338,131 | ) | (372,147 | ) | ||||||
Dividends received from equity investees | (83,648 | ) | (135,058 | ) | (83,685 | ) | ||||||
Excess tax benefits from stock-based awards | 35,844 | 64,407 | 149,582 | |||||||||
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Free cash flow(*) | $ | (834,865 | ) | $ | 786,465 | $ | 590,450 | |||||
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For the year ended December 31, 2014, free cash flow decreased $196 million, compared to 2013, primarily due to a decline in adjusted EBITDA and an increase in the acquisition of property and equipment to support our growth initiatives.
For the year ended December 31, 2013, free cash flow increased $1.6 billion, compared to 2012. Excluding the impact of the cash taxes paid in 2012 of $2.3 billion related to the Initial Repurchase, free cash flow decreased $645 million in 2013, compared to 2012. The decline was primarily due to an upfront payment of $550 million we received in 2012 from Alibaba Group in satisfaction of certain future royalty payments under the existing technology and intellectual property license agreement with Alibaba Group (the “TIPLA”), for which there were no similar payments in 2013. This was partially offset by a decrease in capital expenditures.
Non-GAAP Financial Measures
Revenue ex-TAC. Revenue ex-TAC is a non-GAAP financial measure defined as GAAP revenue less TAC.TAC that has been recorded as a cost of revenue. TAC consists of payments made to Affiliates that have integrated our advertising offerings into their sites and payments made to companies that direct consumer and business traffic to Yahoo Properties. Based on the terms of the Search Agreement with Microsoft described in Note 19—“Search Agreement with Microsoft Corporation” in the Notes to our consolidated financial statements, Microsoft retains a revenue share of 12 percent of the net (after TAC) search revenue generated on Yahoo Properties and Affiliate sites in transitioned markets. We report the net revenue we receive under the Search Agreement as revenue and no longer present the associated TAC. Accordingly, for transitioned markets we report GAAP revenue associated with the Search Agreement on a net (after TAC) basis rather than a gross basis. For markets that had not yet transitioned, revenue continued to be recorded on a gross (before TAC) basis, and TAC is recorded either as a partreduction of operating expenses.revenue or as cost of revenue.
We present revenue ex-TAC to provide investors a metric used by us for evaluation and decision-making purposes during the Microsoft transition and to provide investors with comparable revenue numbers when comparing periods preceding, during and following the transition period.to our historical reported financial information. A limitation of revenue ex-TAC is that it is a measure which we have defined for internal and investor purposes that may be unique to us, and therefore it may not enhance the comparability of our results to those of 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 revenue and total operating expenses, which include TAC in non-transitioned markets.cost of revenue—TAC.
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure defined as net income (loss) attributable to Yahoo! Inc. before taxes, depreciation, amortization of intangible assets, stock-based compensation expense, other income (expense), net (which includes interest), earnings in equity interests, net income attributable to noncontrolling interests, and certainother gains, losses, and expenses that we do not believe are indicative of our ongoing results.
We present adjusted EBITDA because the exclusion of certain gains, losses, and expenses facilitates comparisons of the operating performance of our Company on a period to periodperiod-to-period basis. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for results reported under GAAP. These limitations include: adjusted EBITDA does not reflect tax payments and such payments reflect a reduction in cash available to us; adjusted EBITDA does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses; adjusted EBITDA does not include stock-based compensation expense related to our workforce; adjusted EBITDA also excludes other income (expense), net (which includes interest), earnings in equity interests, net income attributable to noncontrolling interests and certainother gains, losses, and expenses that we do not believe are indicative of our ongoing results, and these items may represent a reduction or increase in cash available to us. Adjustedus; and adjusted EBITDA is a measure that may be unique to us, and therefore it may not enhance the comparability of our results to other companies in our industry. Management compensates for these limitations by also relying on the comparable GAAP financial measure of net income (loss) attributable to Yahoo! Inc., which includes taxes, depreciation, amortization, stock-based compensation expense, other income (expense), net (which includes interest), earnings in equity interests, net income attributable to noncontrolling interests and the other gains, losses and expenses that are excluded from adjusted EBITDA.
Free Cash Flow. Free cash flow is a non-GAAP financial measure defined as net cash provided by (used in) operating activities (adjusted to include excess tax benefits from stock-based awards), less (i) acquisition of property and equipment, net (i.e., acquisition of property and (ii)equipment less proceeds received from disposition of property and equipment) and dividends received from equity investees.
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 operations, after the acquisitiondeducting our net payments for acquisitions and dispositions of property and equipment, which cash can then be used for strategic opportunities or other business purposes including, among others, investing in our 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. Free cash flow is a measure that may be unique to us, and therefore it may not enhance the comparability of our results to other companies in our industry. Management compensates for thethis limitation of free cash flow by also relying on the net change in cash and cash equivalents as presented in our consolidated statements of cash flows prepared in accordance with GAAP which incorporates all cash movements during the period.
Significant TransactionsRevenue
2014-2015 % Change Revenue ex-TAC Acquisition of BrightRoll Years Ended December 31, 2013-2014
% Change 2013 2014 2015 (dollars in thousands) Revenue $ 4,680,380 $ 4,618,133 $ 4,968,301 (1 )% 8% Less: TAC 254,442 217,531 877,514 (15 )% 303% $ 4,425,938 $ 4,400,602 $ 4,090,787 (1 )% (7)%
On
For the year ended December 12, 2014,31, 2015, revenue and TAC increased $350 million and $660 million, respectively, or 8 percent and 303 percent, compared to 2014. For the Company completedyear ended December 31, 2015, revenue ex-TAC (a non-GAAP financial measure) decreased $310 million, or 7 percent, compared to 2014. The increase in revenue for the acquisition of BrightRoll, Inc.year ended December 31, 2015 was primarily attributable to an increase in search and display revenue resulting from an increase in revenue from distribution partners, including Mozilla Corporation (“BrightRoll”Mozilla”), revenue from mobile devices and incremental revenue from the BrightRoll acquisition, a leading programmatic video advertising platform that we acquired in December 2014. This growth was partially offset by declines in our legacy desktop display business, search revenue driven by a decline in Yahoo search traffic, and a decline in other revenue associated with Alibaba Group royalty revenue, for $583 million.which we no longer recognize fees revenue due to the cessation of royalties. The transaction will combine Yahoo’s premium-desktopincrease in TAC for the year ended December 31, 2015, which exceeded the revenue increases for the same period resulting in a decline in revenue ex-TAC, was primarily driven by higher payments to distribution partners, including Mozilla, TAC increase associated with Gemini, and mobile video advertising inventory with BrightRoll’s programmatic video platformincremental TAC related to the BrightRoll acquisition.
Of the $350 million increase in revenue and publisher relationships$660 million increase in TAC for the year ended December 31, 2015, $394 million and $375 million were attributable to bring substantial valuethe agreement we entered into in November 2014 to advertiserscompensate Mozilla for making us the default search provider on both platforms.
See Note 4—“Acquisitions and Dispositions”certain of Mozilla’s products in the NotesUnited States (the “Mozilla Agreement”). See “Results of Operations” for a more detailed discussion of the factors that contributed to the changes in revenue and TAC during this period.
Gemini is our consolidated financial statementsunified marketplace for additional information.
Acquisitionsearch and native advertising on Yahoo Properties and Affiliate sites. Gemini ads appear on search results pages in response to queries and also as native ads alongside display content. Advertisers place ads on the Gemini platform through our simple self-serve interface, as well as through Yahoo’s traditional sales force; we do not source Gemini ads from Microsoft or other third-party providers. Because we are the primary obligor to Gemini advertisers, we recognize Gemini revenue gross of Flurry
On August 25, 2014,the related TAC paid to Affiliates. During 2015, we completedincreased the acquisitionproportion of Flurry, Inc. (“Flurry”),search queries being routed to the Gemini platform, which resulted in reduced paid clicks as we work to optimize the system. We expect to see a mobile data analytics company that optimizes mobile experiences for developers, marketers, and consumers, for $270 million. The combined scale of Yahoo and Flurry is expected to create more personalized and inspiring app experiences for users and enable more effective mobile advertising solutions for brands seeking to reach their audiences and gain cross-device insights.
See Note 4—“Acquisitions and Dispositions”reduction in the Notesimpact on paid clicks by the second half of 2016.
For the year ended December 31, 2014, revenue, TAC and revenue ex-TAC decreased $62 million, $37 million and $25 million, respectively, or 1 percent, 15 percent, and 1 percent, compared to our consolidated financial statements for additional information.
Alibaba Group Holding Limited Initial Public Offering
On September 24, 2014, Alibaba Group closed its initial public offering (“IPO”) of American Depositary Shares (“ADSs”). Each Alibaba Group ADS represents one ordinary share of Alibaba Group. Yahoo! Hong Kong Holdings Limited (“YHK”), our wholly owned subsidiary, sold 140,000,000 Alibaba Group ADSs2013. The decrease in revenue was attributable to a decline in display revenue resulting from a mix shift from premium to native ad units, as well as a decline in other revenue associated with a decline in listings-based revenue. These declines were partially offset by an increase in search revenue driven by revenue-per-search in the IPO at an initial public offering price of $68.00 per ADS. We received $9.4 billion (net of underwriting discounts, commissions,Americas segment on Yahoo Properties and fees of approximately $115 million)growth in cash for the 140 million Alibaba Group ADSs sold. We recorded a pre-tax gain of $10.3 billion (including a $1.3 billion gain reflecting our proportionate share of the IPO proceeds)advertising revenue from mobile. The decline in TAC for the year ended December 31, 2014, which is included in other income, net oncompared to 2013, was primarily driven by the consolidated statements of income. The after-tax gain was approximately $6.3 billion. Following completionimpact of the saletransition of paid search to Microsoft’s platform.
We expect 2016 revenue to be less than the amount reported in the IPO, we retained 383,565,416 ordinary shares of Alibaba Group, representing approximately 15 percent of Alibaba Group’s outstanding ordinary shares.
As2015 as a result of the IPO, we no longer account for our remaining investment in Alibaba Group using the equity method and no longer record our proportionate sharecompletion of Alibaba Group’s financial results in the consolidated financial statements. We reflect our remaining investment in Alibaba Group as an available-for-sale equity security on the consolidated balance sheet and adjust the investment to fair value each quarterly reporting period with changes in fair value recorded within other comprehensive income (loss), netrecognition of tax. Also in connection with the IPO, each of Yahoo and YHK entered into a lock-up agreement with the underwriters restricting the sale of its remaining ordinary shares of Alibaba Group (“Alibaba Group shares”) for a period of one year, subject to certain exceptions.
As a result of the IPO,deferred revenue under the Technology and Intellectual Property License Agreement (“TIPLA”(the “TIPLA”) with Alibaba Group, will terminate on September 18, 2015, the remaining initial TIPLA deferred revenue of $268 million is now being recognized ratably over the remaining term of the TIPLA,strategic product exits, declines in our legacy desktop display business and Alibaba Group’s obligationa decline in desktop search volume. We expect growth from our Mavens offerings to make royalty payments under the TIPLA ceased on September 24, 2014.partially offset this decline.
See Note 2—“Marketable Securities, Investments and Fair Value Disclosures,” Note 3—“Consolidated Financial Statement Details,” and Note 8—“Investments in Equity Interests Accounted for Using the Equity Method of Accounting” in the Notes to our consolidated financial statements for additional information.Mavens Revenue
Spin-Off of Remaining Holdings in Alibaba Group
On January 27, 2015, we announced a plan for a spin-off of allOne of our remaining holdingsprimary strategies is to invest in Alibaba Group into a newly formed independent registered investment company (referred to as “SpinCo”). The stock of SpinCo will be distributed pro rata toand grow our stockholders, resulting in SpinCo becoming a separate publicly traded registered investment company. Following the completion of the transaction, SpinCo will own all of Yahoo’s remaining 384 million Alibaba Group sharesMavens offerings. Revenue from our Mavens offerings is generated from, without duplication, (i) mobile (as defined below), (ii) video ads and Yahoo Small Business, a current operating business of Yahoo that will also be transferred to SpinCo as part of the transaction. SpinCo will not assume any debt as part of the transaction.video ad packages, (iii) native ads, and (iv) Tumblr and Polyvore ads and fees.
The completion of the transaction is expected to occur in the fourth quarter of 2015 after the expiration of our one-year lock-up agreement relating to the Alibaba Group shares entered into in connection with the Alibaba Group IPO. The transaction is subject to certain conditions, including final approval by our Board, receipt of a favorable ruling from the Internal Revenue Service with respect to 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 Securities and Exchange Commission and compliance with the requirements under the Investment Company Act of 1940, and other customary conditions.
The composition of SpinCo’s independent board of directors and management team, and other details of the transaction, including the distribution ratio, will be determined prior to the closing of the transaction.
Upon closing of the transaction, which is subject to the conditions specified above, our consolidated financial position will be materially impacted as the Alibaba Group shares and related deferred tax liabilities will be removed from our consolidated balance sheet with a corresponding reduction of our stockholders’ equity balance. We would no longer hold any Alibaba Group shares and would no longer record changes in fair value within comprehensive income (loss).
Patent Sale and License Agreement
During the second quarter of 2014, we entered into a patent sale and license agreementMavens revenue 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 to existing patents (“Existing Patents”) and $264 million to the license of patents developed or acquired in the next five years (“Capture Period Patents”). We recorded $61 million as a gain on the Sold Patents during the year ended December 31, 2014. We recognized $432015 increased 45 percent to $1,660 million, in revenue relatedcompared to the Existing Patents and Capture Period Patents during$1,148 million for the year ended December 31, 2014. The amounts allocated to the license of the Existing Patents will be recorded asincrease in Mavens revenue over the four year payment period when payments are due. The amounts allocated to the Capture Period Patents will be recorded as revenue over the five year capture period.
See “Operating Costs and Expenses—Gains on Sales of Patents” for additional information on gains recorded for the yearsyear ended December 31, 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 to increase in 2016 from the amount reported in 2015.
Mobile Revenue
With the significant platform shift to mobile devices, 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 Fantasy Sports, Sports, Mail, Search and Tumblr. As of December 31, 2015, we had more than 600 million monthly mobile users (including mobile Tumblr users).
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 search revenue is generated from clicks on text-based links to advertisers’ websites that appear primarily on search results pages. Search revenue is recognized based on Paid Clicks. A Paid Click occurs when an end-user clicks on a sponsored listing on Yahoo Properties or Affiliate sites for which an advertiser pays on a per click basis. Mobile display revenue is generated from the display of graphical, non-graphical, and video advertisements on mobile devices. The Company recognizes revenue from display advertising on Yahoo Properties and Affiliate sites as impressions of or clicks on display advertisements are delivered. Impressions are delivered when a sold advertisement appears in pages viewed by users. Clicks are delivered when a user clicks on a native advertisement. Mobile revenue also includes leads, listings and fees revenue and e-commerce revenue allocated to user activity on mobile devices. Mobile revenue is included within Search, Display, and Other revenue that we have reported.
Mobile revenue for the year ended December 31, 2015 increased 36 percent to $1,048 million, compared to $768 million for the year ended December 31, 2014. The increase in mobile revenue for the year ended December 31, 2015 was primarily attributable to growth in display revenue on mobile devices driven by native advertising and growth in search revenue on mobile devices driven by mobile search advertising on our Yahoo Gemini platform.
We expect our mobile revenue to increase in 2016 from the amount reported in 2015.
Adjusted EBITDA (a non-GAAP financial measure)
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
(dollars in thousands) | ||||||||||||
Net income (loss) attributable to Yahoo! Inc. | $ | 1,366,281 | $ | 7,521,731 | $ | (4,359,082 | ) | |||||
Advisory fees | — | — | 8,808 | |||||||||
Depreciation and amortization | 628,778 | 606,568 | 609,613 | |||||||||
Stock-based compensation expense | 278,220 | 420,174 | 457,153 | |||||||||
Asset impairment charge | — | — | 44,381 | |||||||||
Goodwill impairment charge | 63,555 | 88,414 | 4,460,837 | |||||||||
Intangibles impairment charge | — | — | 15,423 | |||||||||
Restructuring charges, net | 3,766 | 103,450 | 104,019 | |||||||||
Other income (expense), net | (43,357 | ) | (10,369,439 | ) | 75,782 | |||||||
(Provision) benefit for income taxes | 153,392 | 4,038,102 | (89,598 | ) | ||||||||
Earnings in equity interests, net of tax | (896,675 | ) | (1,057,863 | ) | (383,571 | ) | ||||||
Net income attributable to noncontrolling interests | 10,285 | 10,411 | 7,975 | |||||||||
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Adjusted EBITDA | $ | 1,564,245 | $ | 1,361,548 | $ | 951,740 | ||||||
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(*) | Net income (loss) attributable to Yahoo! Inc. as a percentage of GAAP revenue in 2013, 2014, and 2015 was 29 percent, 163 percent, and (88) percent, respectively. |
For the year ended December 31, 2015, adjusted EBITDA decreased $410 million, or 30 percent, compared to 2014, mainly due to higher TAC payments to support our growth and partnership initiatives across Search, Communications and Digital Content, a lower benefit from patent sales year-over-year, and an increase in direct costs in the Americas segment, partially offset by a decline in global operating costs.
For the year ended December 31, 2014, adjusted EBITDA decreased $203 million, or 13 percent, compared to 2013, mainly due to an increase in global operating costs to support our growth initiatives.
Free Cash Flow (a non-GAAP financial measure)
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
(in thousands) | ||||||||||||
Net cash provided by (used in) operating activities | $ | 1,195,247 | $ | 916,350 | $ | (2,383,422 | ) | |||||
Acquisition of property and equipment, net | (338,131 | ) | (395,615 | ) | (542,987 | ) | ||||||
Excess tax benefits from stock-based awards | 64,407 | 149,582 | 58,282 | |||||||||
Dividends received from equity investees | (135,058 | ) | (83,685 | ) | (142,045 | ) | ||||||
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Free cash flow | $ | 786,465 | $ | 586,632 | $ | (3,010,172 | ) | |||||
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For the year ended December 31, 2015, free cash flow decreased $3.6 billion, compared to 2014, primarily due to satisfaction of the $3.3 billion income tax liability related to the sale of Alibaba Group ADSs in September 2014 and 2014.an increase in the acquisition of property and equipment to support our product investment initiatives in our Mail, Search, and Mavens offerings.
For the year ended December 31, 2014, free cash flow decreased $200 million, compared to 2013, primarily due to a decline in adjusted EBITDA and an increase in the acquisition of property and equipment to support our growth initiatives.
Recent Developments
On February 2, 2016, we announced a strategic plan to simplify Yahoo, narrowing our focus on areas of strength to fuel growth, drive revenue, and increase efficiency in 2016 and beyond.We will simplify our product portfolio to emphasize the products that distinguish us competitively and drive the most substantial portion of users, revenue and market opportunity. As part of this plan, we also announced plans to reduce costs, including reducing our work force by approximately 15 percent by the end of 2016 and closing five offices, and to explore divesting non-core assets.
In parallel with executing our strategic plan, we are also exploring strategic alternatives, including transactions to separate our remaining stake in Alibaba Group from our operating business focusing on a reverse spin transaction, as well as exploring strategic proposals for the operating business. Our Board has formed a Strategic Review Committee of independent directors to lead this process. The Strategic Review Committee has engaged advisors and is establishing a process for engaging with interested parties regarding strategic alternatives.
Significant Transactions
Search Agreement with Microsoft Corporation
The term of the Search Agreement is 10 years from its commencement date, February 23, 2010, subject to earlier termination as provided in the Search Agreement. DuringUnder the first five years of the termcurrent terms of the Search Agreement, inas amended on April 15, 2015 by the transitioned markets,Eleventh Amendment to the Search Agreement (the “Eleventh Amendment”), we wereare entitled to receive 88 percenta percentage of the revenue (the “Revenue Share Rate”) generated from Microsoft’s services on Yahoo Properties and from Microsoft’s services on Affiliate sites afterequal to 93 percent. Microsoft receives its 7 percent revenue share before deduction of the Affiliate’sAffiliate site’s share of revenue. The Affiliate site’s share of revenue is deducted from our 93 percent Revenue Share Rate. Pursuant to the Eleventh Amendment, commencing on May 1, 2015, we also agreed to request paid search results from Microsoft for 51 percent of our search queries originating from personal computers accessing Yahoo Properties and certainour Affiliate sites and will display only Microsoft’s paid search results on such search result pages.
Previously under the Search Agreement, Yahoo had sales exclusivity for both Yahoo’s and Microsoft’s premium advertisers. Pursuant to the Eleventh Amendment to the Search Agreement, this sales exclusivity terminated on July 1, 2015. Yahoo and Microsoft costshave been transitioning premium advertisers for new Affiliates and for all Affiliates (including existing Affiliates) after the first five years.Microsoft’s paid search services to Microsoft on a market-by-market basis. As of February 23, 2015, the Revenue Share Rate increased to 90 percent pursuant to the terms of the Search Agreement.
For search revenue generated from Microsoft’s services on Yahoo Properties26, 2016, such transition was substantially complete for most markets in North America and Affiliate sites, we report as revenue our revenue share, as we are not the primary obligor in the arrangement with the advertisers and publishers,Europe, and the amounts paid to Affiliatesparties are recordedcooperating on a net basis as a reduction of revenue. The underlying search advertising services are provided by Microsoft. transitioning the remaining markets.
Revenue under the Search Agreement represented approximately 2531 percent, 3135 percent, and 35 percent of our revenue for the years ended December 31, 2012, 2013, 2014, and 2014,2015, respectively.
Our results reflect search operating cost reimbursements from Microsoft under the Search Agreement of $67 million, $49 million, and less than $1 million for the years ended December 31, 2012, 2013, and 2014, respectively.
As of February 23, 2015, for a period of 30 days following such date, in addition to other termination rights, the Company has the right to terminate the Search Agreement if the trailing 12-month average of the Company’s revenue per search in the United States (the “U.S. RPS”) on Yahoo Properties is less than a specified percentage of Google’s trailing 12-month estimated average U.S. RPS, excluding, in each case, mobile devices.
See Note 19—“Search Agreement with Microsoft Corporation” in the Notes to our consolidated financial statements for additional information.
Services Agreement with Google Inc.
On October 19, 2015, Yahoo and Google entered into the Google Services Agreement (the “Services Agreement”). The Services Agreement expires on December 31, 2018, subject to earlier termination as provided in the Services Agreement. Pursuant to the Services Agreement, Google will provide us with search advertisements through Google’s AdSense for Search service (“AFS”), web algorithmic search services through Google’s Websearch Service, and image search services. The results provided by Google for these services will be available to us for display on both desktop and mobile platforms. We may use Google’s services on Yahoo Properties and on certain Affiliate sites in the United States (U.S.), Canada, Hong Kong, Taiwan, Singapore, Thailand, Vietnam, Philippines, Indonesia, Malaysia, India, Middle East, Africa, Mexico, Argentina, Brazil, Colombia, Chile, Venezuela, Peru, Australia and New Zealand.
Under the Services Agreement, we have discretion to select which search queries to send to Google and are not obligated to send any minimum number of search queries. The Services Agreement is non-exclusive and expressly permits us to use any other search advertising services, including our own service, the services of Microsoft or other third parties.
Google will pay us a percentage of the gross revenues from AFS ads displayed on Yahoo Properties or Affiliate sites. The percentage will vary depending on whether the ads are displayed on U.S. desktop sites, non-U.S. desktop sites or on the tablet or mobile phone versions of the Yahoo Properties or our Affiliate sites. We will pay Google fees for requests for image search results or web algorithmic search results.
The Services Agreement may be terminated by either party upon certain events, including, among others: upon a material breach subject to certain limitations; in the event of a change in control (as defined in the Services Agreement); and subject to certain conditions and limitations, the occurrence or threatened occurrence of certain litigation or regulatory proceedings adversely impacting the performance of the Services Agreement or a party as a result of the continued performance of the Services Agreement.
Acquisition of Polyvore
On September 2, 2015, we completed the acquisition of Polyvore, a social commerce website, for $161 million. Polyvore lets users across the globe discover and shop for their favorite products in fashion, beauty and home décor.
See Note 4—“Acquisitions and Dispositions” in the Notes to our consolidated financial statements for additional information.
Results of Operations
Years Ended December 31, | 2012-2013 % Change | 2013-2014 % Change | ||||||||||||||||||
2012 | 2013 | 2014 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Revenue for groups of similar services: | ||||||||||||||||||||
Search | ||||||||||||||||||||
Yahoo Properties | $ | 1,206,209 | $ | 1,371,134 | $ | 1,518,035 | 14 | % | 11 | % | ||||||||||
Affiliate sites | 679,651 | 370,657 | 274,826 | (45 | )% | (26 | )% | |||||||||||||
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Total Search revenue | $ | 1,885,860 | $ | 1,741,791 | $ | 1,792,861 | (8 | )% | 3 | % | ||||||||||
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Display | ||||||||||||||||||||
Yahoo Properties | $ | 1,930,234 | $ | 1,744,130 | $ | 1,627,458 | (10 | )% | (7 | )% | ||||||||||
Affiliate sites | 212,584 | 205,700 | 240,577 | (3 | )% | 17 | % | |||||||||||||
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| |||||||||||||||
Total Display revenue | $ | 2,142,818 | $ | 1,949,830 | $ | 1,868,035 | (9 | )% | (4 | )% | ||||||||||
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Other | $ | 957,888 | $ | 988,759 | $ | 957,237 | 3 | % | (3 | )% | ||||||||||
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| |||||||||||||||
Total revenue | $ | 4,986,566 | $ | 4,680,380 | $ | 4,618,133 | (6 | )% | (1 | )% | ||||||||||
Cost of revenue—TAC | 518,906 | 254,442 | 217,531 | (51 | )% | (15 | )% | |||||||||||||
Cost of revenue—other | 1,101,660 | 1,094,938 | 1,080,783 | (1 | )% | (1 | )% | |||||||||||||
Sales and marketing | 1,101,572 | 1,130,820 | 1,234,268 | 3 | % | 9 | % | |||||||||||||
Product development | 885,824 | 1,008,487 | 1,207,146 | 14 | % | 20 | % | |||||||||||||
General and administrative | 540,247 | 569,555 | 574,743 | 5 | % | 1 | % | |||||||||||||
Amortization of intangibles | 35,819 | 44,841 | 66,750 | 25 | % | 49 | % | |||||||||||||
Gains on sales of patents | — | (79,950 | ) | (97,894 | ) | 100 | % | 22 | % | |||||||||||
Goodwill impairment charge | — | 63,555 | 88,414 | 100 | % | 39 | % | |||||||||||||
Restructuring charges, net | 236,170 | 3,766 | 103,450 | (98 | )% | N/M | ||||||||||||||
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|
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Total operating expenses | $ | 4,420,198 | $ | 4,090,454 | $ | 4,475,191 | (7 | )% | 9 | % | ||||||||||
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|
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Income from operations | $ | 566,368 | $ | 589,926 | $ | 142,942 | 4 | % | (76 | )% | ||||||||||
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Includes: | ||||||||||||||||||||
Stock-based compensation expense | $ | 224,365 | $ | 278,220 | $ | 420,174 | 24 | % | 51 | % | ||||||||||
Costs associated with the Korea business and its closure | $ | 99,485 | $ | — | $ | — | (100 | )% | 0 | % |
N/M = Not Meaningful
The following table sets forth selected information concerning our results of operations as a percentage of revenue for the period indicated:
Years Ended December 31, | ||||||||||||
2012 | 2013 | 2014 | ||||||||||
(dollars in thousands) | ||||||||||||
Revenue for groups of similar services: | ||||||||||||
Search | ||||||||||||
Yahoo Properties | 24 | % | 29 | % | 33 | % | ||||||
Affiliate sites | 14 | % | 8 | % | 6 | % | ||||||
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Total Search revenue | 38 | % | 37 | % | 39 | % | ||||||
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Display | ||||||||||||
Yahoo Properties | 39 | % | 37 | % | 35 | % | ||||||
Affiliate sites | 4 | % | 5 | % | 5 | % | ||||||
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Total Display revenue | 43 | % | 42 | % | 40 | % | ||||||
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Other | 19 | % | 21 | % | 21 | % | ||||||
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Total revenue | 100 | % | 100 | % | 100 | % | ||||||
Cost of revenue—TAC | 10 | % | 6 | % | 5 | % | ||||||
Cost of revenue—other | 22 | % | 23 | % | 23 | % | ||||||
Sales and marketing | 22 | % | 24 | % | 27 | % | ||||||
Product development | 18 | % | 22 | % | 26 | % | ||||||
General and administrative | 11 | % | 12 | % | 12 | % | ||||||
Amortization of intangibles | 1 | % | 1 | % | 2 | % | ||||||
Gains on sales of patents | — | (2 | )% | (2 | )% | |||||||
Goodwill impairment charge | — | 1 | % | 2 | % | |||||||
Restructuring charges, net | 5 | % | — | 2 | % | |||||||
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Total operating expenses | 89 | % | 87 | % | 97 | % | ||||||
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Income from operations | 11 | % | 13 | % | 3 | % | ||||||
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Includes: | ||||||||||||
Stock-based compensation expense | 4 | % | 6 | % | 9 | % | ||||||
Costs associated with the Korea business and its closure | 2 | % | — | — |
Management Reporting
We continue to manage our business geographically. The primary areas of measurement and decision making are currently the Americas, EMEA and Asia Pacific. Management relies on an internal reporting process that provides revenue ex-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, our segments.
Years Ended December 31, | 2012-2013 % Change | 2013-2014 % Change | ||||||||||||||||||
2012 | 2013 | 2014 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Revenue by segment: | ||||||||||||||||||||
Americas | $ | 3,461,633 | $ | 3,481,502 | $ | 3,517,861 | 1 | % | 1 | % | ||||||||||
EMEA | 472,061 | 385,186 | 374,833 | (18 | )% | (3 | )% | |||||||||||||
Asia Pacific | 1,052,872 | 813,692 | 725,439 | (23 | )% | (11 | )% | |||||||||||||
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Total revenue | $ | 4,986,566 | $ | 4,680,380 | $ | 4,618,133 | (6 | )% | (1 | )% | ||||||||||
TAC by segment: | ||||||||||||||||||||
Americas | $ | 182,511 | $ | 158,974 | $ | 166,545 | (13 | )% | 5 | % | ||||||||||
EMEA | 114,230 | 42,915 | 36,867 | (62 | )% | (14 | )% | |||||||||||||
Asia Pacific | 222,165 | 52,553 | 14,119 | (76 | )% | (73 | )% | |||||||||||||
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Total TAC | $ | 518,906 | $ | 254,442 | $ | 217,531 | (51 | )% | (15 | )% | ||||||||||
Revenue ex-TAC by segment: | ||||||||||||||||||||
Americas | $ | 3,279,122 | $ | 3,322,528 | $ | 3,351,316 | 1 | % | 1 | % | ||||||||||
EMEA | 357,831 | 342,271 | 337,966 | (4 | )% | (1 | )% | |||||||||||||
Asia Pacific | 830,707 | 761,139 | 711,320 | (8 | )% | (7 | )% | |||||||||||||
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Total revenue ex-TAC | $ | 4,467,660 | $ | 4,425,938 | $ | 4,400,602 | (1 | )% | (1 | )% | ||||||||||
Direct costs by segment(1): | ||||||||||||||||||||
Americas | 300,004 | 194,394 | 199,612 | (35 | )% | 3 | % | |||||||||||||
EMEA | 95,632 | 88,534 | 86,225 | (7 | )% | (3 | )% | |||||||||||||
Asia Pacific | 181,632 | 196,832 | 198,806 | 8 | % | 1 | % | |||||||||||||
Global operating costs(2)(3) | 2,214,222 | 2,461,883 | 2,652,305 | 11 | % | 8 | % | |||||||||||||
Depreciation and amortization | 649,267 | 628,778 | 606,568 | (3 | )% | (4 | )% | |||||||||||||
Stock-based compensation expense | 224,365 | 278,220 | 420,174 | 24 | % | 51 | % | |||||||||||||
Gains on sales of patents | — | (79,950 | ) | (97,894 | ) | 100 | % | 22 | % | |||||||||||
Goodwill impairment charge | — | 63,555 | 88,414 | 100 | % | 39 | % | |||||||||||||
Restructuring charges, net | 236,170 | 3,766 | 103,450 | (98 | )% | N/M | ||||||||||||||
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Income from operations | $ | 566,368 | $ | 589,926 | $ | 142,942 | 4 | % | (76 | )% | ||||||||||
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N/M = Not Meaningful
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|
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
(dollars in thousands) | ||||||||||||
Total revenue | $ | 4,680,380 | $ | 4,618,133 | $ | 4,968,301 | ||||||
Total operating expenses(1) | 4,090,454 | 4,475,191 | 9,716,795 | |||||||||
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Income (loss) from operations | $ | 589,926 | $ | 142,942 | $ | (4,748,494 | ) | |||||
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(1) Includes: | ||||||||||||
Stock-based compensation expense | $ | 278,220 | $ | 420,174 | $ | 457,153 | ||||||
Restructuring charges, net | $ | 3,766 | $ | 103,450 | $ | 104,019 | ||||||
Asset impairment charge | $ | — | $ | — | $ | 44,381 | ||||||
Goodwill impairment charge | $ | 63,555 | $ | 88,414 | $ | 4,460,837 | ||||||
Intangibles impairment charge | $ | — | $ | — | $ | 15,423 | ||||||
Items as a percentage of revenue | ||||||||||||
Total revenue | 100 | % | 100 | % | 100 | % | ||||||
Total operating expenses | 87 | % | 97 | % | 196 | % | ||||||
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Income (loss) from operations | 13 | % | 3 | % | (96 | )% | ||||||
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Includes: | ||||||||||||
Stock-based compensation expense | 6 | % | 9 | % | 9 | % |
Revenue
We generate revenue principally from search and display advertising on Yahoo Properties and Affiliate sites, with the majority of our revenue coming from advertising on Yahoo Properties. Our margins on revenue from advertising on Yahoo Properties are higher than our margins on revenue from advertising on Affiliate sites, as we pay TAC to our Affiliates. Additionally, we generate revenue from other sources including listings-based services, facilitating commercial transactions, royalties, patent licenses, and consumer and business fee-based services.
Mobile Revenue
With the significant platform shift to mobile devices, including smartphones and tablets, we have increased our strategic focus on mobile products and mobile ad formats. We have hired engineering and technical talent to help us accelerate our efforts in mobile development, and introduced new mobile apps and refreshed the user experience on mobile across a number of Yahoo Properties, including News, Sports (including Fantasy Sports), Mail, Finance, Weather, and Screen. We are seeing an increase in the number of our daily and monthly mobile users as a result of these product improvements. During the year ended December 31, 2014, we reached more than 575 million monthly mobile users (including Tumblr).
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 search revenue is generated from clicks on text-based links to advertisers’ Websites that appear primarily on search results pages. Search revenue is recognized based on Paid Clicks. A Paid Click occurs when an end-user clicks on a sponsored listing on Yahoo Properties or Affiliate sites for which an advertiser pays on a per click basis. Mobile display revenue is generated from the display of graphical and non-graphical advertisements on mobile. The Company recognizes revenue from display advertising on Yahoo Properties and Affiliate sites as impressions of or clicks on display advertisements are delivered. Impressions are delivered when a sold advertisement appears in pages viewed by users. Clicks are delivered when a user clicks on a native advertisement.
Mobile revenue for the year ended December 31, 2014 was $768 million. Mobile revenue is included within Search, Display, and Other revenue that we have reported. In the latter half of 2014, we saw a significant increase in the contribution of mobile revenue to our total revenue. We expect this trend to continue in 2015.
Search Revenue
Search revenue is generated from mobile and PCdesktop clicks on text-based links to advertisers’ Websiteswebsites that appear primarily on search results pages (“search advertising”). We recognize revenue from search advertising on Yahoo Properties and Affiliate sites. Search revenue is recognized based on Paid Clicks. A Paid Click occurs when an end-user clicks on a sponsored listing on Yahoo Properties or Affiliate sites for which an advertiser pays on a per click basis. Under the Search Agreement with Microsoft in transitioned markets we report as revenue our 8893 percent revenue share as we are not the primary obligor in the arrangement with the advertisers and publishers, and the amounts paid to Affiliates are recorded as a reduction of revenue. Prior to transition, we paid Affiliates TAC for the revenue generated from the search advertisements on Affiliate sites. The revenue derived from these arrangements is reported on a gross basis (before deducting the TAC paid to Affiliates as cost of revenue—TAC), as we were the primary obligor to the advertisers in non-transitioned markets. The search revenue generated from mobile ads served through Yahoo Gemini that involve traffic supplied by Affiliates is reported gross of the TAC paid to Affiliates (reported as cost of revenue – revenue—TAC) as the Company performswe perform the search service. Accordingly, the Company iswe are considered the primary obligor to the advertisers who are the customers of the search advertising service. In October 2015, We reached an agreement with Google that provides us with additional flexibility to choose among suppliers of search results and ads. Google’s offerings
complement the search services provided by Microsoft and Yahoo Gemini (Yahoo’s marketplace for search and native advertising). We also generate search revenue from a revenue sharing arrangement with Yahoo Japan Corporation (“Yahoo Japan”) for search technology and services as reported.
The following table presents search revenue and that revenue as a percentage of total revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Search | ||||||||||||
Yahoo Properties | $ | 1,371,134 | $ | 1,518,035 | $ | 1,809,711 | ||||||
Affiliate sites | 370,657 | 274,826 | 274,428 | |||||||||
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Total search revenue | $ | 1,741,791 | $ | 1,792,861 | $ | 2,084,139 | ||||||
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Search as a percentage of total revenue | ||||||||||||
Yahoo Properties | 29 | % | 33 | % | 36 | % | ||||||
Affiliate sites | 8 | % | 6 | % | 6 | % | ||||||
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Total search revenue | 37 | % | 39 | % | 42 | % | ||||||
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Search revenue for the year ended December 31, 2015 increased $291 million, or 16 percent, compared to 2014. This increase in search revenue was attributable to growth in revenue generated on Yahoo Properties of $292 million, primarily in the Americas segment. This increase resulted from higher search volume on desktop due primarily to the Mozilla Agreement, which contributed $394 million, as well as an increase in revenue from search advertising on mobile devices. The increase was partially offset by a decline in click volume on other visits to Yahoo Properties. Affiliate search revenue overall remained flat but consisted of declines in the Asia Pacific and EMEA segments of $30 million and $13 million, respectively, partially offset by an increase in the Americas segment of $42 million.
The total increase in search revenue for the year ended December 31, 2015 described above included the impact of unfavorable foreign exchange fluctuations of $41 million using the foreign currency exchange rates from the year ended December 31, 2014.
Search revenue for the year ended December 31, 2014 increased by$51 million, or 3 percent, compared to the same period of 2013, driven by higher revenue-per-search in the Americas regionsegment on Yahoo Properties and growth in advertising revenue from mobile, partially offset by the impact of the Microsoft transition in the Asia Pacific region.segment. Search revenue increased for the year ended December 31, 2014, as compared to 2013,grew despite the expiration in March 2014 of Microsoft’s guarantee of Yahoo revenue-per-search under the Search Agreement (the “RPS Guarantee”) in the U.S. The increase in search revenue for the year ended December 31, 2014 was primarily attributable to an increase in advertising revenue on Yahoo Properties in the Americas, EMEA, and Asia Pacific regionssegments of $94 million, $38 million, and $15 million, respectively, partially offset by a decline in advertising revenue on Affiliate sites in the Americas, EMEA, and Asia Pacific regionssegments of $12 million, $8 million and $76 million, respectively. The decline in Affiliate search revenue in the Asia Pacific regionsegment was due to the required change in revenue presentation for transitioned markets from a gross (before TAC) to a net (after TAC) basis.
Search revenue for the year ended December 31, 2013 decreased by 8 percent, compared to 2012. Search revenue decreased primarily due to declines in Affiliate revenue in the Asia Pacific region resulting from the closure of our Korea business, and declines in Affiliate revenue in the EMEA region due to the required change in revenue presentation for transitioned markets from a gross (before TAC) to a net (after TAC) basis. This was partially offset by increased search revenue in the Americas region, which resulted from an increase in sponsored searches on Yahoo Properties and higher revenue per search due to improved ad formats.
Display Revenue
Display revenue is generated from the display of graphical, non-graphical, and non-graphicalvideo advertisements (“display advertising”). We earn revenue from guaranteed or “premium” display advertising by
delivering advertisements according to advertisers’ specified criteria, such as number of impressions during a fixed period on a specific placement. Also, we earn revenue from non-guaranteed or “non-premium” display advertising, which includes native advertising, by delivering advertisements on a preemptible basis. Non-premium advertising also includes native advertising for which we recognize revenue when a user clicks on a native advertisement.
We recognize revenue from display advertising on Yahoo Properties and Affiliate sites as impressions of or clicks on display advertisements are delivered. Impressions are delivered when a sold advertisement appears in pages viewed by users. Clicks are delivered when a user clicks on a native advertisement. Arrangements for these services generally have terms of up to one year.year and in some cases the terms may be up to three years. For display advertising on Affiliate sites, we pay TAC to Affiliates for the revenue generated from the display of these advertisements on the Affiliate sites. The display revenue derived from these arrangements that involve traffic supplied by Affiliates is reported on a gross basis (before deducting the TAC paid to Affiliates as cost of revenue—TAC) as we are the primary obligor to the advertisers who are the customers of the display advertising service.
The following table presents display revenue and that revenue as a percentage of total revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Display | ||||||||||||
Yahoo Properties | $ | 1,776,938 | $ | 1,706,675 | $ | 1,693,411 | ||||||
Affiliate sites | 172,892 | 161,360 | 380,750 | |||||||||
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Total display revenue | $ | 1,949,830 | $ | 1,868,035 | $ | 2,074,161 | ||||||
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Display as a percentage of total revenue | ||||||||||||
Yahoo Properties | 38 | % | 37 | % | 34 | % | ||||||
Affiliate sites | 4 | % | 3 | % | 8 | % | ||||||
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Total display revenue | 42 | % | 40 | % | 42 | % | ||||||
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Display revenue for the year ended December 31, 2015 increased $206 million, or 11 percent, compared to 2014. For the year ended December 31, 2015, the increase in display revenue was driven by increased Affiliate revenue in the Americas, EMEA and Asia Pacific segments of $145 million, $41 million and $33 million, respectively, as well as an increase in display revenue on Yahoo Properties in the Americas segment of $94 million. This was partially offset by declines in display revenue on Yahoo Properties in the EMEA and Asia Pacific segments of $49 million and $58 million, respectively. The increase in Affiliate display revenue for the year ended December 31, 2015 resulted primarily from an increase in video and native advertising, including incremental revenue from the BrightRoll acquisition and an increase in revenue from native advertising on mobile devices. The increase in display revenue on Yahoo Properties in the Americas segment was due to growth in native advertising. The decrease in display revenue on Yahoo Properties in the EMEA and Asia Pacific segments for the year ended December 31, 2015 was primarily driven by declines in volume and pricing of premium and audience advertising, partially offset by an increase in volume of native advertising.
The total increase in display revenue for the year ended December 31, 2015 described above included the impact of unfavorable foreign exchange fluctuations of $68 million using the foreign currency exchange rates from the year ended December 31, 2014.
Display revenue for the year ended December 31, 2014 decreased by$82 million, or 4 percent, compared to 2013, primarily due to a mix shift from premium ad units to lower monetizing native ad units. The
decline for the year ended December 31, 2014 was primarily attributable to a decline in advertising revenue on Yahoo Properties in the Americas, EMEA, and Asia Pacific regionssegments of $64$36 million, $15$8 million, and $38$26 million, respectively, and a decline in advertising revenue on Affiliate sites in the EMEA regionsegment of $8$15 million, partially offset by an increase in advertising revenue on Affiliate sites in the Americas and Asia Pacific regionssegment of $29 million and $15 million, respectively. The growth in Affiliate revenue in the Americas region was primarily attributable to incremental revenue from acquisitions made during 2014.
Display revenue for the year ended December 31, 2013 decreased by 9 percent, compared to 2012. This decrease was primarily attributable to a decline in number of ads that we sold on a premium basis on Yahoo Properties in the Americas region.$3 million.
Other Revenue
Other revenue includes listings-based services revenue, transaction revenue, royalties, patent licenses and fees revenue. Listings-based services revenue is generated from a variety of consumer and business listings-based services, including classified advertising, such as Yahoo Local and other services. We recognize listings-based services revenue when the services are performed. Transaction revenue is generated from facilitating commercial transactions through Yahoo Properties, principally from Yahoo Small Business, Yahoo Travel, and Yahoo Shopping. We recognize transaction revenue when there is evidence that qualifying transactions have occurred. We also receive royalties from Yahoo Japan andthat are recognized when earned. We received royalties from Alibaba Group through the third quarter of 2015 that arewere recognized when earned. See Note 8—“Investments in Equity Interests Accounted for Using the Equity Method of Accounting” in the Notes to our consolidated financial statements for additional information on revenue earned from Yahoo Japan and Alibaba Group. Fees revenue consists of revenue generated from a variety of consumer and business fee-based services as well as services for small businesses. We recognize fees revenue when the services are performed.
The following table presents other revenue and that revenue as a percentage of total revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Other revenue | $ | 988,759 | $ | 957,237 | $ | 810,001 | ||||||
Other revenue as a percentage of total revenue | 21 | % | 21 | % | 16 | % | ||||||
Other revenue for the year ended December 31, 2015 decreased $147 million, or 15 percent, compared to 2014, primarily attributable to a decline in fees and listings-based revenue of $79 million and $69 million, respectively. The decline in fees revenue was primarily attributable to a decline in Alibaba Group royalty revenue pursuant to the TIPLA, for which we ceased recognizing fees revenue in September 2014 due to the Alibaba Group IPO. The decline in listings-based revenue was attributable to a decline in auction and exchange fees, shopping traffic, and expiration of a partner agreement. The decline in fees and listings-based revenue was also attributable to declines in Yahoo Small Business associated with a reduction in its subscriber base.
The decline in other revenue for the year ended December 31, 2015 described above included the impact of unfavorable foreign exchange fluctuations of $10 million using the foreign currency exchange rates from the year ended December 31, 2014.
Other revenue for the year ended December 31, 2014 decreased by$32 million, or 3 percent, compared to 2013. The decrease for the year ended December 31, 2014 was primarily attributable to a decline in listings-based revenue in the Americas, EMEA and Asia Pacific regionssegments of $47 million, $15 million, and $6 million, respectively, partially offset by an increase in fees revenue in the Americas regionsegment of $37 million. The increase in fees revenue in the Americas regionsegment for the year ended December 31,
2014 was primarily attributable to royalty revenue associated with the patent sale and license agreement that we entered into in the second quarter of 2014. See “Significant Transactions—Patent SaleNote 4—“Acquisitions and License Agreement”Dispositions” in the Notes to our consolidated financial statements for additional information.
OtherWe expect other revenue for the year ended December 31, 2013 increased by 3 percent,to decline in 2016, as compared to 2012. The increase was primarily due to increased royalty2015, as a result of completing the recognition of deferred revenue resulting fromunder the amended TIPLA agreement with Alibaba Group. This was partially offset by a decrease in listings-based revenueGroup in the Americas region.third quarter of 2015, for which we no longer recognize associated fees revenue.
Search and Display Metrics
We present information below regarding the number of “Paid Clicks” and “Price-per-Click” for search and the number of “Ads Sold” and “Price-per-Ad” for display. This information is derived from internal data.
“Paid Clicks” are defined as clicks by end-users on sponsored search listings (excluding native ad units)units, which are defined as display ads that appear in the content streams viewed by users) on Yahoo Properties and Affiliate sites. Advertisers generally pay for sponsored search listings on a per-click basis. “Search click-driven revenue” is gross search revenue (GAAP search revenue plus the related revenue share with third parties), excluding the Microsoft RPS Guarantee and search revenue from Yahoo Japan. “Price-per-Click” is defined as search click-driven revenue divided by our total number of Paid Clicks.
“Ads Sold” consist of display ad impressions for paying advertisers on Yahoo Properties.“Price-per-Ad”Properties (including mobile) and Affiliate sites (including Flurry and BrightRoll). “Price-per-Ad” is defined as display revenue from Yahoo Properties (including mobile) and Affiliate sites (including Flurry and BrightRoll) divided by our total number of Ads Sold. Our price and volume metrics for display are based on display revenue which we report on a gross basis (before TAC), and include data for graphical, sponsorship, and native ad units on Yahoo Properties (including mobile). Our price and volume metrics for display exclude both the number of Ads SoldAffiliate sites (including Flurry and the related revenue for certain regions and acquired companies where historical data was not retained in a manner that would support period-to-period comparison on these metrics. The countries and regions included in our display metrics are: the U.S., the United Kingdom, France, Germany, Spain, Italy, Taiwan, Hong Kong, Southeast Asia, and India.BrightRoll).
We periodically review, refine and update our methodologies for monitoring, gathering, and counting number of Paid Clicks and Ads Sold and for calculating search click-driven revenue, Price-per-Click, and Price-per-Ad.
Tumblr, Inc. (“Tumblr”) data is included in our display metrics beginning Commencing in the first quarter of 2014. The Tumblr data that we included for the first and second quarter of 2014 consisted solely of native ad units. Also, commencing in the third quarter of 2013, we made three other updates to our methodologies. First, we have included the impressions and revenue associated with our native ad units, which are display ads that appear in the content streams viewed by users, in2015, our display price and volume metrics (Ads Sold(Price-per-Ad and Price-per-Ad). Second,Ads Sold) include (a) results from Yahoo Properties worldwide (other than Japan, where Yahoo branded sites are operated by third-party licensees), whereas previously those metrics excluded countries and regions where historical data was not previously retained in a manner that would support period-to-period comparisons; (b) results from Affiliate sites (including Affiliates of Flurry and BrightRoll) and (c) historical Tumblr data commencing in the three months ended June 30, 2013, whereas previously Tumblr data was limited to provide metrics that are more consistent with our historical revenue trends,(i) native ad results commencing in the revenuethree months ended March 31, 2014 and volume associated with(ii) other display advertisements sold on a price-per-click basis have been excluded from our search price and volume metrics (Paid Clicks and Price-per-Click) and they will continue to be excluded from our display price and volume metrics. Finally, the Microsoft RPS Guarantee has been excluded from the calculation of Price-per-Click. Due to the closure of the Korea businessad results commencing in the fourth quarter of 2012, “Ads Sold,” “Paid Clicks,” “Price-per-Ad,” and “Price-per-Click,” as presented below, exclude the Korea market for all periods presented.three months ended September 30, 2014. Prior period amounts have been updated to conform to the current presentation.
Search Metrics
For the year ended December 31, 2015, Paid Clicks increased 6 percent and Price-per-Click increased 2 percent, compared to 2014. The increase in Paid Clicks for the year ended December 31, 2015 was primarily attributable to an increase in Paid Clicks on Yahoo Properties in the Americas segment, attributable to our agreements with Mozilla and other distribution partners, partially offset by a decline in Paid Clicks from Affiliate and Yahoo traffic. The increase in Price-per-Click for year ended December 31, 2015 was attributable to a higher mix of traffic from the Americas segment, which is higher monetizing as compared to other segments, as well as improved pricing from Affiliate traffic.
Improvements in the search metrics resulted in year-over-year growth of 9 percent in search click-driven revenue for the year ended December 31, 2015.
For the year ended December 31, 2014, Paid Clicks increased 5 percent and Price-per-Click increased 11 percent, compared to 2013. The increase in Paid Clicks for the year ended December 31, 2014 was attributable to an increase in Paid Clicks on Yahoo Properties from distribution partners primarily in the Americas region,segment, partially offset by a decline in Paid Clicks on Affiliate sites related to traffic quality initiatives across the regions.segments. The increase in Price-per-Click for the year ended December 31, 2014 was primarily driven by a higher mix of traffic from the Americas region,segment, which is higher monetizing as compared to other geographic regions,segments, and improved Affiliate traffic quality across all regionssegments resulting in higher Price-per-Click. Improvements in Price-per-Click resulted in year-over-year growth in search click-driven revenue for the year ended December 31, 2014 of 17 percent.
Display Metrics
For the year ended December 31, 2013, Paid Clicks2015, number of Ads Sold increased 1912 percent and Price-per-Click decreased 4Price-per-Ad increased 2 percent, compared to 2012.2014. The increase in Paid ClicksAds Sold year-over-year for the year ended December 31, 2015 was attributable to improvedan increase in native and video ad formats on Yahoo Search, increased mobile traffic, and increased Affiliate trafficunits sold which was partially offset by a decline in the Americas region.premium ad units sold. The increase in Affiliate traffic was driven by incremental traffic in Latin America. The decrease in Price-per-Clicknative ad units sold was primarily attributable to growth internationally and growth in our network of mobile apps. Native ad units represented approximately 44 percent of total Ads Sold for the year ended December 31, 2015, as compared to 31 percent of total Ads Sold for the year ended December 31, 2014. The increase in Price-per-Ad was due to improved pricing for native advertising and video representing a higherlarger share of the inventory mix, partially offset by a shift in the mix of traffic in lower monetizing geographic regions and traffic quality improvement initiatives conducted by Yahoo, which lowered Price-per-Click.
Display MetricsAds Sold from premium advertising to native advertising.
For the year ended December 31, 2014, number of Ads Sold increased 176 percent and Price-per-Ad decreased 189 percent, compared to 2013. The increase in number of Ads Sold for the year ended December 31, 2014 was attributable to an increase in native ad units sold, partially offset by a decline in premiumaudience Ads Sold. Native ad units were launched late in the second quarter of 2013. Native ad units represented approximately 3731 percent of total Ads Sold for the year ended December 31, 2014, as compared to 75 percent of total Ads Sold for the year ended December 31, 2013. The decrease in Price-per-Ad for the year ended December 31, 2014 was due to a shift in the mix of Ads Sold toward lower monetizing native ad units.
For the year ended December 31, 2013, number of Ads Sold decreased 1 percent and Price-per-Ad decreased 5 percent, compared to 2012. The decrease in number of Ads Sold year-over-year was attributable to a decline in premium Ads Sold, which was partially offset by growth in non-premium advertising as a result of native ad units. The decrease in Price-per-Ad year-over-year was due to a shift in the mix of Ads Sold towards lower monetizing native ad units.
Revenue ex-TAC by Segment
Americas
Americas revenue ex-TAC for the year ended December 31, 2014 increased $29 million, or 1 percent, compared to 2013. The increase in Americas revenue ex-TAC for the year ended December 31, 2014 was attributable to an increase in search revenue ex-TAC of $78 million, partially offset by declines in display revenue ex-TAC and other revenue ex-TAC of $35 million and $14 million, respectively. Search revenue ex-TAC in the Americas region increased 6 percent for the year ended December 31, 2014, as compared to the same period of 2013, as Paid Clicks increased 14 percent and Price-per-Click increased 3 percent in the region. The increase in search revenue ex-TAC for the year ended December 31, 2014 was attributable to an increase in search revenue on Yahoo Properties driven by higher revenue-per-search from a change in the design of the search results page and an increase in search advertising from mobile devices. Search revenue ex-TAC increased despite the expiration of the RPS Guarantee in the U.S in March 2014. The increase in search revenue ex-TAC on Yahoo Properties was partially offset by a decline in Affiliate search revenue in the region. The decline in display revenue ex-TAC for the year ended December 31, 2014 was due to a decline in premium ads sold on Yahoo Properties, partially offset by an increase in native advertising and advertising on Affiliate sites. The decline in other revenue ex-TAC for the year ended December 31, 2014 was primarily attributable to a decline in listings-based revenue, partially offset by an increase in fees revenue, as a result of the patent license revenue.
Americas revenue ex-TAC for the year ended December 31, 2013 increased $43 million, or 1 percent, compared to 2012. The increase in Americas revenue ex-TAC was primarily attributable to an increase in search revenue ex-TAC of $148 million and fees revenue of $87 million. The increase in search revenue ex-TAC was attributable to an increase in sponsored searches on Yahoo Properties and higher revenue per search due to improved ad formats. The increase in fees revenue was primarily
due to increased royalty revenue resulting from the amended TIPLA agreement with Alibaba Group. These increases were partially offset by a decline in display revenue ex-TAC of $142 million due to declines in the number of Ads Sold on a premium basis on Yahoo Properties, and a decline in listings-based revenue of $50 million.
Revenue ex-TAC in the Americas accounted for approximately 76 percent of total revenue ex-TAC for the year ended December 31, 2014, compared to 75 percent in 2013 and 73 percent in 2012.
EMEA
EMEA revenue ex-TAC for the year ended December 31, 2014 decreased $4 million, or 1 percent, compared to 2013. The decrease in EMEA revenue ex-TAC for the year ended December 31, 2014 was primarily attributable to declines in both display and other revenue ex-TAC of $17 million each, partially offset by an increase in search revenue ex-TAC of $30 million. Search revenue ex-TAC in the EMEA region increased 31 percent for the year ended December 31, 2014, as compared to the same period of 2013. The increase in search revenue ex-TAC for year ended December 31, 2014 was due to an increase in search advertising on Yahoo Properties driven by distribution deals that contributed to improved revenue-per-search. The decline in display revenue ex-TAC for the year ended December 31, 2014 was due to a decline in premium ads sold on Yahoo Properties, primarily Homepage, partially offset by an increase in non-premium advertising on Yahoo Properties, due to the launch of native advertising in the region in 2014. The decline in other revenue ex-TAC was primarily due to a decline in listings-based revenue.
EMEA revenue ex-TAC for the year ended December 31, 2013 decreased $16 million, or 4 percent, compared to 2012, due to declines in display revenue ex-TAC on Yahoo Properties driven by a decrease in premium advertising primarily related to Yahoo Mail.
Revenue ex-TAC in EMEA accounted for approximately 8 percent of total revenue ex-TAC for the years ended December 31, 2014, 2013, and 2012.
Asia Pacific
Asia Pacific revenue ex-TAC for the year ended December 31, 2014 decreased $50 million, or 7 percent, compared to 2013. The decline for the year ended December 31, 2014 was primarily attributable to declines in search and display revenue ex-TAC of $23 million and $22 million, respectively. The decline in search revenue ex-TAC for the year ended December 31, 2014 was primarily attributable to the revenue share with Microsoft associated with the Search Agreement. The decline in display revenue ex-TAC for the year ended December 31, 2014 was primarily attributable to a decline in premium advertising on Yahoo Properties due to a decline in supply. This decline was partially offset by an increase in non-premium advertising on Yahoo Properties due to the launch of native advertising in the region as well as an increase in display revenue from Affiliate sites. Revenue ex-TAC in the Asia Pacific region was also impacted by unfavorable foreign exchange fluctuations of $27 million for the year ended December 31, 2014.
Asia Pacific revenue ex-TAC for the year ended December 31, 2013 decreased $70 million, or 8 percent compared to 2012. The decline was primarily attributable to a decrease in revenue ex-TAC related to the closure of our Korea business of $63 million and unfavorable foreign exchange rate fluctuations.
Revenue ex-TAC in Asia Pacific accounted for approximately 16 percent of total revenue ex-TAC for the year ended December 31, 2014, compared to 17 percent in 2013 and 19 percent in 2012.
Direct Costs by Segment
Starting in the fourth quarter of 2014, we adopted a revised methodology for allocating costs between our regions and global operations. The change reflects how management views our business today. The revised methodology reflects the following costs in global operations: marketing, media, costs associated with Yahoo Properties, and ad operations. These costs historically were managed by each segment and are now managed globally. Prior period amounts and commentary related to our direct costs have been revised to conform to the current presentation.
Americas
For the year ended December 31, 2014, direct costs attributable to the Americas segment increased $5 million, or 3 percent, compared to 2013. For the year ended December 31, 2014, the increase in direct costs was primarily due to increases in content and other costs of $9 million, partially offset by a decline in travel and entertainment expense and facilities and equipment expense of $4 million.
For the year ended December 31, 2013, direct costs attributable to the Americas segment decreased $106 million, or 35 percent, compared to 2012. The decrease in direct costs was primarily due to declines in compensation costs of $83 million, bandwidth and other cost of revenue of $7 million, content costs of $6 million, travel and entertainment expense of $5 million, and facilities and equipment and outside service provider expenses of $4 million.
Direct costs attributable to the Americas segment represented approximately 6 percent of Americas revenue ex-TAC for the year ended December 31, 2014, compared to 6 percent in 2013 and 9 percent in 2012.
EMEA
For the years ended December 31, 2014 and 2013, direct costs attributable to the EMEA segment decreased $2 million, or 3 percent, and $7 million, or 7 percent, compared to 2013 and 2012, respectively, primarily due to a decline in compensation costs, bandwidth and other cost of revenue, and content costs, partially offset by a decline in outside service provider expense.
Direct costs attributable to the EMEA segment represented approximately 26 percent of EMEA revenue ex-TAC for the year ended December 31, 2014, compared to 26 percent and 27 percent in 2013 and 2012, respectively.
Asia Pacific
For the year ended December 31, 2014, direct costs attributable to the Asia Pacific segment increased $2 million, or 1 percent, compared to 2013, primarily due to an increase in compensation costs.
For the year ended December 31, 2013, direct costs attributable to the Asia Pacific segment increased $15 million, or 8 percent, compared to 2012. The increase was primarily attributable to increases in bandwidth and other cost of revenue of $9 million, content costs of $8 million, and marketing and public relations expense of $5 million, partially offset by a decline in compensation costs, travel and entertainment expense and other costs of $7 million.
Direct costs attributable to the Asia Pacific segment represented approximately 28 percent of Asia Pacific revenue ex-TAC for the year ended December 31, 2014, compared to 26 percent in 2013 and 22 percent in 2012.
Operating Costs and Expenses
Cost of Revenue—TAC
Cost of revenue—TAC consists of payments made to third-party entities that have integrated our advertising offerings into their Websiteswebsites or other offerings and payments made to companies that direct consumer and business traffic to Yahoo Properties. We enter into agreements of varying duration that involve TAC. There are generally two economic structures of the Affiliate agreements: fixed payments with or without a guaranteed minimum amount of traffic delivered or variable payments based on a percentage of our revenue or based on a certain metric, such as number of searches or paid clicks. We expense TAC under two different methods. Agreements with fixed payments are expensed ratably over the term the fixed payment covers or as traffic is delivered. Agreements based on a percentage of revenue, number of searches, or other metrics are expensed based on the volume of the underlying activity or revenue multiplied by the agreed-upon price or rate. We also have an agreement to compensate Mozilla for making us the default search provider on certain of Mozilla’s products in the United States. We record those payments as cost of revenue—TAC.
The following table presents cost of revenue—TAC and those expenses as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Cost of revenue—TAC | $ | 254,442 | $ | 217,531 | $ | 877,514 | ||||||
Cost of revenue—TAC as a percentage of revenue | 6 | % | 5 | % | 18% | |||||||
Cost of revenue—TAC for the year ended December 31, 2015 increased $660 million, or 303 percent, compared to 2014, primarily due to increased payments to distribution partners (including Mozilla which contributed $375 million) as well as increased TAC associated with Gemini, and incremental TAC from the BrightRoll acquisition.
Cost of revenue—TAC for the year ended December 31, 2014 decreased $37 million, or 15 percent, compared to 2013. The decrease for the year ended December 31, 2014, compared to 2013, was primarily attributable to declines in TAC in the Asia Pacific and EMEA regionssegments of $38 million and $6 million, respectively, partially offset by an increase in TAC in the Americas regionsegment of $8 million related to an increase in search and listings-based TAC. The decline in the Asia Pacific regionsegment was primarily attributable to the required change in revenue presentation for transitioned markets from a gross (before TAC) basis to a net (after TAC).
We expect cost of revenue—TAC for the year ended December 31, 2013 decreased $264 million, or 51 percent, compared to 2012. The decrease for the year ended December 31, 2013, comparedcontinue to 2012, was primarily attributable to declinesgrow in the Asia Pacific, EMEA2016 as a result of an increase in traffic on Affiliate sites through our Gemini platform across search and Americas regions of $170 million, $71 million and $23 million, respectively. The decline was due to (i) the closure of our Korea business in the Asia Pacific region, (ii) the required change in revenue presentation for additional transitioned markets from a gross (before TAC) to a net (after TAC) basis in the EMEA region, and (iii) a decline in display revenue in the Americas region.
TAC represented approximately 5 percent of GAAP revenue for the year ended December 31, 2014, compared to 6 percent and 10 percent in 2013 and 2012, respectively.native advertising.
Cost of Revenue—Other
Cost of revenue—other consists of bandwidth costs, stock-based compensation, content and other expenses associated with the production and usage of Yahoo Properties, including content expense and amortization of developed technology and patents. Cost of revenue—other also includes costs for Yahoo’s technology platforms and infrastructure, including depreciation expense and other operating costs, directly related to revenue generating activities.
The following table presents cost of revenue—other and those expenses as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Cost of revenue—other | $ | 1,094,938 | $ | 1,169,844 | $ | 1,200,234 | ||||||
Cost of revenue—other as a percentage of revenue | 23 | % | 25 | % | 24% | |||||||
Cost of revenue—other decreased $14increased $30 million, or 13 percent, for the year ended December 31, 2015, compared to 2014, primarily due to higher cost of revenue of $48 million related to algorithmic serving costs, our e-commerce business in the Asia Pacific segment, BrightRoll video advertising fees, an increase in depreciation and amortization expense of $16 million, and an increase in content expense of $13 million. This increase in cost of revenue—other was partially offset by declines in bandwidth costs of $21 million, stock-based compensation expense of $10 million, and compensation costs of $17 million.
Cost of revenue—other increased $75 million, or 7 percent, for the year ended December 31, 2014, compared to 2013, due to declinesincreases in depreciation and amortization expense of $23 million, compensation costs of $10$59 million, and facilities and equipment expense of $4 million partially offset by increases in stock-based compensation expense of $18$27 million and credit card fees of $5 million.
Cost of revenue—other decreased $7 million, or 1 percent, for the year ended December 31, 2013, compared to 2012. The decrease for the year ended December 31, 2013, compared to 2012, was primarily due to a decline in amortization of developed technology and patents of $18 million, partially offset by an increasea decline in content costsdepreciation and amortization expense of $11$22 million.
Cost of revenue—other represented approximately 23 percent of GAAP revenue for the year ended December 31, 2014, compared to 23 percent and 22 percent in 2013 and 2012, respectively.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising and other marketing-related expenses, compensation-related expenses (including stock-based compensation expense), sales commissions, and travel costs.
The following table presents sales and marketing expenses and those expenses as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Sales and marketing expenses | $ | 1,083,872 | $ | 1,084,438 | $ | 1,080,718 | ||||||
Sales and marketing expenses as a percentage of revenue | 23 | % | 24 | % | 22% | |||||||
Sales and marketing expenses for the year ended December 31, 2015 decreased $4 million, compared to 2014, primarily attributable to declines in compensation costs of $52 million, stock-based compensation expense of $4 million and travel and entertainment expense of $4 million, partially offset by an increase in marketing expense of $38 million, bad debt expense of $14 million, and outside service provider expenses of $5 million. The decline in compensation costs was primarily attributable to a 17 percent decrease in headcount year-over-year. The increase in marketing expense was primarily due to costs associated with a partner deal entered into in 2015 and brand marketing campaigns in 2015 for which there were no similar campaigns in 2014.
Sales and marketing expenses for the year ended December 31, 2014 increased $103$1 million, or 9 percent, as compared to 2013. For the year ended December 31, 2014, compensation costs increased $40 million, stock-based compensation expense increased $53$44 million, and marketing and public relations expense increased $14 million, and facilities expense increased $14 million. These increases were partially offset by declines in compensation costs of $25 million, travel and entertainment expense of $9$12 million, and outside service provider expenses of $9$12 million and depreciation and amortization expense of $6 million. The increase in compensation costs for the year ended December 31, 2014 was attributable to increases in sales commissions and merit-based increases in salaries, as well as increases in benefits and incentive compensation. The increase in stock-based compensation expense for the year ended December 31, 2014 was attributable to an increase in the number of awards being expensed at a higher fair value. The increase in marketing and public relations expense for the year ended December 31, 2014 was primarily due to increased media advertising and spend on promotional event management.
Sales and marketing expenses for the year ended December 31, 2013 increased $29 million, or 3 percent, as compared to 2012. The year-over-year increase was primarily due to an increase in marketing expenses of $31 million and stock-based compensation expenses of $20 million. This was offset by a decline in other compensation costs of $25 million. The increase in marketing expenses was primarily due to advertising campaigns to generate additional traffic on Yahoo Shopping, Mail, Autos and Screen, as well as our On the Road with Yahoo marketing campaign and our Fantasy Football television advertising campaign, for which there were no similar campaigns in 2012. The increase in stock based compensation in the sales and marketing function was due to an increase in the number of awards granted at a higher fair value, including performance-based awards. The decline in other compensation costs in the sales and marketing function was primarily due to a decline in average headcount in the function year-over-year.
Sales and marketing expenses represented approximately 27 percent of GAAP revenue for the year ended December 31, 2014, compared to 24 percent and 22 percent in 2013 and 2012, respectively.
Product Development
Product development expenses consist primarily of compensation-related expenses (including stock-based compensation expense) incurred for the development of, enhancements to and maintenance of Yahoo Properties, classification and organization of listings within Yahoo Properties, research and development, and Yahoo’s technology platforms and infrastructure. Depreciation expense and other operating costs are also included in product development.
The following table presents product development expenses and those expenses as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Product development expenses | $ | 957,587 | $ | 1,156,386 | $ | 1,177,923 | ||||||
Product development expenses as a percentage of revenue | 21 | % | 24 | % | 24% | |||||||
Product development expenses for the year ended December 31, 2015 increased $22 million, or 2 percent, compared to 2014, primarily attributable to an increase of $51 million in stock-based compensation expense, as well as an increase in investment activities supporting our search, communications and other product initiatives of $35 million. This increase was partially offset by a decline in depreciation and amortization expense of $37 million, facilities and equipment expense of $15 million and compensation costs of $11 million. The increase in stock-based compensation expense was due to an increase in the number of awards granted at a higher fair value. The decline in compensation costs is primarily attributable to a 17 percent decline in headcount year-over-year, as well as a decline in transition and relocation costs.
Product development expenses for the year ended December 31, 2014 increased $199 million, or 2021 percent, as compared to 2013. For the year ended December 31, 2014, the increase was2013, primarily attributable to increases in compensation costs of $131$141 million, stock-based compensation expense of $56 million, and a decline in capitalizable projects of $38 million, partially offset by declines in depreciation and amortization expense of $12 million, and outside service provider expense of $14 million, and travel and entertainment expense of $10 million. The increase in compensation costs for the year ended December 31, 2014 was primarily attributable to a 6 percent increase in headcount year-over-year, including incremental headcount for
mobile and search as well as merit-based increases in salaries, increases in costs from a shift in location of employees, increases in benefits, increased headcount from acquisitions, and increases in incentive compensation. The increase in stock-based compensation expense for the year ended December 31, 2014 was attributable to an increase in the number of awards being expensed at a higher fair value and an increase in expense related to equity assumed and granted related to acquisitions.
Product development expenses for the year ended December 31, 2013 increased $123 million, or 14 percent, as compared to 2012. For the year ended December 31, 2013, the increase was primarily attributable to a decline in capitalizable projects of $65 million, as well as an increase in facilities and equipment expense of $24 million, stock based compensation expense of $9 million, compensation costs of $11 million due to an increase in headcount in the function, and travel and entertainment expense of $6 million. The increase in stock based compensation in the product development function was due to an increase in the number of awards granted at a higher fair value.
Product development expenses represented approximately 26 percent of GAAP revenue for the year ended December 31, 2014, compared to 22 percent and 18 percent in 2013 and 2012, respectively.
General and Administrative
General and administrative expenses consist primarily of compensation-related expenses (including stock-based compensation expense) related to other corporate departments and fees for professional services.
The following table presents general and administrative expenses and those expenses as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
General and administrative expenses | $ | 667,403 | $ | 686,272 | $ | 687,804 | ||||||
General and administrative expenses as a percentage of revenue | 14 | % | 15 | % | 14% | |||||||
General and administrative expenses for the year ended December 31, 2015 increased $2 million, compared to 2014, primarily attributable to increases of $26 million due to net gains on disposal of assets, business tax refunds received and legal settlements in 2014 for which there are no similar
benefits in 2015, $14 million in depreciation and amortization expense, travel and entertainment expense of $4 million and marketing and public relations expense of $4 million. These increases in general and administrative expenses were partially offset by declines in facilities and equipment expense of $16 million, outside service provider expense of $16 million and compensation costs of $14 million. The decline in compensation costs was primarily attributable to a 19 percent decline in headcount year-over-year.
General and administrative expenses for the year ended December 31, 2014 increased $5$19 million, or 13 percent, as compared to 2013, due to increases in stock-based compensation expense of $16 million, outside service provider expense of $3 million, facilities and equipment expense of $3$16 million, and compensation costs of $2 million. These increases were partially offset by a decline in depreciation and amortization expense of $4 million, benefits related to net gains on disposal of assets of $9 million and business tax refunds received of $6 million. The increase in stock-based compensation expense for the year ended December 31, 2014 was attributable to an increase in the number of awards being expensed at a higher fair value.
General and administrative expenses for the year ended December 31, 2013 increased $29 million, or 5 percent, as compared to 2012. The increase in expenses in the general and administrative function was due to increases in facilities and equipment expense of $20 million due to investments in office space and our global employee experience, compensation costs of $13 million due to an increase in headcount in the function, and stock-based compensation expense of $20 million due to an increase in the number of awards granted at a higher fair value, including performance-based awards. This was partially offset by a decline of $20 million in legal costs.
General and administrative expenses represented approximately 12 percent of GAAP revenue for the year ended December 31, 2014, compared to 12 percent and 11 percent in 2013 and 2012, respectively.
Amortization of Intangibles
We have purchased, and expect to continue purchasing, assets and/or businesses, which may include the purchase of intangible assets. Intangible assets include customer, affiliate, and advertiser-related relationships and tradenames, trademarks and domain names. Amortization of developed technology and patents is included in the cost of revenue—other, and not in amortization of intangibles.
The following table presents amortization of intangibles and those expenses as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Amortization of intangibles | $ | 44,841 | $ | 66,750 | $ | 79,042 | ||||||
Amortization of intangibles as a percentage of revenue | 1 | % | 2 | % | 2% | |||||||
Amortization of intangibles for the year ended December 31, 2015 increased $12 million, or 18 percent, compared to 2014, primarily driven by incremental amortization of intangible assets related to BrightRoll, which we acquired in the fourth quarter of 2014, as well as incremental amortization of intangibles assets related to companies acquired in 2015.
Amortization of intangibles for the year ended December 31, 2014 increased $22 million, or 49 percent, as compared to 2013, primarily driven by amortization of intangible assets related to Tumblr, which we acquired in the second quarter of 2013.
Gain on Sales of Patents
The following table presents gain on sales of patents and those gains as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||
2013 | 2014 | 2015 | ||||
Gain on sales of patents | $ (79,950) | $ (97,894) | $ (11,100) | |||
Gain on sales of patents as a percentage of revenue | (2)% | (2)% | 0% | |||
Amortization of intangibles forFor the year ended December 31, 2013 increased $9 million, or 25 percent, as compared to 2012. The year-over-year increase in amortization2015, we sold certain patents and recorded a gain on sales of intangibles from 2012 to 2013 was primarily driven by incremental amortization from acquisitions completed in 2013, partially offset by a decrease in amortizationpatents of intangibles driven by fully amortized assets acquired in prior years.
Amortization of intangibles represented approximately 2 percent of GAAP revenue for the year ended December 31, 2014, compared to 1 percent in both 2013 and 2012.
Gains on Sales of Patents$11 million.
For the year ended December 31, 2014, we sold certain patents and recorded gainsa gain on sales of patents of approximately $98 million. These gainsThe gain on sales of patents include patents sold to a wholly-owned affiliate of Alibaba Group for a gain on sale of $24 million and patents sold to Yahoo Japan for a gain on sale of $12 million. See “Significant Transactions—Patent Sale and License Agreement” for additional information on significant patents sold during 2014.
For the year ended December 31, 2013, we sold certain patents and recorded gainsa gain on sales of patents of approximately $80 million. The gainsgain on sales of patents werewas primarily related to a patent sale agreement with a wholly-owned affiliate of Alibaba Group entered into during 2013 for $70 million.
See Note 4—“Acquisitions and Dispositions” in the Notes to our consolidated financial statements for additional information.
Asset Impairment Charge
The following table presents asset impairment charge and those charges as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Asset impairment charge | $ | — | $ | — | $ | 44,381 | ||||||
Asset impairment charge as a percentage of revenue | 0% | 0% | 1% | |||||||||
During the year ended December 31, 2015, we recorded an asset impairment charge of $16 million related to originally developed content equal to the amount by which the unamortized cost of the originally developed content exceeded its estimated fair value and $28 million for acquired content equal to the amount by which the unamortized cost of the acquired content exceeded its net realizable value.
Goodwill Impairment Charge
We conducted our annualThe following table presents goodwill impairment testcharge and those charges as a percentage of October 31, 2014revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Goodwill impairment charge | $ | 63,555 | $ | 88,414 | $ | 4,460,837 | ||||||
Goodwill impairment charge as a percentage of revenue | 1 | % | 2 | % | 90% | |||||||
During 2015, we recorded a $4,461 million goodwill impairment charge. The impairments were a result of a combination of factors, including a sustained decrease in our market capitalization in the fourth quarter of 2015 and determined thatlower estimated projected revenue and profitability in the fair values of our reporting units, with the exception of (1) the Middle East and (2) India & Southeast Asia reporting units, exceeded their carrying values and therefore goodwill in those reporting units was not impaired.near term. We concluded that the carrying value of eachour U.S. & Canada, Europe, Tumblr, and Latin America reporting units exceeded their respective estimated fair values and recorded a goodwill impairment charge of approximately $3,692 million, $531 million, $230 million and $8 million, respectively.
During 2014, we recorded an $88 million goodwill impairment charge for the Middle East and India & Southeast Asia reporting units exceeded its fair valueunits. The impairment resulted from a decline in business conditions in the Middle East and recorded a goodwill impairment chargeIndia & Southeast Asia during the latter half of approximately $79 million and $9 million, respectively. 2014.
During 2013, we recorded a $64 million goodwill impairment charge for the Middle East reporting unit.
For the Europe reporting unit, the percentage by which the estimated fair value exceeded the carrying value as of October 31, 2014 was 12 percent and the amount of goodwill allocated to the Europe reporting unit was $465 million. The key assumptions used for the 2014 goodwill impairment test for Europe were 1) revenue ex-TAC cumulative average growth rate of approximately 5 percent over the next 5 year period, 2) adjusted EBITDA growth rate of 15 percent over the next five years, 3) discount rate of 11 percent, and 4) terminal value growth rate of 3 percent. Determining the fair value ofresulted from a reporting unit is judgmental in nature and requires the use of estimates and key assumptions. It is reasonably possible that changes in judgments, assumptions and estimates we made in assessing the fair value of goodwill could cause us to consider some portion or all of the remaining goodwill of the Europe reporting unit to become impaired. In addition, a future decline in the overall European marketbusiness conditions and/or changes in our market share in the European market could negatively impactMiddle East during the market comparables, estimated future cash flows and discount rates used in the market and income approaches to determine the fair valuelatter half of the reporting unit and could result in an impairment charge in the foreseeable future.2013.
See Note 5—“Goodwill” in the Notes to our consolidated financial statements and “Critical Accounting Policies—Goodwill” within Management’s Discussion and Analysis for additional information.
Intangibles Impairment Charge
The following table presents intangibles impairment charge and those charges as a percentage of revenue for the periods presented (dollars in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2014 | 2015 | ||||||||||
Intangibles impairment charge | $ | — | $ | — | $ | 15,423 | ||||||
Intangibles impairment charge as a percentage of revenue | 0% | 0% | 0% | |||||||||
In the fourth quarter of 2015, we reviewed both definite-lived and indefinite-lived intangible assets for impairment. No impairment was identified for definite-lived intangibles. For indefinite-lived intangibles, we performed a quantitative test comparing the fair value of the indefinite-lived intangible assets with their carrying amount and recorded an impairment charge of $15 million related to certain indefinite-lived intangible assets in the EMEA segment. See Intangible Assets within Note 1—“The Company And Summary Of Significant Accounting Policies” and Note 6—“Intangible Assets, Net” in the Notes to our consolidated financial statements for additional information.
Restructuring Charges, Net
For the years ended December 31, 2012, 2013, and 2014, restructuringRestructuring charges, net was comprised of the following (dollars in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2012 | 2013 | 2014 | 2013 | 2014 | 2015 | |||||||||||||||||||
Employee severance pay and related costs | $ | 139,623 | $ | 12,337 | $ | 30,749 | $ | 12,337 | $ | 30,749 | $ | 69,042 | ||||||||||||
Non-cancelable lease, contract termination, and other charges | 27,785 | 15,822 | 79,317 | 15,822 | 79,317 | 36,526 | ||||||||||||||||||
Non-cash reversals of stock-based compensation expense | (3,429 | ) | — | — | ||||||||||||||||||||
Reversals of previous charges | (24,940 | ) | (3,222 | ) | (7,404 | ) | ||||||||||||||||||
Non-cash accelerations of stock-based compensation expense | — | — | 2,705 | |||||||||||||||||||||
Other non-cash charges (credits), net | 109,896 | 547 | (3,394 | ) | 547 | (3,394 | ) | 3,150 | ||||||||||||||||
Changes in estimates and reversals of previous charges | (37,705 | ) | (24,940 | ) | (3,222 | ) | ||||||||||||||||||
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Restructuring charges, net | $ | 236,170 | $ | 3,766 | $ | 103,450 | $ | 3,766 | $ | 103,450 | $ | 104,019 | ||||||||||||
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We have implemented various restructuring plans to reduce our cost structure, align resources with our product strategy and improve efficiency, which have resulted in workforce reductions and the consolidation of certain real estate facilities and data centers. DuringFor the year ended December 31, 2012,2015, we recorded expense of $103$69 million, $45$31 million, and $88$4 million related to the Americas, EMEA, and Asia Pacific segments, respectively. For the year ended December 31, 2014, we recorded expense of
$76 million, $25 million, and $2 million related to the Americas, EMEA, and Asia Pacific segments, respectively. For the year ended December 31, 2013, we recorded expense of $1 million, $3 million, and less than $1 million related to the Americas, EMEA, and Asia Pacific segments, respectively. ForThe amounts recorded during the year ended December 31, 2014, we recorded expense of $76 million, $25 million, and $2 million2015 were primarily related to the Americas, EMEA,severance, facility and Asia Pacific segments, respectively.other related costs pursuant to restructuring plans that we initiated in 2015. The amounts recorded during the year ended December 31, 2014 were primarily related to the consolidation of a data center as we ceased use of that facility pursuant to a restructuring plan we initiated in 2011 and severance charges related to restructuring plans that we initiated in 2014 as part of our location strategy and to align resources. The amounts recorded during the year ended December 31, 2013 were part of our continued efforts to streamline our operations and focus our resources.
The $84$66 million restructuring liability as of December 31, 20142015 consists of $16$15 million for employee severance expenses, which we expect to pay out by the end of the thirdsecond quarter of 2015,2017, and $68$51 million related to non-cancelable lease costs, which we expect to pay over the terms of the related obligations through the fourth quarter of 2021,2025, less estimated sublease income.
In connection with our strategic plan, which we announced on February 2, 2016 would include reducing our workforce by approximately 15 percent by the end of 2016 and exiting five offices, we expect to incur cash charges for severance pay expenses and related cash expenditures, and in connection with the consolidation and exit of facilities, and non-cash charges related to stock-based compensation expense and impairment costs.
See Note 15—20—“Restructuring charges, net”Subsequent Events” in the Notes to our consolidated financial statements for additional information.
Other Income (Expense), Net
Other income (expense), net was as follows (dollars in thousands):
Years Ended December 31, | 2012-2013 Dollar Change | 2013-2014 Dollar Change | ||||||||||||||||||
2012 | 2013 | 2014 | ||||||||||||||||||
Interest, dividend, and investment income | $ | 41,673 | $ | 57,544 | $ | 26,309 | $ | 15,871 | $ | (31,235 | ) | |||||||||
Interest expense | (9,297 | ) | (14,319 | ) | (68,851 | ) | (5,022 | ) | (54,532 | ) | ||||||||||
Gain related to the sale of Alibaba Group shares | 4,603,322 | — | — | (4,603,322 | ) | — | ||||||||||||||
Gain on sale of Alibaba Group ADSs | — | — | 10,319,437 | — | 10,319,437 | |||||||||||||||
Gain on Hortonworks warrants | — | — | 98,062 | — | 98,062 | |||||||||||||||
Other income (expense), net | 12,141 | 132 | (5,518 | ) | (12,009 | ) | (5,650 | ) | ||||||||||||
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Total other income, net | $ | 4,647,839 | $ | 43,357 | $ | 10,369,439 | $ | (4,604,482 | ) | $ | 10,326,082 | |||||||||
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2013 | 2014 | 2015 | ||||||||||
Interest, dividend, and investment income | $ | 57,544 | $ | 26,309 | $ | 34,383 | ||||||
Interest expense | (14,319 | ) | (68,851 | ) | (71,865 | ) | ||||||
Gain on sale of Alibaba Group ADSs | — | 10,319,437 | — | |||||||||
Gain (loss) on Hortonworks warrants | — | 98,062 | (19,201 | ) | ||||||||
Foreign exchange gain (losses) | (6,197 | ) | (14,687 | ) | (22,226 | ) | ||||||
Other | 6,329 | 9,169 | 3,127 | |||||||||
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Total other income (expense), net | $ | 43,357 | $ | 10,369,439 | $ | (75,782 | ) | |||||
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Interest, dividend, and investment income consists of income earned from cash and cash equivalents in bank accounts, investments made in marketable debt securities, and money market funds, and dividend income on the Alibaba Group Preference Shares prior to the redemption of such shares in May 2013. Interest, dividend and investment income increased $16$8 million for the year ended December 31, 2015, compared to 2014, primarily due to an increase in interest income. Interest, dividend, and investment income decreased $31 million for the yearsyear ended December 31, 2013 and 2014, respectively, compared to 2012 and 2013, respectively, primarily due to dividend income on the Alibaba Group Preference Shares received during the yearsyear ended December 31, 2012 and 2013, for which there was no similar income for the year ended December 31, 2014.
Interest expense is related to the $1.4375 billion of 0.00% Convertible Notes due 2018 (the “Notes”) we issued in November 2013, interest expense on notes payable related to building obligations, and capital lease obligations for data centers. Interest expense increased $5$3 million and $54 million for the years ended December 31, 20132015 and 2014, respectively, compared to 20122014 and 2013, respectively, primarily due to the accreted non-cash interest expense related to the Notes.
For the year ended December 31, 2012, we recorded a pre-tax gain of approximately $4.6 billion related to the sale to Alibaba Group of the Alibaba Group shares. See Note 8—“Investments in Equity Interests Accounted for Using the Equity Method of Accounting” in the Notes to our consolidated financial statements for additional information.
For the year ended December 31, 2014, we recorded a pre-tax gain of approximately $10 billion related to the sale of Alibaba Group ADSs. See “Significant Transactions—Alibaba Group Holding Limited Initial Public Offering” above and Note 8—“Investments in Equity Interests Accounted for Using the Equity Method of Accounting” in the Notes to our consolidated financial statements for additional information.
We hold warrants that vested upon the December 12, 2014 initial public offering of Hortonworks Inc. (“Hortonworks”), which entitle us to purchase an aggregate of 3.7 million shares of Hortonworks common stock upon exercise of the warrants. We hold 6.5 million preferred warrants that are exercisable for 3.25 million shares of common stock at an exercise price of $0.01 per share, as well as 0.5 million common warrants that are exercisable for 0.5 million shares of common stock at an exercise price of $8.46 per share. We determined the estimated fair value of the warrants using the Black-Scholes model. For the year ended December 31, 2015, we recorded a loss of $19 million due to the change in estimated fair value of the Hortonworks warrants during the period, which was recorded through other income, net in our consolidated statements of operations. During the year ended December 31, 2014, we recorded a gain of $57 million
upon the initial public offering of Hortonworks and a $41 million gain related to the mark to market of the warrants held as of December 31, 2014, which were included within other income, net on the consolidated statements of income. Changes in the estimated fair value of the Hortonworks warrants will be recorded through other income, net in our consolidated statements of income.operations.
Other income (expense), netForeign exchange losses 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 consists of gains from other non-operational items.
Other income (expense), net decreased $12 million and $6 million for the years ended December 31, 2013 and 2014, respectively, compared to 2012 and 2013, respectively. The decline from 2012 to 2013 was primarily due to an investment sale in 2012, for which there were no similar transactions in 2013. The increase in expense from 2013 to 2014 was primarily due to foreign exchange losses.
Other income, net may fluctuate in future periods due to changes in our average investment balances, changes in interest and foreign exchange rates, changes in the fair value of foreign currency forward contracts, realized gains and losses on investments, and impairments of investments.
Income Taxes
The provisionbenefit for income taxes for the year ended December 31, 20142015 differs from the amount computed by applying the federal statutory income tax rate to income before provisionbenefit for income taxes and earnings in equity interests as follows (dollars in thousands):
Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2012 | (*) | 2013 | (*) | 2014 | (*) | 2013 | (*) | 2014 | (*) | 2015 | (*) | |||||||||||||||||||||||||||||||||||||
Income tax at the U.S. federal statutory rate of 35 percent | $ | 1,824,973 | 35% | $ | 221,648 | 35% | $ | 3,679,333 | 35% | $ | 221,648 | 35% | $ | 3,679,333 | 35% | $ | (1,688,496) | 35% | ||||||||||||||||||||||||||||||
State income taxes, net of federal benefit | 237,637 | 5% | 23,000 | 4% | 400,824 | 4% | 23,000 | 4% | 400,824 | 4% | (7,912) | 0% | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 19,946 | — | 16,015 | 3% | 8,132 | — | 16,015 | 3% | 8,132 | 0% | 9,508 | 0% | ||||||||||||||||||||||||||||||||||||
Research tax credits | — | — | (18,036 | ) | (3)% | (23,775 | ) | — | (18,036) | (3)% | (23,775) | 0% | (15,659) | 0% | ||||||||||||||||||||||||||||||||||
Effect of non-U.S. operations | (138,078 | ) | (3)% | (47,968 | ) | (8)% | (53,079 | ) | (1)% | (47,968) | (8)% | (53,079) | (1)% | 165,203 | (3)% | |||||||||||||||||||||||||||||||||
Settlement with tax authorities | (4,711 | ) | — | (46,943 | ) | (7)% | (24,870 | ) | — | (46,943) | (7)% | (24,870) | 0% | (1,981) | 0% | |||||||||||||||||||||||||||||||||
Remeasurement of prior year tax positions | — | — | (24,246 | ) | (4)% | — | — | (24,246) | (4)% | — | 0% | (5,286) | 0% | |||||||||||||||||||||||||||||||||||
Acquisition related non-deductible expenses | 1,894 | — | 9,296 | 1% | 16,881 | — | 9,296 | 1% | 16,881 | 0% | 15,970 | 0% | ||||||||||||||||||||||||||||||||||||
Goodwill impairment charge | — | — | 22,244 | 3% | 30,945 | — | ||||||||||||||||||||||||||||||||||||||||||
Tax liquidation of acquired entities | — | 0% | — | 0% | (56,170) | 1% | ||||||||||||||||||||||||||||||||||||||||||
Goodwill impairment charge(5) | 22,244 | 3% | 30,945 | 0% | 1,486,792 | (31)% | ||||||||||||||||||||||||||||||||||||||||||
Intangible impairment charge | — | 0% | — | 0% | 2,468 | 0% | ||||||||||||||||||||||||||||||||||||||||||
Other | (1,618 | ) | — | (1,618 | ) | — | 3,711 | — | (1,618) | 0% | 3,711 | 0% | 5,965 | 0% | ||||||||||||||||||||||||||||||||||
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Provision for income taxes | $ | 1,940,043 | 37% | $ | 153,392 | 24% | $ | 4,038,102 | 38% | |||||||||||||||||||||||||||||||||||||||
Provision (benefit) for income taxes | $ | 153,392 | 24% | $ | 4,038,102 | 38% | $ | (89,598) | 2% | |||||||||||||||||||||||||||||||||||||||
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(*) | Percent of income before income taxes and earnings in equity interests. |
Significant variances year-over-year as shown above are further explained as follows:
(1) | On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law retroactively extending the federal research and development credit for amounts paid or incurred after December 31, 2011 and before January 1, 2014. As such, the provision for income taxes for the
As of December 31, On July 27, 2015, the United States Tax Court issued an opinion inAltera Corp. et al. v. Commissioner, which invalidated the 2003 final Treasury rule that requires participants in qualified cost-sharing arrangements to share stock-based compensation costs. Based on the decision of the Tax Court, we could be entitled to an income tax benefit by excluding stock-based compensation costs from our cost sharing with affiliated entities for the period of time that we had the cost-sharing structure in place. The IRS has until the first quarter of 2016 to appeal this Tax Court decision. There is uncertainty related to the IRS response to the Tax Court opinion, the final resolution of this issue, and the potential favorable benefits to us. We will continue to monitor developments related to this opinion and the potential impact of those developments on our current and prior fiscal years. Our gross amount of unrecognized tax benefits as of December 31, We are in various stages of examination and appeal in connection with our taxes both in the U.S. and in foreign jurisdictions. Those audits generally span tax years 2005 through
We 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 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 Tax authorities from the Brazilian State of Sao Paulo have assessed certain indirect taxes against our Brazilian subsidiary, Yahoo! do Brasil Internet Ltda., related to online advertising services. The assessment Earnings in Equity Interests We record our share of the results of earnings in equity interests, including tax impacts, one quarter in arrears, within earnings in equity interests in the consolidated statements of The following table presents earnings in equity interests for the periods presented (dollars in thousands):
The decrease for the year ended December 31, See Noncontrolling Interests Noncontrolling interests represent the noncontrolling holders’ percentage share of income or losses from the subsidiaries in which we hold a majority, but less than 100 percent, ownership interest and the results of which are consolidated in our consolidated financial statements. Noncontrolling interests were approximately Segment Reporting We continue to manage our business geographically. The primary areas of measurement and decision making are currently the Americas, EMEA and Asia Pacific. Management relies on an internal reporting process that provides revenue, revenue ex-TAC, direct costs excluding TAC by segment, and consolidated income (loss) from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, our segments.
Revenue and Revenue ex-TAC by Segment Americas Americas revenue for the year ended December 31, 2015 increased $459 million, or 13 percent, compared to 2014. The increase in Americas revenue for the year ended December 31, 2015 was primarily attributable to increases in search and display revenue of $333 million and $239 million, respectively, partially offset by a decline in other revenue of $113 million. The increase in Americas search revenue for the year ended December 31, 2015 was attributable to an increase in search revenue from mobile devices as well as $390 million attributable to the Mozilla Agreement, partially offset by a decline in click volume on other visits to Yahoo Properties and on Affiliate sites. The increase in Americas display revenue for the year ended December 31, 2015 was primarily associated with an increase in video and native advertising, including incremental revenue following the BrightRoll acquisition and an increase in revenue from mobile devices driven by native advertising. The increase in Americas display revenue for the year ended December 31, 2015 was despite unfavorable foreign exchange fluctuations related to Canada and Brazil of approximately $17 million. The decrease in Americas other revenue for the year ended December 31, 2015 was primarily attributable to declines in fees and listings-based revenue of $44 million and $68 million, respectively, due to a decline in Alibaba Group royalty revenue under the TIPLA, a decline in shopping traffic, expiration of a partner agreement, and declines in Yahoo Small Business associated with a reduction in its subscriber base. Americas revenue for year ended December 31, 2014 increased $36 million, or 1 percent, compared to 2013. The increase in Americas revenue for the year ended December 31, 2014 was primarily attributable to an increase in search revenue of $82 million, partially offset by a decline in display and other revenue of $36 million and $10 million, respectively. The increase in Americas search revenue for the year ended December 31, 2014 was attributable to an increase in search revenue on Yahoo Properties driven by higher revenue-per-search from a change in the design of the search results page and an increase in search advertising from mobile devices. These increases were partially offset by a decline in Affiliate search revenue and despite the expiration of the RPS Guarantee in the U.S. in 2014. The decrease in Americas display revenue for the year ended December 31, 2014 was primarily due to a decline in premium ads sold on Yahoo Properties, partially offset by an increase in native advertising. The decrease in Americas other revenue for the year ended December 31, 2014 was primarily attributable to a decline in listings-based revenue, partially offset by an increase in fees revenue, as a result of patent license revenue. Revenue in the Americas accounted for approximately 80 percent of total revenue for 2015, compared to 76 percent in 2014 and 74 percent in 2013. Americas revenue ex-TAC for the year ended December 31, 2015 decreased $163 million, or 5 percent, compared to 2014, due to an increase in TAC partially offset by an increase in revenue as discussed above. TAC in the Americas segment increased $622 million for the year ended December 31, 2015 due to increased payments to distribution partners, including Mozilla, TAC associated with Gemini, and incremental TAC from the BrightRoll acquisition. Americas revenue ex-TAC for the year ended December 31, 2014 increased $29 million, or 1 percent, compared to 2013, due to an increase in revenue, as discussed above, partially offset by an increase in TAC. TAC in the Americas segment increased $8 million for the year ended December 31, 2014 due to increased search and listing-based TAC. Revenue ex-TAC in the Americas accounted for approximately 78 percent of total revenue ex-TAC for 2015, compared to 76 percent in 2014 and 75 percent in 2013. EMEA EMEA revenue for the year ended December 31, 2015 decreased $31 million, or 8 percent, compared to 2014, primarily due to unfavorable foreign exchange fluctuations of $44 million for the year ended December 31, 2015, using the foreign currency exchange rates from the year ended December 31, 2014. Excluding the impact of foreign exchange, display and search revenue in the EMEA segment increased $21 million and $3 million, respectively, and other revenue declined $11 million. The increase in display revenue in the segment was attributable to an increase in Affiliate revenue in the region primarily from native advertising. EMEA revenue for the year ended December 31, 2014 decreased $10 million, or 3 percent, compared to 2013, primarily due to an increase in search revenue of $30 million, which was offset by a decline in display and other revenue of $23 million and $17 million, respectively. The increase in search revenue for year ended December 31, 2014 was due to an increase in search advertising on Yahoo Properties driven by distribution deals that contributed to improved revenue-per-search. The decline in display revenue for the year ended December 31, 2014 was due to a decline in advertising revenue from Affiliate sites and a decline in premium ads sold on Yahoo Properties, partially offset by an increase in native advertising on Yahoo Properties, which launched in the region in 2014. The decline in other revenue was primarily due to a decline in listings-based revenue. Revenue in EMEA accounted for approximately 7 percent of total revenue for 2015, compared to 8 percent for both 2014 and 2013. EMEA revenue ex-TAC for the year ended December 31, 2015 decreased $52 million, or 15 percent, compared to 2014, primarily due to an increase in TAC and a decrease in revenue as discussed above. The increase in TAC in the EMEA segment for the year ended December 31, 2015 was primarily driven by an increase in display TAC of $17 million, associated with an increase in Affiliate TAC payments to partners. EMEA revenue ex-TAC for the year ended December 31, 2014 decreased $4 million, or 1 percent, compared to 2013, primarily attributable to a decrease in revenue, as discussed above, partially offset by a decrease in display TAC in the segment. Revenue ex-TAC in EMEA accounted for approximately 7 percent of total revenue ex-TAC for 2015, compared to 8 percent for both 2014 and 2013. Asia Pacific Asia Pacific revenue for the year ended December 31, 2015 decreased $78 million, or 11 percent, compared to 2014, primarily due to unfavorable foreign exchange fluctuations of $52 million for the year ended December 31, 2015, using the foreign currency exchange rates from the year ended December 31, 2014. In addition to unfavorable foreign exchange fluctuations, the decline in Asia Pacific revenue for the year ended December 31, 2015 was driven primarily by a decrease in search and other revenue of $7 million and $15 million, respectively. Asia Pacific revenue for the year ended December 31, 2014 decreased $88 million, or 11 percent, compared to 2013, primarily due to declines in search, display and other revenue of $61 million, $23 million, and $4 million, respectively. The decline in search revenue for the year ended December 31, 2014 was primarily attributable to the revenue share with Microsoft associated with the Search Agreement. The decline in display revenue for the year ended December 31, 2014 was primarily attributable to a decline in premium advertising on Yahoo Properties due to a decline in supply. This decline was partially offset by an increase in non-guaranteed display advertising on Yahoo Properties due to the launch of native advertising in the region. Revenue in Asia Pacific accounted for approximately 13 percent of total revenue for 2015, compared to 16 percent in 2014 and 17 percent in 2013. Asia Pacific revenue ex-TAC for year ended December 31, 2015 decreased $95 million, or 13 percent, compared to 2014, primarily due to an increase in TAC and a decrease in revenue as discussed above. The increase in TAC in the Asia Pacific segment for the year ended December 31, 2015 was primarily driven by an increase in display TAC of $17 million primarily associated with an increase in Affiliate TAC payments to partners. Asia Pacific revenue ex-TAC for the year ended December 31, 2014 decreased $50 million, or 7 percent, compared to 2013. The decline for the year ended December 31, 2014 was primarily attributable to a decrease in revenue, as discussed above, partially offset by a decrease in TAC. The decrease in TAC was driven by a decline in search TAC associated with a required change in revenue presentation following the transition of paid search to Microsoft in the region, which is now accounted for on a net (after TAC) basis. Revenue ex-TAC in the Asia Pacific segment was also impacted by unfavorable foreign exchange fluctuations of $27 million for the year ended December 31, 2014. Revenue ex-TAC in Asia Pacific accounted for approximately 15 percent of total revenue ex-TAC for 2015, compared to 16 percent in 2014 and 17 percent in 2013. Direct Costs by Segment Americas For the year ended December 31, 2015, direct costs attributable to the Americas segment increased $36 million, or 13 percent, compared to 2014. The increase in direct costs was primarily due to higher compensation costs from acquisitions of $33 million, marketing and public relations expense of $7 million, and other cost of revenue of $2 million, partially offset by lower content costs of $6 million. For the year ended December 31, 2014, direct costs attributable to the Americas segment increased $27 million, or 10 percent, compared to 2013. The increase in direct costs was primarily due to increases in compensation costs of $14 million, marketing and public relations expense of $6 million and content costs of $7 million. Direct costs attributable to the Americas segment represented approximately 10 percent of Americas revenue ex-TAC for 2015, compared to 8 percent for both 2014 and 2013. EMEA For the year ended December 31, 2015, direct costs attributable to the EMEA segment increased $8 million, or 9 percent, compared to 2014, respectively, primarily due to an increase in bad debt expense of $15 million, partially offset by a decline in compensation costs of $6 million. For the year ended December 31, 2014, direct costs attributable to the EMEA segment decreased $2 million, or 2 percent, compared to 2013, primarily due to a decline in compensation costs, and bandwidth and other cost of revenue. Direct costs attributable to the EMEA segment represented approximately 33 percent of EMEA revenue ex-TAC for 2015, compared to 26 percent for both 2014 and 2013. Asia Pacific For the year ended December 31, 2015, direct costs attributable to the Asia Pacific segment decreased $3 million, or 1 percent, compared to 2014, primarily due to a decline in compensation costs of $16 million and outside service provider expenses of $2 million, partially offset by an increase in other cost of revenue of $14 million related to our e-commerce business in the region. For the year ended December 31, 2014, direct costs attributable to the Asia Pacific segment increased $2 million, or 1 percent, compared to 2013. The increase was primarily attributable to increases in bandwidth and other cost of revenue of $3 million, content costs of $3 million, and compensation costs of $2 million, partially offset by a decline in outside service provider expenses of $5 million. Direct costs attributable to the Asia Pacific segment represented approximately 32 percent of Asia Pacific revenue ex-TAC for 2015, compared to 28 percent and 26 percent in 2014 and 2013, respectively. Liquidity and Capital Resources
In 2015, we satisfied the $3.3 billion income tax liability associated with the sale of Alibaba Group ADSs in the Alibaba Group’s IPO in 2014, which drove the net use of cash from operations. Our operating activities for
As of December 31, 2014, we had cash, cash equivalents, and marketable securities (excluding Alibaba Group and Hortonworks equity securities) totaling $10.2 billion compared to $5.0 billion at December 31, 2013. The increase was due to the net cash proceeds of $9.4 billion received from the sale of 140 million Alibaba Group ADSs in the Alibaba Group IPO. This was partially offset by the repurchase of approximately 102 million shares of our outstanding common stock for approximately $4.2 billion and $859 million used for acquisitions.
Our foreign subsidiaries held We have a credit agreement with Citibank, N.A., as Administrative Agent (as amended, the “Credit Agreement”) that provides for a $750 million unsecured revolving credit facility, subject to increase by up to $250 million in accordance with its terms. The Credit Agreement We invest excess cash predominantly in marketable securities, money market funds, and time deposits that are liquid and highly rated, and our investment portfolio has an effective maturity of less than one year. Our marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. Realized gains or losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are reported in other income, net. The fair value We currently hedge a portion of our net investment in Yahoo Japan with forward and option contracts to reduce the risk that our investment in Yahoo Japan will be adversely affected by foreign currency translation exchange rate fluctuations. The forward contracts are required to be settled in cash and the amount of cash payment we receive or could be required to pay upon settlement could be material. The amount of cash paid or received on the option contracts would only be required if the exchange rate is outside a predetermined range. We expect to continue to evaluate possible acquisitions of, or strategic investments in, businesses, products, and technologies that are complementary to our business, which acquisitions and investments may require the use of cash. We See Note 2—“Marketable Securities, Investments and Fair Value Disclosures” in the Notes to our consolidated financial statements for additional information. Cash Flow Changes Net cash provided (used in) by operating activities. Cash provided by (used in) operating activities is driven by our net income (loss), adjusted for non-cash items, working capital changes and dividends received from equity investees. Non-cash adjustments include depreciation, amortization of intangible assets, accretion of convertible notes discount, stock-based compensation expense, non-cash restructuring charges, non-cash asset impairment charges, non-cash goodwill impairment charges, non-cash intangibles impairment charges, tax benefits from stock-based awards, excess tax benefits from stock-based awards, deferred income taxes, earnings in equity interests, and Cash flows from operating activities for the year ended December 31, 2015 was reduced by a net loss of $4,351 million, changes in working capital of $3,445 million (which included the reduction of the income tax liability related to the sale of Alibaba Group shares in September 2014) and earnings in equity interests of $384 million offset by non-cash goodwill and other impairment charges of $4,521 million, other non-cash adjustments of $1,134 million, and dividends from equity investees of $142 million. For the year ended December 31, 2014, operating activities provided For the year ended December 31, 2013, operating activities provided
Net cash (used in) provided by Cash (used in) provided by In the year ended December 31, 2015, the $1,752 million provided by investing activities was due to proceeds from sales and maturities of marketable securities, net of purchases, of $2,308 million, $29 million in proceeds from the sale of patents, and $138 million in net proceeds from settlement of derivative hedge contracts, partially offset by $543 million used for capital expenditures, net, $176 million used for acquisitions, and $4 million used for the purchase of intangibles and other activities. During the year ended December 31, 2014, the and commissions, proceeds from sales and maturities of marketable securities of $3.2 billion, $254 million in proceeds received from settlement of derivative hedge contracts, and $86 million in proceeds from sales of patents, partially offset by $7.9 billion in purchases of marketable securities, During the year ended December 31, 2013, the $23 million used in investing activities was due to purchases of marketable securities of $3.2 billion, $338 million used for capital expenditures, and $1.2 billion used for acquisitions, offset by net proceeds from sales and maturities of marketable securities of $3.6 billion, $800 million received from the redemption of the Alibaba Group Preference Shares, $80 million from sales of patents, and $290 million from the settlement of foreign exchange contracts (including the settlement of certain foreign exchange forward contracts designated as net investment hedges).
Net cash used in financing activities. Cash used in financing activities is driven by stock repurchases offset by employee stock option exercises and employee stock purchases. In the year ended December 31, 2015, the $377 million used in financing activities was due to $204 million used for the repurchase of 4 million shares of common stock at an average price of $47.65 per share, $16 million used for distributions to non-controlling interests, and $274 million used for tax withholding payments related to net share settlements of restricted stock units and other financing activities. This use of cash was partially offset by $59 million in cash proceeds received from employee stock option exercises and employee stock purchases made through our employee stock purchase plan, and an excess tax benefit from stock-based awards of $58 million. During the year ended December 31, 2014, the $4 billion used in financing activities was due to $4.2 billion used for the repurchase of 102 million shares of our common stock at an average price of $40.94 per share, $22 million used for distributions to noncontrolling interests, and $295 million used for tax withholding payments related to net share settlements of restricted stock units and other financing activities. This use of cash was partially offset by $308 million in cash proceeds received from employee stock option exercises and employee stock purchases made through our employee stock purchase plan, and an excess tax benefit from stock-based awards of $150 million. During the year ended December 31, 2013, the $1.7 billion used in financing activities was due to $3.3 billion used for the repurchase of 129 million shares of common stock at an average price of $25.95 per share, $206 million used to purchase note hedges, and $149 million used for tax withholding payments related to net share settlements of restricted stock units and other financing activities. This use of cash was partially offset by $1.4 billion in cash proceeds from issuance of the Notes, $125 million in cash proceeds from the issuance of warrants, $353 million in cash proceeds received from employee stock option exercises and employee stock purchases made through our employee stock purchase plan, and an excess tax benefit from stock-based awards of $64 million.
current year, they are reported as financing activities in the consolidated statements of cash flows. See Note 14—“Employee Benefits” in the Notes to our consolidated financial statements for additional information. Stock Repurchases
During the year ended December 31, 2015, we repurchased approximately 4 million shares of our common stock under the November 2013 program at an average price of $47.65 per share for a total of approximately $204 million. During the year ended December 31, 2014, we repurchased approximately 102 million shares of our common stock under the May 2012 and November 2013 programs at an average price of $40.94 per share for a total of approximately $4.2 billion. This amount includes approximately 40 million shares of our common stock repurchased at an average price of $43.47 per share (for a total of approximately $1.7 billion) under an During the year ended December 31, 2013, we repurchased approximately 129 million shares of our common stock under the May 2012 Repurchase Capacity under Approved Programs
Capital Expenditures, Net Capital expenditures, net are generally comprised of purchases of computer hardware, software, server equipment, furniture and fixtures, real estate, and capitalized software and labor for internal use software projects. Capital expenditures, net were We expect capital expenditures Contractual Obligations and Commitments The following table presents certain payments due under contractual obligations with minimum commitments as of December 31,
Standby Letters of Credit. As of December 31, 2015, we had outstanding potential obligations relating to standby letters of credit of $42 million. Standby letters of credit are financial guarantees provided by third parties for ongoing operating liabilities such as leases, utility bills, taxes, and insurance. If any letter of credit is drawn upon by a beneficiary, we are obligated to reimburse the provider of the guarantee. The standby letters of credit generally renew annually. Other
As of December 31, Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us 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. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about, among other things, the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. Management has discussed the development and selection of these critical accounting estimates with the Audit and Finance Committee (the “Audit Committee”) of our Board, and the Audit Committee has reviewed the disclosure below. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our consolidated financial statements. Revenue Recognition. Our revenue is generated from search and display advertising, and other sources. Display advertising revenue is generated from the display of graphical, non-graphical, and Income Taxes. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. See Note 16—“Income Taxes” in the Notes to our consolidated financial statements for additional information. We establish liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities are established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. We adjust these liabilities in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation, developments in case law or interactions with the tax authorities. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of liability provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties. We record a valuation allowance against certain of our deferred income tax assets if it is more likely than not that those assets will not be realized. In evaluating our ability to realize our deferred income tax assets we consider all available positive and negative evidence, including our operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction by jurisdiction basis. In the event we were to determine that we would be able to realize these deferred income tax assets in the future, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Goodwill.Goodwill is not amortized but is evaluated for impairment annually (as of October 31) or whenever we identify certain triggering events or circumstances that would more likely than not reduce the estimated fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, regulatory changes, loss of key personnel and reporting unit and macro-economic factors. Goodwill is tested for impairment at the reporting unit level, which is one level below our operating segments. We identified U.S. & Canada, Latin America, and Tumblr as the reporting units below the Americas operating segment; Europe and Middle East as the reporting units below the EMEA operating segment; and Taiwan, Hong Kong, Australia & New Zealand, India & Southeast Asia as the reporting units below the Asia Pacific operating segment. These operating segments are the same as our reportable segments.
Discount rate assumptions for these reporting units take into account our assessment of the risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We also review marketplace data to assess the reasonableness of our computation of our overall weighted average cost of capital and, when available, the discount rates utilized for each of these reporting units. In determining the fair value of all of the reporting units, we used the following assumptions:
Expected cash flows underlying our business plans for the periods
Cash flows beyond
In order to risk adjust the cash flow projections in determining fair value, we utilized discount rates For any reporting units where the carrying value exceeds the estimated fair value, as determined in step one, we perform a second step to measure the amount of impairment, if any. The second step of the quantitative test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. The implied fair value is calculated by allocating all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. Given the partial impairment recorded in our Tumblr reporting unit in 2015, it is reasonably possible that changes in judgments, assumptions and estimates we made in assessing the fair value of goodwill could cause us to consider some portion or all of the remaining goodwill of the Tumblr reporting unit to become impaired, which comprised $519 million of our remaining $808 million goodwill balance as of December 31, 2015. In addition, a future decline in market conditions and/or changes in our market share could negatively impact the estimated future cash flows and discount rates used in the income approach to determine the fair value of the reporting unit and could result in an impairment charge in the foreseeable future. See “Operating Costs and Long-lived Assets. We amortize long-lived assets, including property and equipment and intangible assets, over their estimated useful lives. Identifiable long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted future cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. Fair value is determined based on the lowest level of identifiable estimated future cash flows using discount rates determined by our management to be commensurate with the risk inherent in our business model. Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many factors. Different assumptions and judgments such as revenue growth rates and operating margins, the estimation of the useful life over which the undiscounted cash flows will occur, and the terminal value of the asset group at the end of that useful life could materially affect estimated future cash flows relating to our long-lived assets which could trigger impairment. Investments in Equity Interests. We account for investments in the common stock of entities in which we have the ability to exercise significant influence but do not own a majority equity interest or otherwise control using the equity method. In accounting for these investments we record our proportionate share of the entities’ net income or loss, one quarter in arrears. We review our investments in equity interests for impairment whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment. The determination of fair value of the investment involves considering factors such as the stock prices of public companies in which we have an equity investment, current economic and market conditions, the operating performance of the companies, including current earnings trends and forecasted cash flows, and other company and industry specific information. The fair value determination, particularly for investments in privately-held companies, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments and the determination of whether any identified impairment is other-than-temporary. Stock-Based Compensation Expense. We recognize stock-based compensation expense net of an estimated forfeiture rate and therefore only recognize compensation expense for those shares expected to vest over the service period of the award. Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based options, stock price volatility, and the pre-vesting award forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock on the date of grant based on the implied volatility of publicly traded options on our common stock, with a term of one year or greater. We believe that implied volatility calculated based on actively traded options on our common stock is a better indicator of expected volatility and future stock price trends than historical volatility. Therefore, expected volatility for the year ended December 31, monitored throughout the year. We estimate this forfeiture rate based on historical experience of our stock-based awards that are granted and cancelled before vesting. If our actual forfeiture rate is materially different from our original estimates, the stock-based compensation expense could be significantly different from what we have recorded in the current period. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the effect of adjusting the forfeiture rate for all current and previously recognized expense for unvested awards is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in our consolidated financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to the expense recognized in our consolidated financial statements. See Note 14—“Employee Benefits” in the Notes to our consolidated financial statements for additional information. Recent Accounting Pronouncements
See Note 1—“The Company and Summary of Significant Accounting Policies” in the Notes to our consolidated financial statements, which is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to financial market risks, including changes in currency exchange rates and interest rates and changes in the market values of our investments. We may use derivative financial instruments to mitigate certain risks in accordance with our investment and foreign exchange policies. We enter into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. We present our derivative assets and liabilities at their gross fair values on the consolidated balance sheets. Interest Rate Exposure
Our exposure to market risk for changes in interest rates impacts our costs associated with hedging, and primarily relates to our cash and marketable securities portfolio. We invest excess cash in money market funds, time deposits, and liquid debt instruments of the U.S. and foreign governments and their agencies, U.S. municipalities, and high-credit corporate issuers which are classified as marketable securities and cash equivalents. In November 2013, we issued $1.4375 billion of the Notes. We carry the Notes at face value less unamortized discount on our consolidated balance sheets. The fair value of the Notes changes when the market price of our stock fluctuates. Investments in fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest Foreign Currency Exposure
The objective of our foreign exchange risk management program is to identify material foreign currency exposures and identify methods to manage these exposures to minimize the potential effects of currency fluctuations on our reported consolidated cash flows and results of operations. All counterparties to our derivative contracts are major financial institutions. See Note 9 — “ Foreign Currency Derivative Financial Instruments” in the Notes to our consolidated financial statements for additional information on our hedging programs. We transact business in various foreign currencies and have international revenue, as well as costs denominated in foreign currencies. This exposes us to the risk of fluctuations in foreign currency exchange rates. We had net realized and unrealized foreign currency transaction losses of $22 million, $15 million, Translation Exposure.We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries and our investments in equity interests into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars results in a gain or loss which is recorded as a component of accumulated other comprehensive income which is part of stockholders’ equity. A Value-at-Risk (“VaR”) sensitivity analysis was performed on all of our foreign currency derivative positions to assess the potential impact of fluctuations in exchange rates. The VaR model uses a Monte Carlo simulation to generate thousands of random price paths assuming normal market conditions. The VaR is the maximum expected one day loss in fair value, for a given statistical confidence level, to our foreign currency derivative positions due to adverse movements in rates. The VaR model is used as a risk management tool and is not intended to represent either actual or forecasted losses. Based on the results of the model using a 99 percent confidence interval, we estimate the maximum one-day loss in the net investment hedge portfolio was Revenue ex-TAC and related expenses generated from our international subsidiaries are generally denominated in the currencies of the local countries. Primary currencies include Australian dollars, British pounds, Euros, Japanese yen, Taiwan dollars and for the EMEA segment would have been Investment Exposure
We are exposed to investment risk as it relates to changes in the market value of our investments. We have investments in marketable securities and equity instruments of public and private companies. As of the date of the Alibaba Group IPO, we no longer account for our remaining investment in Alibaba Group using the equity method and no longer record our proportionate share of Alibaba Group’s financial results in the consolidated financial statements. Instead, we now reflect our remaining investment in Alibaba Group as an available-for-sale equity security on the consolidated balance sheet and adjust the investment to fair value each quarterly reporting period with changes in fair value recorded within other comprehensive income (loss), net of tax. The change in the classification of our investment in Alibaba Group from an equity method investment to an available-for-sale
A sensitivity analysis was performed on our marketable equity security portfolio to assess the potential impact of fluctuations in stock price. Hypothetical declines in stock price of ten percent, twenty percent, and thirty percent were selected based on potential near-term changes in the stock price that could have an adverse effect on our marketable equity security portfolio. As of December 31, 2015 and 2014, the fair value of our marketable equity security portfolio was approximately $31 billion and $40 We performed a separate sensitivity analysis on our Hortonworks warrants for which we estimate fair value using the Black-Scholes model. We have held all other inputs constant and determined the impact of hypothetical declines in stock price of ten percent, twenty percent, and thirty percent, based on potential near-term changes in the stock price that could have an adverse effect on the fair value of the warrants and result in a loss recorded to the consolidated statements of
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Yahoo! Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Yahoo! Inc. and its subsidiaries at December 31, As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in 2015 and 2014 due to the adoption of Accounting Standards Update 2015-17,Balance Sheet Classification of Deferred Taxes. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Jose, California February
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Comprehensive Income (loss)
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements. Yahoo! Inc. Consolidated Statements of Stockholders’ Equity—(Continued)
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements. Yahoo! Inc. Consolidated Statements of Cash
The accompanying notes are an integral part of these consolidated financial statements. Notes to Consolidated Financial Statements 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 to digital information discovery, focused on Basis of Presentation. The consolidated financial statements include the accounts of Yahoo! Inc. and its majority-owned or otherwise controlled subsidiaries. All At the beginning of 2015, the Company began classifying editorial costs as cost of revenue—other rather than including such costs in sales and marketing expense. To conform to the current period Prior to the adoption of Accounting Standard Update (“ASU”) 2015-16, “Business Combinations,” in the third quarter of 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 Company revised the 2014 Consolidated Statement of Cash Flows to correct for a non-cash acquisition of property and equipment resulting in an increase in cash provided by operating activities of $23 million and a corresponding decrease in net cash provided by investing activities. 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, originally developed content, acquired content, 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. Concentration of Risk. Financial instruments that potentially subject the Company to significant concentration of credit The fair value of the equity investments in Alibaba Group and Hortonworks will vary over time and is subject to a variety of market risks including: company performance, macro-economic, regulatory, industry, 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 the Company’s investments in marketable securities, including Alibaba Group and Hortonworks changes. Accounts receivable are typically unsecured and are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Historically, such losses have been within management’s expectations. The Company’s derivative instruments, including the convertible note hedge transactions, expose the Company to credit risk to the extent that its derivative counterparties become unable to meet their financial obligations under the terms of the agreements. The Company seeks to mitigate this risk by limiting its derivative counterparties to major financial institutions and by spreading the risk across several major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. See “Note 9—Foreign Currency Derivative Financial Instruments” for additional information related to the Company’s derivative instruments. The Company also holds warrants in Hortonworks, which expose the Company to variability in fair value based on changes in the stock price as an input to the Black-Scholes model. Revenue under the Company’s Search and Advertising Sales Agreement (as amended, the “Search Agreement”) with Microsoft Corporation (“Microsoft”) represented approximately 31 percent, 35 percent, and 35 percent of the Company’s revenue for the years ended December 31, 2013, 2014 and, 2015, respectively, and no other individual customer accounted for 10 percent or more of the Company’s revenue for 2013, 2014, or 2015. As of December 31, Comprehensive Foreign Currency. The functional currency of the Company’s international subsidiaries is evaluated on a case-by-case basis and is often the local currency. The financial statements of these subsidiaries are translated into U.S. dollars using period-end rates of exchange for assets and liabilities, historical rates of exchange for equity, and average rates of exchange for the period for revenue and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income Cash and Cash Equivalents, Short- and Long-Term Marketable Securities. The Company invests its excess cash in money market funds, time deposits, and liquid debt securities of the U.S. and foreign governments and their agencies, U.S. municipalities, and high-credit corporate issuers which are classified as marketable securities and cash equivalents. All investments in debt securities with an original maturity of Operating cash deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate its credit risk by spreading such risk across multiple counterparties and monitoring the risk profiles of these counterparties. The Company’s marketable equity securities, including Alibaba Group and Hortonworks, are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive Realized gains or losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are reported in other income, net. The Company evaluates its marketable debt investments periodically for possible other-than-temporary impairment. A decline of fair value below amortized costs of debt securities is considered an other-than-temporary impairment if the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis. In those instances, an impairment charge equal to the difference between the fair value and the amortized cost basis is recognized in earnings. Regardless of the Company’s intent or requirement to sell a debt security, an impairment is considered other-than-temporary if the Company does not expect to recover the entire amortized cost basis; in those instances, a credit loss equal to the difference between the present value of the cash flows expected to be collected based on credit risk and the amortized cost basis of the debt security is recognized in earnings. The Company has no current requirement or intent to sell a material portion of debt securities as of December 31, Allowance for Doubtful Accounts. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions, and other factors that may affect customers’ ability to pay to determine the level of allowance required. Foreign Currency Derivative Financial Instruments. The Company uses derivative financial instruments, primarily foreign currency forward contracts and option contracts, to mitigate certain foreign currency exposures. The Company hedges, on an after-tax basis, a portion of its net investment in Yahoo Japan Corporation (“Yahoo Japan”). The Company has designated these foreign currency forward and option contracts as net investment hedges. The effective portion of changes in fair value is recorded in accumulated other comprehensive income on the Company’s consolidated balance sheet and any ineffective portion is recorded in other income (expense), net on the Company’s consolidated statements of For derivatives designated as cash flow hedges, the effective portion of the unrealized gains or losses on these forward contracts is recorded in accumulated other comprehensive income on the Company’s consolidated balance sheets and reclassified into revenue in the consolidated statements of 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 balance sheet hedges are used to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currency. Changes in the fair value of these derivatives are recorded in other income (expense), net on the Company’s consolidated statements of The Company recognizes all derivative instruments as other assets or liabilities on the Company’s consolidated balance sheets at fair value. See Note 9—“Foreign Currency Derivative Financial Instruments” for a full description of the Company’s derivative financial instrument activities and related accounting. Property and Equipment. Buildings are stated at cost and depreciated using the straight-line method over the estimated useful lives of 25 years. Leasehold improvements are amortized over the lesser of their expected useful lives and the remaining lease term. Computers and equipment and furniture and fixtures are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally three to five years. Property and equipment to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets that management expects to hold and use is based on the excess of the carrying value of the asset over its fair value. No impairments of such assets were identified during any of the periods presented. Capitalized Software and Labor. The Company capitalized certain software and labor costs totaling approximately one to three years. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a change in estimated useful lives and therefore amortization expense in future periods. During Goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment on an annual basis and more frequently if impairment indicators are present. The Company’s reporting units are one level below the operating segments level. The reporting unit’s carrying value is compared to its fair value. The estimated fair values of the reporting units are determined using either the market approach, income approach or a combination of the market and income approach. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its estimated fair value. The income approach uses expected future operating results and failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. If the carrying value of the reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. The implied fair value is calculated by allocating all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied estimated fair value. The Company conducts its annual goodwill impairment test as of October 31, Intangible Assets. Originally Developed Content and Acquired Content. Originally developed content and acquired content are both carried at cost. Originally developed content is amortized based on the expected pattern of viewing, typically over 18 months. Acquired content is amortized on a straight-line basis over the shorter of each program’s contractual window of availability or estimated period of use, beginning with the month of first availability. Marketing and general and administrative costs are expensed as incurred. For originally developed content, the Company performs regular recoverability assessments on a program-by-program basis. If there are any events or changes in circumstances indicating that the Company should assess whether the fair value of originally developed content is less than its unamortized costs, the Company performs a fair value analysis using an expected cash flow approach. The amount by which the unamortized costs of the originally developed content exceed estimated fair value is charged to expense as an asset impairment. During the year ended December 31, 2015, the Company recorded an asset impairment charge of $16 million related to originally developed content. For acquired content, the Company compares the net realizable value on a program-by-program basis with the unamortized cost. The amount by which the unamortized costs of the acquired content exceed net realizable value is charged to expense as an asset impairment. During the year ended December 31, 2015, the Company recorded an asset impairment charge of $28 million related to acquired content, primarily driven by a reduction of forecasted revenues to be generated from advertising on Yahoo Properties. Investments in Equity Interests. Investments in the common stock of 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 consolidated balance sheets. The Company records its share of the results of these companies one quarter in arrears within earnings in equity interests in the consolidated statements of The Company reviews its investments for other-than-temporary impairment whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment. The determination of fair value of the investment involves considering factors such as the stock prices of public companies in which the Company has an equity investment, current economic and market conditions, the operating performance of the companies including current earnings trends and forecasted cash flows, and other company and industry specific information.
uses the date that the Company has the right to control the asset to begin The Company establishes assets and liabilities for the Income Taxes. Deferred income taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. The Company records a valuation allowance against particular deferred income tax assets if it is more likely than not that those assets will not be realized. The provision for income taxes comprises the Company’s current tax liability and change in deferred income tax assets and liabilities. Significant judgment is required in evaluating the Company’s uncertain tax positions and determining its provision for income taxes. The Company establishes liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are in accordance with applicable tax laws. The Company adjusts these liabilities Revenue Recognition. Revenue is generated from offerings, which include clicks on text-based links to advertisers’ The Company recognizes revenue from search advertising on Yahoo Properties and Affiliate sites. Search revenue is recognized based on Paid Clicks. A Paid Click occurs when an end-user clicks on a sponsored listing on Yahoo Properties and Affiliate sites for which an advertiser pays on a per click basis. The Company also sells search traffic to certain customers where it does not have a direct relationship with the advertiser, in which case revenue is also recognized based on Paid Clicks. In the Company’s Search Agreement with Microsoft, Previously under the Search Agreement, the Company
The Company recognizes search revenue generated from mobile ads served through Yahoo Gemini The Company recognizes revenue from display advertising on Yahoo Properties and Affiliate sites as impressions of or clicks on display advertisements are delivered. Impressions are delivered when a sold advertisement appears in pages viewed by users. Clicks are delivered when a user clicks on a native advertisement. Arrangements for these services generally have terms of up to one year and in some cases the terms may be up to three years. For display advertising on Affiliate sites, the Company pays Affiliates From time-to-time, the Company may offer customized display advertising solutions to advertisers. These customized display advertising solutions combine the Company’s standard display advertising with customized content, customer insights, and campaign analysis which are separate units of accounting. Due to the unique nature of these products, the Company may not be able to establish selling prices based on historical stand-alone sales or third-party evidence; therefore, the Company may use its best estimate to establish selling prices. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, class of advertiser, size of transaction, seasonality, margin objectives, observed pricing trends, available online inventory, industry pricing strategies, and market conditions. The Company believes the use of the best estimates of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction. Other revenue includes listings-based services revenue, transaction revenue, royalties, patent licenses and fees revenue. Listings-based services revenue is generated from a variety of consumer and business listings-based services, including classified advertising such as Yahoo Local and other services. The Company recognizes listings-based services revenue when the services are performed. Transaction revenue is generated from facilitating commercial transactions through Yahoo Properties, principally from Yahoo Small Business, Yahoo Travel, and Yahoo Shopping. The Company recognizes transaction revenue when there is evidence that qualifying transactions have occurred. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the related fee is reasonably assured. The Company’s arrangements generally do not include a provision for cancellation, termination, or refunds that would significantly impact revenue recognition. The Company accounts for cash consideration given to customers, for which it does not receive a separately identifiable benefit and cannot reasonably estimate fair value, as a reduction of revenue. Current deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition. Long-term deferred revenue includes amounts received for which revenue will not be earned within the next 12 months. Cost of revenue—TAC. TAC consists of payments made to Cost of revenue—other. Cost of revenue-other consists of bandwidth costs, stock-based compensation, content, and other expenses associated with the production and usage of Yahoo Properties, including expense and amortization of developed technology and patents. Cost of revenue—other also includes costs for Yahoo’s technology platforms and infrastructure, including depreciation expense of facilities and other operating costs, directly related to revenue generating activities. Amortization of Intangibles. Amortization of customer, affiliate, and advertiser-related relationships and tradenames, trademarks and domain names are classified within amortization of intangibles. Amortization of developed technology and patents is included in cost of revenue—other. Product Development. Product development expenses consist primarily of compensation-related expenses (including stock-based compensation expense) incurred for research and development, the development of, enhancements to, and maintenance and operation of Yahoo Properties, advertising products, technology platforms, and infrastructure. Depreciation expense, third-party technology and development expense, and other operating costs are also included in product development. Advertising Costs. Advertising production costs are recorded as expense the first time an advertisement appears. Costs of advertising are recorded as expense as advertising space or airtime is used. All other advertising costs are expensed as incurred. Advertising expense totaled approximately Restructuring Charges. The Company has developed and implemented restructuring initiatives to improve efficiencies across the organization, reduce termination benefits as well as certain contractual termination benefits or employee terminations under ongoing benefit arrangements. One-time termination benefits are recognized as a liability at estimated fair value when the approved plan of termination has been communicated to employees, unless employees must provide future service, in which case the benefits are recognized ratably over the future service period. Ongoing termination benefits arrangements are recognized as a liability at estimated fair value when the amount of such benefits becomes estimable and payment is probable. Contract termination costs are recognized at estimated fair value when the entity terminates the contract in accordance with the contract These restructuring initiatives require management to make estimates in several areas including: (i) expenses for severance and other employee separation costs; (ii) realizable values of assets made redundant, obsolete, or excessive; and (iii) the ability to generate sublease income and to terminate lease obligations at the estimated amounts. Stock-Based Compensation Expense. The Company recognizes stock-based compensation expense, net of an estimated forfeiture rate and therefore only recognizes compensation costs for those shares expected to vest over the service period of the award. Stock-based awards are valued based on the grant date fair value of these awards; the Company records stock-based compensation expense on a straight-line basis over the requisite service period, generally one to four years. Calculating stock-based compensation expense related to stock options requires the input of highly subjective assumptions, including the expected term of the stock options, stock price volatility, and the pre-vesting forfeiture rate of stock awards. The Company estimates the expected life of options granted based on historical exercise patterns, which the Company believes are representative of future behavior. The Company estimates the volatility of its common stock on the date of grant based on the implied volatility of publicly traded options on its common stock, with a term of one year or greater. The Company believes that implied volatility calculated based on actively traded options on its common stock is a better indicator of expected volatility and future stock price trends than historical volatility. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected pre-vesting award forfeiture rate, as well as the probability that performance conditions that affect the vesting of certain awards will be achieved, and only recognizes expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience of the Company’s stock-based awards that are granted and cancelled before vesting. See Note 14—“Employee Benefits” for additional information. The Company uses the “with and without” approach in determining the order in which tax attributes are utilized. As a result, the Company recognizes a tax benefit from stock-based awards in additional paid-in capital only if an incremental tax benefit is realized after all other tax attributes currently available to the Company have been utilized. When tax deductions from stock-based awards are less than the cumulative book compensation expense, the tax effect of the resulting difference (“shortfall”) is charged first to additional paid-in capital, to the extent of the Company’s pool of windfall tax benefits, with any remainder recognized in income tax expense. The Company determined that it had a sufficient windfall pool available through the end of 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 September 2015, the FASB issued ASU 2015-16, “Business Combinations,” which simplifies the accounting for measurement-period adjustments by eliminating the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires the cumulative impact of measurement period adjustments, including the impact on prior periods, to be recognized in the reporting period in which the adjustment is identified. The ASU is effective for public companies for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company evaluated the effects of the ASU 2015-16 and elected to early adopt the ASU during the third quarter of 2015. The ASU will be applied prospectively to the acquisitions which require adjustments to the provisional amounts that occurred during the open measurement periods, regardless of the acquisition date. In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and entities are permitted to apply either prospectively or retrospectively; early adoption is permitted. The Company evaluated the effects of the ASU 2015-17 and elected to early adopt the ASU during the fourth quarter of 2015. The ASU was applied retrospectively to provide a consistent financial statement presentation for all deferred tax assets and liabilities for the years ended December 31, 2014 and December 31, 2015. To conform to the current period presentation, the Company reclassified $253 million and $8 million, respectively, which were previously included in prepaid expense and other current assets and other accrued expenses and current liabilities for the year ended December 31, 2014. As a result of the reclassifications, year-end balances of other long-term assets and investments increased by $9 million and deferred and other long-term tax liabilities decreased by $236 million for the year ended December 31, 2014. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. The new standard principally affects accounting standards for equity investments, financial liabilities where the fair value option has been elected, and the presentation and disclosure requirements for financial instruments. Upon the effective date of the new standards, all equity investments in unconsolidated entities, other than those accounted for using the equity method of accounting, will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification and therefore, no changes in fair value will be reported in other comprehensive income for equity securities with readily determinable fair values. The new guidance on the classification and measurement will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2016-01 on the consolidated financial statements and currently anticipates the new guidance would significantly impact its Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income as the Company’s marketable equity securities, due primarily to Alibaba Group and Hortonworks, are currently classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. In February 2016, the FASB issued ASU 2016-02, “Leases” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements and anticipates the new guidance will significantly impact its consolidated financial statements given the Company has a significant number of leases. Note 2 Marketable Securities Investments And Fair Value Disclosures
The following tables summarize the available-for-sale securities (in thousands):
Short-term, highly liquid investments of included in the table above as the gross unrealized gains and losses were immaterial as the carrying value approximates fair value because of the short maturity of those instruments. The remaining contractual maturities of available-for-sale marketable debt securities were as follows (in thousands):
The following tables show all available-for-sale marketable debt securities
The Company’s investment portfolio includes equity securities debt, money market funds, commercial paper, certificates of deposit and time deposits with financial institutions. The fair value of any debt or equity 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 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. Available-for-sale marketable debt securities 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,
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,
The amount of cash included in cash and cash equivalents as of December 31, 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 for the Company’s Level 3 financial asset was obtained using a Black-Scholes model. Activity between Levels of the Fair Value Hierarchy During the years ended December 31, Hortonworks Prior to the December 12, 2014 initial public offering of Hortonworks, the Company held an approximate 16 percent interest in Hortonworks with an investment balance of $26 million, which was accounted for as a cost method investment. Subsequent to the initial public offering, the Company owns 3.8 million unregistered The Company also holds warrants that vested upon the initial public offering of Hortonworks, which entitle the Company to purchase an aggregate of 3.7 million shares of Hortonworks common stock upon exercise of the warrants. The Company holds 6.5 million preferred warrants that are exercisable for 3.25 million shares of common stock at an exercise price of $0.01 per share, as well as 0.5 million common warrants that are exercisable for 0.5 million shares of common stock at an exercise price of $8.46 per share. These warrants had a fair value of $98 million and $79 million as of December 31, 2014 and 2015, respectively. The Company determined the estimated fair value of the warrants using the Black-Scholes
During the year ended December 31, 2014, the Company recorded a gain of $57 million upon the initial public offering of Hortonworks through other comprehensive income on our consolidated balance sheet and a $41 million gain related to the mark to market of the warrants as of December 31, 2014, which Assets and Liabilities Measured 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 in 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 December 31, billion, respectively. The estimated 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. Goodwill and Indefinite-Lived Intangible Assets The inputs used to measure the estimated fair value of goodwill and indefinite-lived intangible assets are classified as a Level 3 fair value measurement due to the significance of unobservable inputs using company-specific information. The valuation methodology used to estimate the fair value of goodwill and indefinite-lived intangible assets is discussed in Note Other Investments As of December 31, Note 3 Consolidated Financial Statement Details
Prepaid Expenses and Other Current Assets As of December 31, prepaid expenses and other current assets consisted of the following (in thousands):
Property and Equipment, Net As of December 31, property and equipment, net consisted of the following (in thousands):
Other Long-Term Assets and Investments As of December 31, other long-term assets and investments consisted of the following (in thousands):
Other Accrued Expenses and Current Liabilities As of December 31, other accrued expenses and current liabilities consisted of the following (in thousands):
Deferred and Other Long-Term Tax Liabilities As of December 31, deferred and other long-term tax liabilities consisted of the following (in thousands):
Accumulated Other Comprehensive Income As of December 31, the components of accumulated other comprehensive income were as follows (in thousands):
Noncontrolling Interests As of December 31, noncontrolling interests were as follows (in thousands):
Other Income (Expense), Net Other income (expense), net for
Interest, dividend, and investment income consists of income earned from cash and cash equivalents in bank accounts, Interest expense is related to the Notes
During the year ended December 31, 2014, the Company recorded a gain of $57 million upon the initial public offering of Hortonworks and a $41 million gain related to the mark to market of the warrants
Other consists of gains from other non-operational items. Reclassifications Out of Accumulated Other Comprehensive Income Reclassifications out of accumulated other comprehensive income for the period ended December 31,
Reclassifications out of accumulated other comprehensive income for the period ended December 31, 2014 were as follows (in thousands):
Reclassifications out of accumulated other comprehensive income for the period ended December 31, 2015 were as follows (in thousands):
Note 4 Acquisitions And Dispositions
The following table summarizes acquisitions (including business combinations and asset acquisitions) completed during the three years ended December 31,
Transactions completed in 2013 Tumblr. On June 19, 2013, the Company completed the acquisition of Tumblr, Inc. (“Tumblr”), a blog-hosting The purchase price exceeded the fair value of the net tangible and identifiable intangible assets acquired and, as a result, the Company recorded goodwill in connection with this transaction. Under the terms of the agreement, the Company acquired all of the equity interests (including all outstanding vested options) in Tumblr. Tumblr stockholders and vested optionholders were paid in cash, outstanding Tumblr unvested options and restricted stock units were assumed and converted into equivalent awards covering Yahoo common stock and a portion of the Tumblr shares held by its founder were exchanged for Yahoo common stock. The total purchase price of approximately $990 million consisted mainly of cash consideration. The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):
In connection with the acquisition, the Company is recognizing stock-based compensation expense of $70 million over a period of up to four years. This amount is comprised of assumed unvested stock options and restricted stock units (which had an aggregate fair value of $29 million at the acquisition date), and Yahoo common stock issued to Tumblr’s founder (which had a fair value of $41 million at the acquisition date). The Yahoo common stock issued to Tumblr’s founder is subject to holdback and will be released over four years provided he remains an employee of the Company. In addition, the transaction resulted in cash consideration of $40 million to be paid to Tumblr’s founder over four years, also provided that he remains an employee of the Company. Such cash payments are being recognized as compensation expense over the four-year service period. The amortizable intangible assets have useful lives not exceeding six years and a weighted average useful life of six years. Other Acquisitions—Business Combinations. During the year ended December 31, 2013, the Company acquired 25 other companies, which were accounted for as business combinations. The total aggregate purchase price for these other acquisitions was $279 million. The total cash consideration of $279 million less cash acquired of $2 million resulted in a net cash outlay of $277 million. The allocation of the purchase price of the assets and liabilities assumed based on their estimated fair values was $95 million to amortizable intangible assets, $2 million to cash acquired, $44 million to other tangible assets, $34 million to assumed liabilities, and the remainder of $170 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 2014 Flurry. On August 25, 2014, the Company completed the acquisition of Flurry, Inc. (“Flurry”), a mobile data analytics company that optimizes mobile experiences for developers, marketers, and The total purchase price of approximately $270 million
The
The amortizable intangible assets have useful lives not exceeding five years and a weighted average useful life of five years. BrightRoll. On December 12, 2014, the Company completed the acquisition of BrightRoll, Inc. (“BrightRoll”), a leading programmatic video advertising platform. The transaction The purchase price of BrightRoll stockholders and vested option holders were paid in cash. Outstanding BrightRoll unvested options were assumed and converted into equivalent awards for Yahoo common stock valued at $25 million, which is being recognized as stock-based compensation expense as the options vest over periods of up to four years.
In connection with the acquisition, the Company issued restricted stock units to employees valued at $78 million, which is being recognized as stock-based compensation expense as the restricted stock units vest over four years related to continuing employment. In addition, the transaction resulted in cash consideration of $54 million to be paid to BrightRoll’s founder over three years, also provided that he remains an employee of the Company. Such cash payments are being recognized as compensation expense over the three-year service period. The total purchase price of approximately $581 million consisted mainly of cash consideration. The allocation of the purchase price of the assets acquired and liabilities assumed based on their estimated fair values was as follows (in thousands):
The amortizable intangible assets have useful lives not exceeding seven years and a weighted average useful life of five years. Other Acquisitions—Business Combinations. During the year ended December 31, 2014, the Company acquired nine other companies, all of which were accounted for as business combinations. The total purchase price for these acquisitions was $66 million less cash acquired of $4 million, which resulted in a net cash outlay of $62 million. The Transactions completed in 2015 Polyvore. On September 2, 2015, the Company acquired Polyvore, Inc. (“Polyvore”), a social commerce website that lets users across the globe discover and shop for their favorite products in fashion, beauty and home décor. The total purchase price of approximately $161 million consisted of cash consideration. Under the terms of the agreement, the Company acquired all of the equity interests (including all outstanding vested options) of Polyvore. Outstanding Polyvore unvested options were assumed and converted into equivalent awards for Yahoo common stock valued at $7 million, which is being recognized as stock-based compensation expense as the options vest over periods of up to four years. In connection with the acquisition, the Company is also recognizing stock-based compensation expense of $15 million over a period of four years. This amount is comprised of Yahoo common stock issued to the founders (which had a fair value of $15 million at the acquisition date). The Yahoo common stock held in escrow is issued to the founders and is subject to forfeiture and will be released over four years provided they remain employees of the Company. The allocation of the purchase price of the assets acquired and liabilities assumed based on their estimated fair values was as follows (in thousands):
The amortizable intangible assets have useful lives not exceeding five years and a weighted average useful life of three years. The purchase price of $161 million exceeded the estimated fair value of the tangible and identifiable intangible assets and liabilities acquired and, as a result of the allocation, the Company recorded goodwill of $131 million in connection with this transaction. Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired and is not deductible for tax purposes. The entire goodwill amount was recorded in the Americas segment. Other Acquisitions—During the year ended December 31, 2015, the Company acquired one other company which was accounted for as a business combination. The total purchase price for this acquisition was $23 million. The purchase price allocation of the assets acquired and liabilities assumed based on their estimated fair values was as follows: $5 million to amortizable intangibles; $4 million to net liabilities assumed; and the remainder of $22 million to goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired and is not deductible for tax purposes. The entire goodwill amount was recorded in the EMEA segment. The Company’s business combinations completed during the years ended December Patent Sale and License Agreement During 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 to 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 $61 million as a gain on the Sold Patents during 2014. The gain on sale of these patents is recorded as a part of 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. The Company recognized $43 million and $86 million in revenue related to the Existing Patents and the Capture Period Patents during the Patent Sale Agreements During 2013 and 2014, the Company entered into patent sale agreements with a wholly-owned affiliate of Alibaba Group pursuant to which the Company sold certain patents for aggregate consideration of $70 million and $23.5 million, respectively. The gains on sales of these patents are recorded as a part of During 2014, the Company entered into a patent sale agreement with Yahoo Japan pursuant to which the Company sold certain patents for aggregate consideration of $18 million. The gain on sale of these patents of $12 million is recorded as a part of During 2015, the Company sold certain patents and recorded a gain on sales of patents of approximately $11 million. Note 5 Goodwill
The changes in the carrying amount of goodwill for the years ended December 31,
Goodwill Impairment Testing Goodwill is not amortized but is evaluated for impairment annually (as of October 31) or whenever the Company identifies certain triggering events or circumstances that would more likely than not reduce the estimated fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, regulatory changes, loss of key personnel and reporting unit and macro-economic factors such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets. Goodwill is tested for impairment at the reporting unit level, which is one level below the Company’s operating segments. The To test for impairment, the Company uses the two-step quantitative test. Step One The first step of the quantitative test involves comparing the estimated fair value of the Company’s reporting units to their carrying values, including goodwill. In 2015, the estimated fair values of the reporting units for all reporting units identified, except for Tumblr and Latin America, were estimated using Step Two For any reporting units, where the carrying value exceeds the estimated fair value, as determined in step one, the Company performs step two to measure the amount of impairment, if any. The second step of the quantitative test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. The implied fair value is calculated by allocating all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. As identified above, in step one, in 2015, the carrying value of the U.S. & Canada, Europe, Tumblr and Latin America reporting units exceeded the estimated fair value. The Company completed an assessment of the implied fair value of these reporting units, which resulted in an impairment of all goodwill for the U.S. & Canada, Europe, and Latin America reporting units and a partial impairment for the Tumblr reporting unit. The Company recorded goodwill impairment charges of $3,692 million, $531 million, $230 million and $8 million, associated with the U.S. & Canada, Europe, Tumblr, and Latin America reporting units, respectively, for the year ended December 31, 2015. The impairments were a result of a combination of factors, including a sustained decrease in our market capitalization in fourth quarter of 2015 and lower estimated projected revenue and profitability in the near term. The lower estimated projected cash flows and higher discount rates were used to estimate the fair value of each reporting unit affected by such changes. The remaining goodwill as of December 31, 2015 was $808 million, of which $519 million relates to the Tumblr reporting unit. Given the partial impairment recorded in the Tumblr reporting unit in 2015, it is In 2014, as a result of the annual goodwill impairment test, the Company concluded that the carrying value of the Middle East reporting unit, included in the EMEA reportable segment, and the carrying value of the India & Southeast Asia reporting unit included in the Asia Pacific reportable segment both exceeded their respective fair values. As required by the second step of the impairment test, the Company performed an allocation of the fair value to all the assets and liabilities of the reporting unit, including identifiable intangible assets, based on their estimated fair values, to determine the implied fair value of goodwill. Accordingly, the Company recorded a goodwill impairment charge related to the Middle East and India & Southeast Asia reporting units of $79 million and $9 million, respectively, during the quarter ended December 31, 2014 for the difference between the carrying value of the goodwill in the reporting unit and its implied fair value with no goodwill remaining in either reporting unit. The impairment resulted from a decline in business conditions in the Middle East and India & Southeast Asia during the latter half of 2014.
In 2013, as a result of the annual goodwill impairment test, the Company concluded that the carrying value of the Middle East reporting unit, included in the EMEA reportable segment, exceeded its fair value. The Company recorded a goodwill impairment charge of approximately $64 million during the quarter ended December 31, 2013 for the difference between the carrying value of the goodwill in the reporting unit and its implied fair value with goodwill remaining of $77 million. The impairment resulted from a decline in business conditions in the Middle East during the latter half of 2013.
Note 6 Intangible Assets, Net
The following table summarizes the Company’s intangible assets, net (in thousands):
The intangible assets have estimated useful lives as follows:
Customer, affiliate, and advertiser related relationships—
Developed technology and patents—one
The Company recognized amortization expense for intangible assets of Intangibles Impairment Testing The Company reviews identifiable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Intangible assets with indefinite useful lives are not amortized but are reviewed for impairment whenever events or changes in circumstances indicate that it is more likely than not that the fair value is less than its carrying amount. If the Company determines that an intangible asset with an indefinite life is more likely than not impaired, a quantitative test comparing the fair value of the indefinite-lived purchased intangible asset with its carrying amount is performed. The Company estimates the fair value of indefinite-lived purchased intangible assets using an income approach. Measurement of any impairment losses on both definite-lived and indefinite-lived intangible assets are based on the excess of the carrying value of the asset over its fair value. In the fourth quarter of 2015, the Company reviewed both definite-lived and indefinite-lived intangible assets for impairment. No impairment was identified for definite-lived intangibles. For indefinite-lived intangibles, the Company performed a quantitative test comparing the fair value of the indefinite-lived intangible assets with their carrying amount and recorded an impairment charge of $15 million related to certain indefinite-lived intangible assets in the EMEA segment. 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 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. For 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 The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
Note 8 Investments In Equity Interests Accounted For Using The Equity Method Of Accounting
The following table summarizes the Company’s investments in equity interests using the equity method of accounting as of December 31,
Yahoo Japan During April 1996, the Company signed a joint venture agreement with Softbank, as amended in September 1997, which formed Yahoo Japan. Yahoo Japan was formed to establish and manage a local version of Yahoo in Japan. The investment in Yahoo Japan is The Company makes adjustments to the earnings in equity interests line in the consolidated statements of The fair value of the Company’s ownership interest in the common stock of Yahoo Japan, based on the quoted stock price, was approximately During the years ended December 31, During the year ended December 31, 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 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.
Since acquiring its equity interest in Yahoo Japan, the Company has recorded cumulative earnings in equity interests, net of dividends received and related taxes on dividends, of 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 Alibaba Group Equity Investment in Alibaba Group. Prior to the closing of the Alibaba Group IPO 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 balance 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. Technology and Intellectual Property License Agreement. As a result of the Alibaba Group IPO, Alibaba Group’s obligation to make royalty payments under the TIPLA ceased on September 24, 2014 and the Company’s recognition of the remaining TIPLA deferred revenue was completed on September 18, 2015. The Company recognized approximately $259 million, $281 million and $199 million for the years ended December 31, 2013, 2014 and 2015, respectively, related to the TIPLA. 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 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 consolidated statements of the underlying hedged revenue is recognized. Any ineffective portions of net investment hedges and cash flow hedges are recorded in other income (expense), net on the Company’s consolidated statements of The Company enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of Designated as Hedging Instruments Net Investment Hedges. The Company currently 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, Cash Flow Hedges. The Company entered into foreign currency forward contracts designated as cash flow hedges of varying maturities through 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 as of December 31,
Foreign currency derivative activity for the year ended December 31, 2014 was as follows (in millions):
Foreign currency derivative activity for the year ended December 31, 2015 was as follows (in millions):
Foreign currency derivative contracts balance sheet location and ending fair value was as follows (in millions):
See the Foreign Currency and Derivative Financial Instruments section within Note 1—“The Company and Summary of Significant Accounting Policies” for additional information. Note 10 Credit Agreement
Borrowings under the Credit Agreement, as amended, will continue to bear interest at a rate equal to, at the option of the Company, either (a) a customary London interbank offered rate (a “Eurodollar Rate”), or (b) a customary base rate (a “Base Rate”), in each case plus an applicable margin. The applicable margins for borrowings under the Credit Agreement, as amended, will be based upon the leverage ratio of the Company and range from 1.00 percent to 1.25 percent with respect to Eurodollar Rate borrowings and 0 percent to 0.25 percent with respect to Base Rate borrowings. As of December 31, Note 11 Convertible Notes
0.00% Convertible Senior Notes As of December 31, November 20, 2013, with J.P. Morgan Securities LLC and Goldman, Sachs & Co., as representatives of the several initial purchasers named therein (collectively, the “Initial Purchasers”). The Notes were sold to the Initial Purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. In connection with the issuance of the Notes, the Company entered into an indenture (the “Indenture”) with respect to the Notes with The Bank of New York Mellon Trust Company, N.A., as trustee. Under the Indenture, the Notes are senior unsecured obligations of Yahoo, the Notes do not bear regular interest. 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 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 In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the Notes using the effective interest method with an effective interest rate of 5.26 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the The Notes consist of the following (in thousands):
The following table sets forth total interest expense recognized related to the Notes (in thousands):
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 (the carrying value excludes the equity component of the Notes classified in equity)
Note Hedge Transactions and Warrant Transactions The Company entered into note hedge transactions with certain option counterparties (the “Option Counterparties”) to reduce the potential dilution with respect to Yahoo’s common stock upon conversion of the Notes or offset any cash payment the Company is required to make in excess of the principal amount of converted Notes. For the year ended December 31, 2013, the Company paid $206 million for the note hedge transactions. Separately, the Company also entered into privately negotiated warrant transactions with the Option Counterparties giving them the right to purchase common stock from the Company. The warrant transactions will have a dilutive effect with respect to Yahoo’s common stock to the extent that the market price per share of its common stock exceeds the strike price of $71.24 per share of the warrants on or prior to the expiration date of the warrants. The warrants begin to expire in March 2019. For the year ended December 31, 2013, the Company received $125 million in proceeds from the issuance of warrants. The note hedges and warrants are not marked to market. The value of the note hedges and warrants were initially recorded in stockholders’ equity and continue to be classified as stockholders’ equity. 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
In December 2014, the Company entered into a 10-year Rent expense for all operating leases was approximately Many of the Company’s leases contain one or more of the following options which the Company can exercise at the end of the initial lease term: (i) renewal of the lease for a defined number of years at the then fair market rental rate or at a slight discount to the fair market rental rate; (ii) purchase of the property at the then fair market value; or (iii) right of first offer to lease additional space that becomes available. A summary of gross and net lease commitments as of December 31,
Affiliate Commitments. The Company is obligated to make payments, which represent TAC, to its Affiliates. As of December 31, 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 December 31, Intellectual Property Rights. The Company is committed to make certain payments under various intellectual property arrangements of up to Construction Liabilities. The Company capitalizes construction in progress and records a corresponding long-term liability for build-to-suit lease agreements where the Company is considered as the owner during the construction period for accounting purposes. These liabilities relate to one corporate building in Los Angeles, California. The estimated timing and amounts of payments for rent associated with the build-to-suit lease arrangement that has not been placed in service totaled $20 million, of which $1 million will be payable in 2016, $2 million will be payable in 2017, $2 million will be payable in 2018, $2 million will be payable in 2019, $2 million will be payable in 2020, and $11 million will be payable thereafter. Note Payable Obligations. The Company is obligated to make payments for notes payable related to two buildings in Sunnyvale, California. The estimated timing and amounts of payments totaled $56 million, of which $4 million will be payable in 2016, $5 million will be payable in 2017, $5 million will be payable in 2018, $5 million will be payable in 2019, $5 million will be payable in 2020, and $32 million will be payable thereafter. Standby Letters of Credit. As of December 31, 2015, the Company had outstanding potential obligations relating to standby letters of credit of $42 million. Standby letters of credit are financial guarantees provided by third parties for ongoing operating liabilities such as leases, utility bills, taxes, and insurance. If any letter of credit is drawn upon by a beneficiary, the Company is obligated to reimburse the provider of the guarantee. The standby letters of credit generally renew annually. 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 consolidated financial statements. As of December 31,
Legal Contingencies
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 captionIn 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 captionIn 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. 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 captionIn re Yahoo! Inc. Securities Litigationand appointed the Pension Trust Fund for Operating Engineers as lead plaintiff. In a consolidated amended complaint filed December 15, 2011, the lead plaintiff On against Mr. de Castro. The plaintiff seeks to recoup the severance paid to Mr. de Castro, On January 27, 2016, a stockholder action 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 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. TCPA Litigation Concerning Yahoo Messenger. On March 21, 2014 and April 16, 2014, civil complaints were filed in the United States District Court for the Northern District of Illinois by plaintiffs Rachel Johnson and Zenaida Calderin, respectively, against Yahoo, alleging that the process by which Yahoo Messenger sends a notification SMS message in addition to delivering a user’s instant message to a recipient’s cellular telephone constitutes a violation of the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. § 227. The penalty per violation ranges from $500 to $1,500. The complaints, which are consolidated, seek statutory damages for a purported class of plaintiffs. In January 2016, the District Court denied class certification treatment proposed by plaintiff Calderin, but certified a class proposed by plaintiff Johnson comprising more than 300,000 potential members. The Company sought permission from the United States Court of Appeals for the Seventh Circuit to appeal the District Court’s certification order, which the Court of Appeals denied. No decision has been made on the merits of plaintiffs’ claims, which the Company is defending vigorously. The Company is also defending related litigation in the United States District Court for the Southern District of California, which denied class certification in September 2015. 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 remaining Mexico Note 13 Stockholders’ Equity
The Board has the authority to issue up to 10 million shares of preferred stock and to determine the price, rights, preferences, privileges, and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. Stock Repurchases. In $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 December 31, 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 year ended December 31, 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. In September and October 2014, the Company entered into two unrelated accelerated share repurchase agreements (“ASR”) with a financial institution to repurchase shares of its common stock. Under the September 2014 agreement, the Company prepaid $1.1 billion and approximately 15 million shares were initially delivered to the Company on September 30, 2014 and are included in treasury stock. Final settlement occurred on October 17, 2014, resulting in a total of approximately 23.5 million shares, inclusive of shares initially delivered, repurchased for $933 million, all of which are included in treasury stock. The Company received a return of cash for the remaining amount not settled in shares of $167 million. Under the October 2014 agreement, the Company prepaid the maximum repurchase amount of $1.0 billion and approximately 15 million shares were initially delivered on October 30, 2014. Final settlement occurred on December 9, 2014, resulting in a total of approximately 16 million shares, inclusive of shares initially delivered, repurchased for $800 million, all of which are included in treasury stock. The Company received a return of cash for the remaining amount not settled in shares of $200 million. Both ASR agreements were entered into pursuant to the Company’s existing share repurchase program. The Company accounted for the September 2014 ASR as two separate transactions: (i) approximately 15 million shares of common stock initially delivered to the Company, and $600 million was accounted for as a treasury stock transaction and (ii) the remaining $500 million unsettled portion of the contract was determined to be a forward contract indexed to the Company’s own common stock. The initial delivery of approximately 15 million shares resulted in an immediate reduction, on the delivery date, of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share. The Company has determined that the forward contract, indexed to its common stock, met all of the applicable criteria for equity classification. The Company recorded $600 million as treasury stock and recorded $500 million, the implied value of the forward contract, in additional paid-in capital on the consolidated balance sheets as of September 30, 2014. As the remainder of the shares were delivered to the Company, in the fourth quarter of 2014, the forward contract was reclassified from additional paid-in capital to treasury stock for the value of the additional shares received, and additional paid-in capital was debited for the cash returned for the remaining amount of shares not settled. During the year ended December 31, 2014, in addition to the repurchase under the ASR’s, the Company repurchased approximately 62 million shares of its common stock under its stock repurchase program at an average price of $39.30 per share for a total of approximately $2.4 billion. During the year ended December 31, 2013, the Company repurchased approximately 129 million shares of its common stock under a previous stock repurchase program approved by the Company’s Board in May 2012 primarily with cash as well as borrowings of $150 million under the Company’s unsecured revolving credit facility that have been repaid.
Retirements.During the year ended December 31, 2013, the Company retired 198 million shares, resulting in reductions of $198,000 in common stock, $1.6 billion in additional paid-in capital, and $2.9 billion in retained earnings. During the year ended December 31, 2014, the Company retired 94 million shares, resulting in reductions of $94,000 in common stock, $795 million in additional paid-in capital, and $2.9 billion in retained earnings. During the year ended December 31, 2015, the Company did not retire any of its remaining treasury stock. Note 14 Employee Benefits
Benefit Plans. The Company maintains the Yahoo! Inc. 401(k) Plan (the “401(k) Plan”) for its full-time employees in the U.S. The 401(k) Plan allows employees of the Company to contribute up to the Internal Revenue Code prescribed maximum amount. Employees may elect to contribute from 1 to contributions at a rate of 25 percent, up to the IRS prescribed amount. Both employee and employer contributions vest immediately upon contribution. During Stock Plans. The Stock Plan provides for the issuance of stock-based awards to employees, including executive officers, and consultants. The Stock Plan permits the granting of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, and dividend equivalents. Options granted under the Stock Plan before May 19, 2005 generally expire 10 years after the grant date, and options granted after May 19, 2005 generally expire seven years after the grant date. Options generally become exercisable over a four-year period based on continued employment and vest either monthly, quarterly, semi-annually, or annually. The Stock Plan permits the granting of restricted stock and restricted stock units (collectively referred to as “restricted stock awards”). The restricted stock award vesting criteria are generally the passing of time, meeting certain performance-based objectives, or a combination of both, and continued employment through the vesting period (which varies but generally does not exceed four years). Restricted stock award grants are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock. Such value is recognized as an expense over the corresponding service period. The Stock Plan provides for the issuance of a maximum of 784 million shares of which The Directors’ Plan provides for the grant of nonqualified stock options and restricted stock units to non-employee directors of the Company. The Directors’ Plan provides for the issuance of up to 9 million shares of the Company’s common stock, of which approximately 5 million were still available for award grant purposes as of December 31, Options granted under the Directors’ Plan before May 25, 2006 generally become exercisable, based on continued service as a director, for initial grants to new directors, in equal monthly installments over four years, and for annual grants, with 25 percent of such options vesting on the one year anniversary of the date of grant and the remaining options vesting in equal monthly installments over the remaining 36-month period thereafter. Such options generally expire seven to 10 years after the grant date. Options granted on or after May 25, 2006 become exercisable, based on continued service as a director, in equal quarterly installments over one year. Such options generally expire seven years after the grant date. Restricted stock units granted under the Directors’ Plan generally vest in equal quarterly installments over a one-year period following the date of grant and, once vested, are generally payable in an equal number of shares of the Company’s common stock on the earlier of the end of the one-year vesting period or the date the director ceases to be a member of the Board (subject to any deferral election that may be made by the director). Non-employee directors are also permitted to elect an award of restricted stock units or a stock option under the Directors’ Plan in lieu of a cash payment of their quarterly Board retainer and any cash fees for serving on committees of the Board. Such stock options or restricted stock unit awards granted in lieu of cash fees are fully vested on the grant date. From time to time, the Company also assumes stock-based awards in connection with corporate mergers and acquisitions, which awards become payable in shares of the Company’s common stock. Employee Stock Purchase Plan. During the first quarter of 2015, the Company discontinued the offering of the Employee Stock Purchase Plan to its employees. The Employee Stock Purchase Plan
Stock Options. The Company’s Stock Plan, the Directors’ Plan,
The weighted average grant date fair values of all options granted and assumed in the years ended December 31, The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock on December 31, The total intrinsic values of options exercised in the years ended December 31, As of December 31, Cash received from option exercises and purchases of shares under the Employee Stock Purchase Plan for the year ended December 31, The total net tax benefit attributable to stock options exercised in the year ended December 31, The fair value of option grants, including assumed options from acquisitions, is determined using the Black-Scholes option pricing model with the following weighted average assumptions:
Restricted Stock and Restricted Stock Units. Restricted stock and restricted stock unit activity under the Plans for the year ended December 31,
As of December 31, The total fair value of restricted stock awards vested during the years ended December 31, During the year ended December 31, Total payments for the employees’ tax obligations to the relevant taxing authorities were In Performance-Based Executive Incentive Equity Awards CEO 2012 Annual Equity Awards.Marissa A. Mayer, the Company’s Chief Executive Officer, received an equity award for 2012 that After 2012, Ms. Mayer is eligible to receive annual equity grants when such grants are made to senior executives. Subject to the discretion of the Compensation and Leadership Development Committee of the Board of Directors (the “Compensation Committee”), the Company contemplates that the target value of such awards will not be less than the target value of her 2012 annual grant. CEO One-Time Retention restricted stock units on July 26, 2012 and vests over five years. The remaining portion of this equity award (valued at $15 million per the offer letter) was granted in November 2012 as a performance-based stock option that vests over the four and a half years after July 26, 2012, subject to satisfaction of performance criteria. The number of performance options granted in November 2012 was determined based on the grant date fair value as of July 26, 2012. See below for additional discussion of the performance-based stock options. CEO Make-Whole Restricted Stock 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 Performance RSUs. In Note 15 Restructuring Charges, Net
Restructuring charges, net consists of employee severance pay and related costs, For the years ended December 31,
Although the Company does not allocate restructuring charges to its segments, the amounts of the restructuring charges relating to each segment are presented below. For the years ended December 31,
The Company has implemented The Company’s restructuring accrual activity for the years ended December 31,
The As of December 31, restructuring accruals were included on the Company’s consolidated balance sheets as follows (in thousands):
As of December 31, restructuring accruals by segment consisted of the following (in thousands):
See Note 20—“Subsequent Events” for additional information. Note 16 Income Taxes
The components of income (loss) before income taxes and earnings in equity interests are as follows (in thousands):
The provision (benefit) for income taxes is composed of the following (in thousands):
The provision (benefit) for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before income taxes and earnings in equity interests as follows (in thousands):
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities are as follows (in thousands):
As of December 31,
On December approximately exercise of employee stock options are not recorded on the Company’s consolidated balance sheets and are accounted for as a credit to additional paid-in capital if and when realized through a reduction in income taxes payable. The income tax receivable as of December 31, 2015 increased from December 31, 2014 primarily due to a loss incurred in 2015 that can be carried back to earlier years for a cash tax refund for U.S. federal income tax purposes. The Company has a valuation allowance of approximately $24 million and $29 million as of December 31, 2014 and 2015 against certain deferred income tax assets that are not more likely than not to be realized in future periods. In evaluating the Company’s ability to realize its deferred income tax assets, the Company considers all available positive and negative evidence, including operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction by jurisdiction basis. The valuation allowance as of December 31, In 2012, the Company made a one-time distribution of foreign earnings resulting in an overall net benefit of $117 million. During 2013, the Company recorded an additional net benefit of $36 million related to this distribution. In 2014, the Company recorded a detriment of $8 million to account for the corresponding adjustments from the IRS on foreign earnings available at the time of the 2012 repatriation. As of December 31, The total amount of gross unrecognized tax benefits was
The remaining balances are recorded on the Company’s consolidated balance sheets as follows (in thousands):
The Company’s gross amount of unrecognized tax benefits as of December 31, On July 27, 2015, the United States Tax Court issued an opinion inAltera Corp. et al. v. Commissioner, which invalidated the 2003 final Treasury rule that requires participants in qualified cost-sharing arrangements to share stock-based compensation costs. Based on the decision of the Tax Court, the Company could be entitled to a future income tax benefit by excluding stock-based compensation costs from its cost sharing with affiliated entities for the period of time that the Company had the cost-sharing structure in place. The IRS has until the first quarter of fiscal 2016 to appeal this Tax Court decision. There is uncertainty related to the IRS response to the Tax Court opinion, the final resolution of this issue, and the potential favorable benefits to the Company. The Company will continue to monitor developments related to this opinion and the potential impact of those developments on its current and prior fiscal years. The Company is in various stages of examination and appeal in connection with 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 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 Note 17 Transactions With Related Parties
Revenue from related parties, excluding Yahoo Japan, See Note 8—“Investments in Equity Interests Accounted for Using the Equity Method of Accounting” for additional information related to transactions involving Yahoo Note 18 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 The following tables present summarized information by segment (in thousands):
See also Note 5—“Goodwill” and Note 15—“Restructuring Charges, Net” for additional information regarding segments. Enterprise Wide Disclosures: The following table presents revenue for groups of similar services (in thousands):
Revenue is attributed to individual countries according to the online property that generated the revenue. No single foreign country accounted for more than 10 percent of the Company’s revenue in Note 19 Search Agreement With Microsoft Corporation
On December 4, 2009, the Company entered into the Search Agreement with On April 15, 2015, the Company and Microsoft entered into the Eleventh Amendment to the Search Agreement (the “Eleventh Amendment”) pursuant to which the
Previously under the Search Agreement, the Company was entitled to receive Share Rate increased to Additionally, pursuant to the Previously under the Search Agreement, Yahoo had sales exclusivity for both the Company’s and Microsoft’s premium advertisers. Pursuant to the Eleventh Amendment to the Search Agreement, this sales exclusivity terminated on July 1, 2015. The Company and Microsoft are transitioning premium advertisers for Microsoft’s paid search services to Microsoft on a market-by-market basis. As of December 31, 2015, such transition was continuing for markets in North America and Europe. The term of the Search Agreement is 10 years from its commencement date, February 23, 2010, subject to earlier termination as provided in the Search Agreement. The Company currently 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
As of December 31,
Note 20 Subsequent Events
The Company estimates that in connection with this action it will incur related pre-tax cash charges of $40 million
The
Schedule II—Valuation and Qualifying Accounts Years Ended December 31,
Selected Quarterly Financial Data (Unaudited)
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.
Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company’s principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective. Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, the Company’s management concluded that its internal control over financial reporting was effective as of December 31, Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s independent registered public accounting firm has issued an attestation report regarding its assessment of the Company’s internal control over financial reporting as of December 31, Changes in Internal Control Over Financial Reporting
There have been no changes in Yahoo’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31,
Not applicable. PART III
Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to Yahoo’s Proxy Statement for its In addition, the Board has adopted a code of ethics, which is posted on the Company’s The Company’s code of ethics applies to the Company’s directors and employees, including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Global Controller, and to contractors of the Company. The code of ethics sets forth the fundamental principles and key policies and procedures that govern the conduct of the Company’s business. The Company’s employees receive training on the code of ethics. We intend to disclose any amendment to, or waiver from, the code of ethics for our directors and executive officers, including our Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer or Global Controller or persons performing similar functions, to the extent disclosure is required by applicable rules of the SEC and NASDAQ Stock Market LLC by posting such information on our
Item 11. Executive Compensation The information required by this item is incorporated by reference to Yahoo’s Proxy Statement for its
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to Yahoo’s Proxy Statement for its
Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to Yahoo’s Proxy Statement for its
Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference to Yahoo’s Proxy Statement for its PART IV
Item 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as part of this report: 1.Consolidated Financial Statements:
The exhibits listed in the Exhibit Index (following the signatures page of this report) are filed with, or incorporated by reference in, this report. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the
Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ken Goldman and Ronald S. Bell, or either of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with Exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
EXHIBIT INDEX The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K (and are numbered in accordance with Item 601 of Regulation S-K). Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately precedes the exhibits.
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