Item 1. Condensed Consolidated Financial Statements (unaudited)
Yahoo! Inc.
Condensed
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
|
|
|
|
(Unaudited, in thousands
except par values)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,631,911
|
|
|
$
|
1,411,308
|
|
Short-term marketable securities
|
|
|
4,225,112
|
|
|
|
5,189,207
|
|
Accounts receivable, net
|
|
|
1,047,504
|
|
|
|
945,659
|
|
Prepaid expenses and other current assets
|
|
|
602,792
|
|
|
|
244,782
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,507,319
|
|
|
|
7,790,956
|
|
Long-term marketable securities
|
|
|
975,961
|
|
|
|
1,170,962
|
|
Property and equipment, net
|
|
|
1,547,323
|
|
|
|
1,273,327
|
|
Goodwill
|
|
|
808,114
|
|
|
|
437,609
|
|
Intangible assets, net
|
|
|
347,269
|
|
|
|
181,998
|
|
Other long-term assets and investments
|
|
|
342,390
|
|
|
|
218,585
|
|
Investment in Alibaba Group
|
|
|
31,172,361
|
|
|
|
40,577,385
|
|
Investments in equity interests
|
|
|
2,503,229
|
|
|
|
3,020,804
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
45,203,966
|
|
|
$
|
54,671,626
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
208,691
|
|
|
$
|
168,148
|
|
Other accrued expenses and current liabilities
|
|
|
934,658
|
|
|
|
984,301
|
|
Deferred revenue
|
|
|
134,031
|
|
|
|
115,991
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,277,380
|
|
|
|
1,268,440
|
|
Convertible notes
|
|
|
1,233,485
|
|
|
|
1,283,002
|
|
Long-term deferred revenue
|
|
|
27,801
|
|
|
|
36,609
|
|
Other long-term liabilities
|
|
|
118,689
|
|
|
|
102,283
|
|
Deferred tax liabilities related to investment in Alibaba Group
|
|
|
12,611,867
|
|
|
|
16,444,038
|
|
Deferred and other long-term tax liabilities
|
|
|
855,324
|
|
|
|
668,098
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
16,124,546
|
|
|
|
19,802,470
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
-
|
|
|
|
-
|
|
Yahoo! Inc. stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 5,000,000 shares authorized; 962,959 shares issued and 945,854 shares outstanding as of
December 31, 2015 and 970,528 shares issued and 953,467 shares outstanding as of September 30, 2016
|
|
|
959
|
|
|
|
967
|
|
Additional paid-in capital
|
|
|
8,807,273
|
|
|
|
9,036,876
|
|
Treasury stock at cost, 17,105 shares as of December 31, 2015 and 17,061 shares as of September 30, 2016
|
|
|
(911,533)
|
|
|
|
(909,508)
|
|
Retained earnings
|
|
|
4,570,807
|
|
|
|
4,192,467
|
|
Accumulated other comprehensive income
|
|
|
16,576,031
|
|
|
|
22,515,470
|
|
|
|
|
|
|
|
|
|
|
Total Yahoo! Inc. stockholders equity
|
|
|
29,043,537
|
|
|
|
34,836,272
|
|
Noncontrolling interests
|
|
|
35,883
|
|
|
|
32,884
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
29,079,420
|
|
|
|
34,869,156
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
45,203,966
|
|
|
$
|
54,671,626
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Yahoo! Inc.
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(Unaudited, in thousands
except per share amounts)
|
|
Revenue
|
|
$
|
1,225,673
|
|
|
$
|
1,305,206
|
|
|
$
|
3,694,908
|
|
|
$
|
3,699,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue traffic acquisition costs
|
|
|
223,229
|
|
|
|
447,537
|
|
|
|
606,598
|
|
|
|
1,141,786
|
|
Cost of revenue other
|
|
|
302,846
|
|
|
|
255,421
|
|
|
|
884,041
|
|
|
|
806,491
|
|
Sales and marketing
|
|
|
274,329
|
|
|
|
212,654
|
|
|
|
823,990
|
|
|
|
674,711
|
|
Product development
|
|
|
272,285
|
|
|
|
243,644
|
|
|
|
905,460
|
|
|
|
801,708
|
|
General and administrative
|
|
|
151,963
|
|
|
|
176,713
|
|
|
|
506,071
|
|
|
|
490,519
|
|
Amortization of intangibles
|
|
|
19,622
|
|
|
|
11,594
|
|
|
|
59,677
|
|
|
|
46,736
|
|
Gain on sale of patents and land
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,100)
|
|
|
|
(121,559)
|
|
Asset impairment charge
|
|
|
41,699
|
|
|
|
-
|
|
|
|
41,699
|
|
|
|
-
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
394,901
|
|
Intangible assets impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,335
|
|
Restructuring charges, net
|
|
|
26,012
|
|
|
|
9,962
|
|
|
|
96,932
|
|
|
|
86,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,311,985
|
|
|
|
1,357,525
|
|
|
|
3,913,368
|
|
|
|
4,409,204
|
|
Loss from operations
|
|
|
(86,312)
|
|
|
|
(52,319)
|
|
|
|
(218,460)
|
|
|
|
(709,209)
|
|
Other expense, net
|
|
|
(23,955)
|
|
|
|
(6,122)
|
|
|
|
(66,759)
|
|
|
|
(38,476)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and earnings in equity interests
|
|
|
(110,267)
|
|
|
|
(58,441)
|
|
|
|
(285,219)
|
|
|
|
(747,685)
|
|
Benefit for income taxes
|
|
|
93,208
|
|
|
|
105,513
|
|
|
|
75,613
|
|
|
|
124,736
|
|
Earnings in equity interests, net of tax
|
|
|
95,195
|
|
|
|
116,228
|
|
|
|
290,726
|
|
|
|
249,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
78,136
|
|
|
|
163,300
|
|
|
|
81,120
|
|
|
|
(373,370)
|
|
Net income attributable to noncontrolling interests
|
|
|
(1,875)
|
|
|
|
(474)
|
|
|
|
(5,215)
|
|
|
|
(2,949)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc.
|
|
$
|
76,261
|
|
|
$
|
162,826
|
|
|
$
|
75,905
|
|
|
$
|
(376,319)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc. common stockholders per share basic
|
|
$
|
0.08
|
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
|
$
|
(0.40)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc. common stockholders per share diluted
|
|
$
|
0.08
|
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
|
$
|
(0.40)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
940,822
|
|
|
|
951,421
|
|
|
|
937,713
|
|
|
|
948,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
946,934
|
|
|
|
957,304
|
|
|
|
944,160
|
|
|
|
948,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense by function:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue other
|
|
$
|
9,748
|
|
|
$
|
9,440
|
|
|
$
|
22,957
|
|
|
$
|
25,876
|
|
Sales and marketing
|
|
|
33,317
|
|
|
|
36,428
|
|
|
|
111,416
|
|
|
|
108,259
|
|
Product development
|
|
|
46,461
|
|
|
|
54,720
|
|
|
|
145,444
|
|
|
|
161,182
|
|
General and administrative
|
|
|
20,900
|
|
|
|
28,304
|
|
|
|
71,435
|
|
|
|
73,946
|
|
Restructuring charges, net
|
|
|
-
|
|
|
|
-
|
|
|
|
2,705
|
|
|
|
7,374
|
|
|
|
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
Yahoo! Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
Net income (loss)
|
|
$
|
78,136
|
|
|
$
|
163,300
|
|
|
$
|
81,120
|
|
|
$
|
(373,370)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on available-for-sale securities, net of taxes of $3,646,362 and $(4,099,170) for the three months ended
September 30, 2015 and 2016, respectively, and $7,034,475 and $(3,812,738) for the nine months ended September 30, 2015 and 2016, respectively
|
|
|
(5,299,758)
|
|
|
|
5,960,520
|
|
|
|
(10,225,842)
|
|
|
|
5,555,697
|
|
Reclassification adjustment for realized losses (gains) on available-for-sale securities included in net income, net of taxes of
$(44) and $(6) for the three months ended September 30, 2015 and 2016, respectively, and $(45) and $(113) for the nine months ended September 30, 2015 and 2016, respectively
|
|
|
72
|
|
|
|
11
|
|
|
|
74
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized (losses) gains on available-for-sale securities, net of tax
|
|
|
(5,299,686)
|
|
|
|
5,960,531
|
|
|
|
(10,225,768)
|
|
|
|
5,555,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (CTA):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign CTA (losses) gains, net of taxes of $607 and $106 for the three months ended September 30, 2015 and 2016,
respectively, and $1,061 and $(273) for the nine months ended September 30, 2015 and 2016, respectively
|
|
|
(126,774)
|
|
|
|
291,871
|
|
|
|
(359,876)
|
|
|
|
459,805
|
|
Net investment hedge CTA (losses) gains, net of taxes of $8,252 and $(217) for the three months ended September 30, 2015 and
2016, respectively, and $(2,492) and $30,036 for the nine months ended September 30, 2015 and 2016, respectively
|
|
|
(13,855)
|
|
|
|
393
|
|
|
|
4,183
|
|
|
|
(54,482)
|
|
Reclassification adjustment for realized (gains) losses included in CTA, net of taxes of $0 for both the three and nine months
ended September 30, 2016, respectively
|
|
|
-
|
|
|
|
(2,863)
|
|
|
|
-
|
|
|
|
(19,363)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign CTA (losses) gains, net of tax
|
|
|
(140,629)
|
|
|
|
289,401
|
|
|
|
(355,693)
|
|
|
|
385,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on cash flow hedges, net of taxes of $362 and $163 for the three months ended September 30, 2015
and 2016, respectively, and $(327) and $3,138 for the nine months ended September 30, 2015 and 2016, respectively
|
|
|
(1,440)
|
|
|
|
(296)
|
|
|
|
(6,721)
|
|
|
|
(5,694)
|
|
Reclassification adjustment for realized losses (gains) on cash flow hedges included in net income, net of taxes of $274 and
$(1,013) for the three months ended September 30, 2015 and 2016, respectively, and $992 and $(1,802) for the nine months ended September 30, 2015 and 2016, respectively
|
|
|
869
|
|
|
|
1,838
|
|
|
|
3,007
|
|
|
|
3,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized (losses) gains on cash flow hedges, net of tax
|
|
|
(571)
|
|
|
|
1,542
|
|
|
|
(3,714)
|
|
|
|
(2,424)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(5,440,886)
|
|
|
|
6,251,474
|
|
|
|
(10,585,175)
|
|
|
|
5,939,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
(5,362,750)
|
|
|
|
6,414,774
|
|
|
|
(10,504,055)
|
|
|
|
5,566,069
|
|
Less: comprehensive income attributable to noncontrolling interests
|
|
|
(1,875)
|
|
|
|
(474)
|
|
|
|
(5,215)
|
|
|
|
(2,949)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to Yahoo! Inc.
|
|
$
|
(5,364,625)
|
|
|
$
|
6,414,300
|
|
|
$
|
(10,509,270)
|
|
|
$
|
5,563,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Yahoo! Inc.
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
81,120
|
|
|
$
|
(373,370)
|
|
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
355,540
|
|
|
|
308,324
|
|
Amortization of intangible assets
|
|
|
102,090
|
|
|
|
80,036
|
|
Accretion of convertible notes discount
|
|
|
46,984
|
|
|
|
49,517
|
|
Stock-based compensation expense
|
|
|
353,957
|
|
|
|
376,637
|
|
Non-cash asset impairment charge
|
|
|
41,699
|
|
|
|
-
|
|
Non-cash goodwill impairment charge
|
|
|
-
|
|
|
|
394,901
|
|
Non-cash intangible assets impairment charge
|
|
|
-
|
|
|
|
87,335
|
|
Non-cash restructuring (reversals) charges
|
|
|
(31)
|
|
|
|
1,227
|
|
Non-cash accretion on marketable debt securities
|
|
|
38,328
|
|
|
|
23,060
|
|
Foreign exchange loss (gain)
|
|
|
10,337
|
|
|
|
(46,046)
|
|
Gain on sale of assets and other
|
|
|
(3,058)
|
|
|
|
(2,719)
|
|
Gain on sale of patents and land
|
|
|
(11,100)
|
|
|
|
(121,559)
|
|
Loss on Hortonworks warrants
|
|
|
19,241
|
|
|
|
49,930
|
|
Earnings in equity interests
|
|
|
(290,726)
|
|
|
|
(249,579)
|
|
Tax benefits (detriments) from stock-based awards
|
|
|
22,990
|
|
|
|
(8,598)
|
|
Excess tax benefits from stock-based awards
|
|
|
(33,359)
|
|
|
|
(1,743)
|
|
Deferred income taxes
|
|
|
(52,605)
|
|
|
|
(175,984)
|
|
Dividends received from equity investee
|
|
|
142,045
|
|
|
|
156,968
|
|
Changes in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
34,303
|
|
|
|
106,261
|
|
Prepaid expenses and other
|
|
|
(64,112)
|
|
|
|
346,103
|
|
Accounts payable
|
|
|
(29,642)
|
|
|
|
(10,083)
|
|
Accrued expenses and other liabilities
|
|
|
194,569
|
|
|
|
12,974
|
|
Incomes taxes payable related to sale of Alibaba Group ADSs
|
|
|
(3,282,293)
|
|
|
|
-
|
|
Deferred revenue
|
|
|
(191,989)
|
|
|
|
(9,988)
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,515,712)
|
|
|
|
993,604
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(428,345)
|
|
|
|
(197,508)
|
|
Proceeds from sales of property and equipment
|
|
|
11,069
|
|
|
|
249,089
|
|
Purchases of marketable securities
|
|
|
(3,472,587)
|
|
|
|
(5,680,284)
|
|
Proceeds from sales of marketable securities
|
|
|
566,321
|
|
|
|
281,393
|
|
Proceeds from maturities of marketable securities
|
|
|
4,889,437
|
|
|
|
4,223,735
|
|
Acquisitions, net of cash acquired
|
|
|
(174,630)
|
|
|
|
-
|
|
Proceeds from sales of patents
|
|
|
29,100
|
|
|
|
1,500
|
|
Purchases of intangible assets
|
|
|
(4,733)
|
|
|
|
(2,001)
|
|
Proceeds from settlement of derivative hedge contracts
|
|
|
120,682
|
|
|
|
39,007
|
|
Payments for settlement of derivative hedge contracts
|
|
|
(6,594)
|
|
|
|
(7,012)
|
|
Payments for equity investments in privately held companies
|
|
|
-
|
|
|
|
(9)
|
|
Other investing activities, net
|
|
|
(203)
|
|
|
|
(127)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,529,517
|
|
|
|
(1,092,217)
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
7
Yahoo! Inc.
Condensed Consolidated Statements of Cash Flows (continued)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
52,297
|
|
|
|
15,512
|
|
Repurchases of common stock
|
|
|
(203,771)
|
|
|
|
-
|
|
Excess tax benefits from stock-based awards
|
|
|
33,359
|
|
|
|
1,743
|
|
Tax withholdings related to net share settlements of restricted stock units
|
|
|
(216,061)
|
|
|
|
(157,442)
|
|
Distributions to noncontrolling interests
|
|
|
(15,847)
|
|
|
|
(5,948)
|
|
Other financing activities, net
|
|
|
(13,554)
|
|
|
|
(10,414)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(363,577)
|
|
|
|
(156,549)
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(33,166)
|
|
|
|
34,559
|
|
Net change in cash and cash equivalents
|
|
|
(1,382,938)
|
|
|
|
(220,603)
|
|
Cash and cash equivalents at beginning of period
|
|
|
2,664,098
|
|
|
|
1,631,911
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,281,160
|
|
|
$
|
1,411,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change in non-cash acquisitions of property and equipment
|
|
$
|
38,761
|
|
|
$
|
(3,570)
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Yahoo! Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note
1 The Company and Summary of Significant Accounting Policies
The Company
.
Yahoo! Inc., together with its consolidated subsidiaries (Yahoo or the Company), is a guide to
digital information discovery, focused on informing, connecting, and entertaining users through its search, communications, and digital content products. By creating highly personalized experiences, the Company helps users discover the information
that matters most to them around the world on mobile or desktop. The Company creates value for advertisers with a streamlined, simple advertising technology stack that leverages Yahoos data, content, and technology to connect
advertisers with their target audiences. Advertisers can build their businesses through advertising to targeted audiences on the Companys online properties and services (Yahoo Properties) and a distribution network of third party
entities (Affiliates) who integrate the Companys advertising offerings into their websites or other offerings (Affiliate sites). The Companys revenue is generated principally from search and display advertising.
The Company manages and measures its business geographically, principally in the Americas, EMEA (Europe, Middle East, and Africa) and Asia Pacific.
Basis of Presentation
.
The condensed consolidated financial statements include the accounts of Yahoo! Inc. and its
majority-owned or otherwise controlled subsidiaries. All intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or
otherwise control, are accounted for using the equity method and are included as investments in equity interests on the condensed consolidated balance sheets. The Company has included the results of operations of acquired companies from the date of
the acquisition.
The Company revised the consolidated statement of cash flows for the nine months ended September 30, 2015 to correct for a
non-cash acquisition of property and equipment resulting in an increase in cash used in operating activities of $23 million and a corresponding increase in net cash provided by investing activities. Certain other prior period amounts have been
reclassified to conform to the current period presentation.
The accompanying unaudited condensed consolidated interim financial statements reflect
all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full year or for any future periods.
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles (GAAP) in the United States (U.S.) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses
and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue, the useful lives of long-lived assets including property and equipment and intangible
assets, investment fair values, 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.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related
notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2015. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been
condensed or omitted. The condensed consolidated balance sheet as of December 31, 2015 was derived from the Companys audited financial statements for the year ended December 31, 2015, but does not include all disclosures required by
U.S. GAAP. However, the Company believes the disclosures are adequate to make the information presented not misleading.
Revenue
Recognition Search Revenue and Cost of Revenue TAC.
On April 15, 2015, the Company and Microsoft Corporation (Microsoft) entered into the Eleventh Amendment (the Eleventh Amendment) to the
Search and Advertising Services and Sales Agreement (Microsoft Search Agreement). Pursuant to the Eleventh Amendment, the Company completed the transition of its exclusive sales responsibilities to Microsoft for Microsofts paid
search services to premium advertisers in the United States, Canada, and Europe on April 1, 2016 and in its remaining markets (other than Taiwan and Hong Kong) on June 1, 2016. Following the transition in each respective market, Yahoo is
considered the principal in the sale of traffic to Microsoft and other customers because Yahoo is the primary obligor in its arrangements with Microsoft and has discretion in how search queries from Affiliate sites will be fulfilled and monetized.
As a result, amounts paid to Affiliates under the Microsoft Search Agreement in the transitioned markets are recorded as cost of revenue TAC rather than as a reduction to revenue, resulting in revenue from the Microsoft Search Agreement being
reported on a gross rather than net basis. Effective June 3, 2016, the Company and Microsoft further amended the Microsoft Search Agreement to provide that sales responsibilities for premium advertisers in Taiwan and Hong Kong will not be
transitioned. TAC in those markets will continue to be reported as a reduction to revenue.
9
The table below presents how the Company accounted for amounts paid to Affiliates related to the Microsoft
Search Agreement in transitioned markets, and shows the impact of the implementation of the Eleventh Amendment in transitioned markets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Cost of revenue TAC in transitioned markets
(*)
|
|
$
|
-
|
|
|
$
|
257,601
|
|
|
$
|
-
|
|
|
$
|
509,932
|
|
Reduction to revenue in transitioned markets
|
|
$
|
299,710
|
|
|
$
|
-
|
|
|
$
|
987,601
|
|
|
$
|
273,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
For the three months ended September 30, 2016, cost of revenueTAC included $222 million in the Americas
segment, $34 million in the EMEA segment and $2 million in the Asia Pacific segment. For the nine months ended September 30, 2016, cost of revenueTAC included $440 million in the Americas segment, $67 million in the EMEA segment and $3
million in the Asia Pacific segment.
|
See Note 17Microsoft Search Agreement for a description of the Search Agreement with
Microsoft.
Prior to the Eleventh Amendment, the Company was entitled to receive a percentage of the revenue (the Revenue Share Rate)
generated from Microsofts services on Yahoo Properties and on Affiliate sites after deduction of the Affiliate sites share of revenue and certain Microsoft costs. The Revenue Share Rate was 88 percent for the first five years of the
Microsoft Search Agreement and then increased to 90 percent on February 23, 2015. Pursuant to the Eleventh Amendment, the Revenue Share Rate increased to 93 percent, but Microsoft now receives its 7 percent revenue share before deduction of the
Affiliate sites share of revenue. The Company is responsible for paying the Affiliate for the Affiliate sites share of revenue.
Search
revenue is generated from mobile and desktop clicks on text-based links to advertisers websites that appear primarily on search results pages (search advertising). 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 Microsoft Search Agreement, the Company agreed to request
paid search results from Microsoft for 51 percent of search queries originating from desktop computers accessing Yahoo Properties and Affiliate sites (the Volume Commitment). There is no such Volume Commitment for traffic generated on
mobile devices.
The Company recognizes search revenue generated from mobile and desktop ads served through Yahoo Gemini (Yahoos marketplace
for search and native advertising) to Yahoo Properties and Affiliate sites. The Company is considered the primary obligor to the advertisers who are the customers of the search advertising service. Accordingly, the search revenue generated from
mobile and desktop ads served through Yahoo Gemini that involve traffic supplied by Affiliates is reported gross of the traffic acquisition costs (TAC) paid to Affiliates (reported as cost of revenueTAC) as the Company performs the
search service for advertisers.
In October 2015, Yahoo reached an agreement with Google that provides Yahoo with additional flexibility to choose
among suppliers of search results and ads. Googles offerings complement the search services provided by Microsoft and Yahoo Gemini. The Company also generates search revenue from a revenue sharing arrangement with Yahoo Japan for search
technology and services and records the related revenue as reported.
TAC consists of payments made to Affiliates and payments made to companies that
direct consumer and business traffic to Yahoo Properties. TAC is either recorded as a reduction to revenue or as cost of revenueTAC. TAC related to the Microsoft Search Agreement was recorded as a reduction to revenue for reporting periods
through March 31, 2016. Beginning in the reporting period ended June 30, 2016, TAC related to the Microsoft Search Agreement is recorded as cost of revenueTAC in markets that have completed the transition of exclusive sales
responsibilities to Microsoft for paid search services to premium advertisers pursuant to the Eleventh Amendment as described above.
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 programs 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 three and nine months ended September 30, 2015, the Company recorded an asset impairment charge of $14 million related to originally developed content.
10
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 three and nine months ended September 30, 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.
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 August 2015, the FASB issued ASU 2015-14, which defers by one
year the effective date of ASU 2014-09. Accordingly, this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15,
2016. In March 2016, the FASB issued ASU 2016-08 Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which finalizes its amendments to the guidance in the new revenue standard on assessing whether an entity is a
principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued ASU 2016-10 Identifying Performance Obligations and Licensing which
finalizes its amendments to the guidance in the new revenue standard regarding the identification of performance obligations and accounting for the license of intellectual property. In May 2016, the FASB issued ASU 2016-12 Narrow-Scope
Improvements and Practical Expedients which finalizes its amendments to the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition. The amendments are intended to make the
guidance more operable and lead to more consistent application. The amendments have the same effective date and transition requirements as the new revenue recognition standard. The Company plans to adopt this guidance on January 1, 2018. The
Company is currently evaluating the effects, if any, that the adoption of this guidance will have on the Companys financial position, results of operations, and cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going
Concern that requires management to evaluate whether there are conditions and events that raise substantial doubt about the Companys ability to continue as a going concern within one year after the financial statements are issued on both
an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Companys ability to continue as a going concern.
ASU 2014-15 becomes effective for annual periods beginning after December 15, 2016 and for interim reporting periods thereafter. The Company does not expect the adoption of this ASU to have a material impact on the Companys disclosures in
the footnotes to its consolidated financial statements.
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 (loss) 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 (loss) as the Companys marketable equity securities, primarily the Companys investments in Alibaba Group Holding Limited (Alibaba Group) and Hortonworks Inc.
(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 Companys consolidated financial position, results of operations and cash flows and anticipates the new guidance will significantly impact its consolidated financial statements given
the Company has a significant number of leases.
In March 2016, the FASB issued ASU 2016-06, Contingent put and call options in debt
instruments, a consensus of the FASBs Emerging Issues Task Force, which simplifies the embedded derivative analysis for debt instruments containing contingent call or put options. The new guidance clarifies that an exercise contingency
does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. A contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as
a derivative instrument without regard to the nature of the exercise contingency. The ASU is effective for public companies for fiscal years beginning after December 15, 2016, 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 new guidance is required to be applied on a modified retrospective basis to all existing and future debt instruments. An entity will be able to elect the
fair value option at transition for the entire debt instrument, including its embedded features, but will not be able to unwind a previously-elected fair value option. The Company is currently evaluating the effects, if any, that the adoption of
this guidance will have on the Companys consolidated financial position, results of operations and cash flows.
11
In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of
Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment in order to reduce recognition and presentation
complexity in financial reporting. Instead, the new guidance requires equity method of accounting to be applied prospectively from the date significant influence is obtained. The ASU is effective for public companies for fiscal years beginning after
December 15, 2016, 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 new guidance is required to be applied prospectively for
investments that qualify for the equity method of accounting after the effective date. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on the Companys consolidated financial position,
results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment
Accounting as part of its simplification initiative, which involves several aspects of accounting for share-based payment transactions, including the income tax effects, statutory withholding requirements, forfeitures, and classification on
the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial
statements that have not been issued. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating
the effects, if any, that the adoption of this guidance will have on the Companys consolidated financial position, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses, which introduces new guidance for credit losses on
instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt
securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an
available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is
effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on the Companys consolidated financial position, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASBs Emerging Issues Task Force.
The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a
retrospective transition method. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on the Companys consolidated cash flows.
In October 2016, FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory which amends the accounting for
income taxes. The new guidance requires the recognition of the income tax consequences of an intra-entity asset transfer, other than transfers of inventory, when the transfer occurs. For intra-entity transfers of inventory, the income tax
effects will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The new guidance is required to be applied on
a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have
on the Companys consolidated financial position, results of operations and cash flows.
Note 2 Marketable Securities,
Investments and Fair Value Disclosures
The
following tables summarize the available-for-sale securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Cost
Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
|
Government and agency securities
|
|
$
|
616,501
|
|
|
$
|
24
|
|
|
$
|
(635)
|
|
|
$
|
615,890
|
|
Corporate debt securities, commercial paper, time deposits, and bank certificates of deposit
|
|
|
4,589,799
|
|
|
|
292
|
|
|
|
(4,908)
|
|
|
|
4,585,183
|
|
Alibaba Group equity securities
|
|
|
2,713,483
|
|
|
|
28,458,878
|
|
|
|
-
|
|
|
|
31,172,361
|
|
Hortonworks equity securities
|
|
|
26,246
|
|
|
|
57,977
|
|
|
|
-
|
|
|
|
84,223
|
|
Other corporate equity securities
|
|
|
298
|
|
|
|
-
|
|
|
|
(101)
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable securities
|
|
$
|
7,946,327
|
|
|
$
|
28,517,171
|
|
|
$
|
(5,644)
|
|
|
$
|
36,457,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Cost
Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
|
Government and agency securities
|
|
$
|
685,888
|
|
|
$
|
310
|
|
|
$
|
(191)
|
|
|
$
|
686,007
|
|
Corporate debt securities, commercial paper, time deposits, and bank certificates of deposit
|
|
|
5,673,306
|
|
|
|
2,472
|
|
|
|
(1,616)
|
|
|
|
5,674,162
|
|
Alibaba Group equity securities
|
|
|
2,713,484
|
|
|
|
37,863,901
|
|
|
|
-
|
|
|
|
40,577,385
|
|
Hortonworks equity securities
|
|
|
26,246
|
|
|
|
5,867
|
|
|
|
-
|
|
|
|
32,113
|
|
Other corporate equity securities
|
|
|
8,267
|
|
|
|
74
|
|
|
|
(1,380)
|
|
|
|
6,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable securities
|
|
$
|
9,107,191
|
|
|
$
|
37,872,624
|
|
|
$
|
(3,187)
|
|
|
$
|
46,976,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Short-term marketable securities
|
|
$
|
4,225,112
|
|
|
$
|
5,189,207
|
|
Long-term marketable securities
|
|
|
975,961
|
|
|
|
1,170,962
|
|
Investment in Alibaba Group
|
|
|
31,172,361
|
|
|
|
40,577,385
|
|
Other long-term assets and investments
|
|
|
84,420
|
|
|
|
39,074
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,457,854
|
|
|
$
|
46,976,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term, highly liquid investments of $667 million and $644 million as of December 31, 2015 and
September 30, 2016, respectively, included in cash and cash equivalents on the condensed consolidated balance sheets are not included in the table above as the gross unrealized gains and losses were immaterial as the carrying value approximates
fair value because of the short maturity of those instruments. Realized gains and losses from sales of available-for-sale marketable debt securities were not material for both the three and nine months ended September 30, 2015 and 2016.
The remaining contractual maturities of available-for-sale marketable debt securities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
|
|
Due within one year
|
|
$
|
4,225,112
|
|
|
$
|
5,189,207
|
|
Due after one year through five years
|
|
|
975,961
|
|
|
|
1,170,962
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable debt securities
|
|
$
|
5,201,073
|
|
|
$
|
6,360,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show all available-for-sale marketable debt securities in an unrealized loss position for which an
other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
Government and agency securities
|
|
$
|
552,041
|
|
|
$
|
(635)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
552,041
|
|
|
$
|
(635)
|
|
Corporate debt securities, commercial paper, and bank certificates of deposit
|
|
|
2,415,347
|
|
|
|
(4,763)
|
|
|
|
99,214
|
|
|
|
(145)
|
|
|
|
2,514,561
|
|
|
|
(4,908)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable debt securities
|
|
$
|
2,967,388
|
|
|
$
|
(5,398)
|
|
|
$
|
99,214
|
|
|
$
|
(145)
|
|
|
$
|
3,066,602
|
|
|
$
|
(5,543)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
Government and agency securities
|
|
$
|
197,080
|
|
|
$
|
(191)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
197,080
|
|
|
$
|
(191)
|
|
Corporate debt securities, commercial paper, and bank certificates of deposit
|
|
|
1,570,989
|
|
|
|
(1,586)
|
|
|
|
56,522
|
|
|
|
(30)
|
|
|
|
1,627,511
|
|
|
|
(1,616)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable debt securities
|
|
$
|
1,768,069
|
|
|
$
|
(1,777)
|
|
|
$
|
56,522
|
|
|
$
|
(30)
|
|
|
$
|
1,824,591
|
|
|
$
|
(1,807)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment portfolio includes equity securities of Alibaba Group and Hortonworks, as well as liquid
high-quality fixed income debt securities including government, agency and corporate debt, money market funds, commercial paper, certificates of deposit and time deposits held with financial institutions. The fair value of any debt or equity
security will vary over time and is subject to a variety of market risks including: macro-economic, regulatory, industry, company performance, and systemic risks of the equity markets overall. Consequently, the carrying value of the Companys
investment portfolio will vary over time as the value of the various marketable securities changes.
Investments in instruments that earn a fixed
rate or a 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, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Money market funds
(1)
|
|
$
|
386,792
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
386,792
|
|
Available-for-sale marketable debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agency securities
(1)
|
|
|
-
|
|
|
|
635,917
|
|
|
|
-
|
|
|
|
635,917
|
|
Commercial paper and bank certificates of deposit
(1)
|
|
|
-
|
|
|
|
1,844,494
|
|
|
|
-
|
|
|
|
1,844,494
|
|
Corporate debt securities
(1)
|
|
|
-
|
|
|
|
2,918,496
|
|
|
|
-
|
|
|
|
2,918,496
|
|
Time deposits
(1)
|
|
|
-
|
|
|
|
82,703
|
|
|
|
-
|
|
|
|
82,703
|
|
Available-for-sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other corporate equity securities
(2)
|
|
|
197
|
|
|
|
-
|
|
|
|
-
|
|
|
|
197
|
|
Alibaba Group equity securities
|
|
|
31,172,361
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,172,361
|
|
Hortonworks equity securities
(2)
|
|
|
84,223
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84,223
|
|
Hortonworks warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
78,861
|
|
|
|
78,861
|
|
Foreign currency derivative contracts
(3)
|
|
|
-
|
|
|
|
84,319
|
|
|
|
-
|
|
|
|
84,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets at fair value
|
|
$
|
31,643,573
|
|
|
$
|
5,565,929
|
|
|
$
|
78,861
|
|
|
$
|
37,288,363
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
(3)
|
|
|
-
|
|
|
|
(5,661)
|
|
|
|
-
|
|
|
|
(5,661)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets and liabilities at fair value
|
|
$
|
31,643,573
|
|
|
$
|
5,560,268
|
|
|
$
|
78,861
|
|
|
$
|
37,282,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The following table sets forth the financial assets and liabilities, measured at fair value, by level within
the fair value hierarchy as of September 30, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Money market funds
(1)
|
|
$
|
574,351
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
574,351
|
|
Available-for-sale marketable debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agency securities
(1)
|
|
|
-
|
|
|
|
686,007
|
|
|
|
-
|
|
|
|
686,007
|
|
Commercial paper and bank certificates of deposit
(1)
|
|
|
-
|
|
|
|
2,658,311
|
|
|
|
-
|
|
|
|
2,658,311
|
|
Corporate debt securities
(1)
|
|
|
-
|
|
|
|
3,045,334
|
|
|
|
-
|
|
|
|
3,045,334
|
|
Time deposits
(1)
|
|
|
-
|
|
|
|
40,297
|
|
|
|
-
|
|
|
|
40,297
|
|
Available-for-sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other corporate equity securities
(2)
|
|
|
6,961
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,961
|
|
Alibaba Group equity securities
|
|
|
40,577,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,577,385
|
|
Hortonworks equity securities
(2)
|
|
|
32,113
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,113
|
|
Hortonworks warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
28,931
|
|
|
|
28,931
|
|
Foreign currency derivative contracts
(3)
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets at fair value
|
|
$
|
41,190,810
|
|
|
$
|
6,429,996
|
|
|
$
|
28,931
|
|
|
$
|
47,649,737
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
(3)
|
|
|
-
|
|
|
|
(45,657)
|
|
|
|
-
|
|
|
|
(45,657)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets and liabilities at fair value
|
|
$
|
41,190,810
|
|
|
$
|
6,384,339
|
|
|
$
|
28,931
|
|
|
$
|
47,604,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The money market funds, government and agency securities, commercial paper and bank certificates of deposit, corporate
debt securities, and time deposits are classified as part of either cash and cash equivalents or short or long-term marketable securities on the condensed consolidated balance sheets.
|
(2)
|
The Hortonworks equity securities and other corporate equity securities are classified as part of other long-term assets
and investments on the condensed consolidated balance sheets.
|
(3)
|
Foreign currency derivative contracts are classified as part of either current or noncurrent assets or liabilities on the
condensed consolidated balance sheets. The notional amounts of the foreign currency derivative contracts were: $1.5 billion, including contracts designated as net investment hedges of $1.2 billion, as of December 31, 2015; and $0.3 billion,
including contracts designated as net investment hedges of $0.2 billion, as of September 30, 2016.
|
The amount of cash
included in cash and cash equivalents as of December 31, 2015 and September 30, 2016 was $965 million and $767 million, respectively.
The
fair values of the Companys Level 1 financial assets and liabilities are based on quoted prices in active markets for identical assets or liabilities. The fair values of the Companys 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 Companys Level 3 financial asset was obtained using a Black-Scholes model.
Activity between Levels of the Fair Value Hierarchy
During the year ended December 31, 2015 and the nine months ended September 30, 2016, the Company did not make any transfers between Level 1,
Level 2, and Level 3 assets or liabilities.
Hortonworks Warrants
The estimated fair value of the Hortonworks warrants was $79 million and $29 million as of December 31, 2015 and September 30, 2016,
respectively, which is included in other long-term assets and investments on the condensed consolidated balance sheets. During the three and nine months ended September 30, 2015, the Company recorded a loss of $13 million and $19 million,
respectively, and during the three and nine months ended September 30, 2016, the Company recorded losses of $8 million and $50 million, respectively, due to the change in estimated fair value of the Hortonworks warrants during the respective
periods, which was included within other expense, net in the Companys condensed consolidated statements of operations. The estimated fair value of the Hortonworks warrants was determined using a Black-Scholes model.
15
Assets and Liabilities at Fair Value on a Nonrecurring Basis
Convertible Senior Notes.
In 2013, the Company issued $1.4 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 both
December 31, 2015 and September 30, 2016 was $1.3 billion. 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
11Convertible Notes for additional information related to the Notes.
Goodwill and Definite-Lived Intangible Assets.
The inputs used to measure the estimated fair value of goodwill and definite-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 definite-lived intangible assets is discussed in Note 5Goodwill and Note 6Intangible Assets, Net.
Other Investments
. As of both December 31, 2015 and September 30, 2016, the Company held approximately $83 million of investments
in equity securities of privately-held companies that are accounted for using the cost method. These investments are included within other long-term assets and investments on the condensed consolidated balance sheets. Such investments are reviewed
periodically for impairment.
Note 3 Consolidated Financial Statement Details
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
|
|
Unrealized gains on available-for-sale securities, net of tax
|
|
$
|
16,918,539
|
|
|
$
|
22,474,442
|
|
Unrealized gains (losses) on cash flow hedges, net of tax
|
|
|
482
|
|
|
|
(1,942)
|
|
Foreign currency translation, net of tax
|
|
|
(342,990)
|
|
|
|
42,970
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
16,576,031
|
|
|
$
|
22,515,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
Interests
Noncontrolling interests were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
|
Beginning noncontrolling interests
|
|
$
|
43,755
|
|
|
$
|
35,883
|
|
Distributions to noncontrolling interests
|
|
|
(15,847)
|
|
|
|
(5,948)
|
|
Net income attributable to noncontrolling interests
|
|
|
5,215
|
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
|
Ending noncontrolling interests
|
|
$
|
33,123
|
|
|
$
|
32,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
Other Expense, Net
Other expense, net was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Interest and investment income
|
|
$
|
8,010
|
|
|
$
|
17,013
|
|
|
$
|
24,888
|
|
|
$
|
42,534
|
|
Interest expense
|
|
|
(18,411)
|
|
|
|
(18,513)
|
|
|
|
(53,540)
|
|
|
|
(55,238)
|
|
Loss on Hortonworks warrants
|
|
|
(12,782)
|
|
|
|
(8,493)
|
|
|
|
(19,241)
|
|
|
|
(49,930)
|
|
Foreign exchange (loss) gain
|
|
|
(1,490)
|
|
|
|
3,180
|
|
|
|
(21,017)
|
|
|
|
22,006
|
|
Other
|
|
|
718
|
|
|
|
691
|
|
|
|
2,151
|
|
|
|
2,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
$
|
(23,955)
|
|
|
$
|
(6,122)
|
|
|
$
|
(66,759)
|
|
|
$
|
(38,476)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and investment income consists of income earned from cash and cash equivalents in bank accounts and investments
made in marketable debt securities.
Interest expense is related to the Notes and notes payable related to building and capital lease obligations for
data centers.
During the three and nine months ended September 30, 2015, the Company recorded losses of $13 million and $19 million,
respectively, and during the three and nine months ended September 30, 2016, the Company recorded losses of $8 million and $50 million, respectively, due to the change in estimated fair value of the Hortonworks warrants during the respective
periods. See Note 2Marketable Securities, Investments and Fair Value Disclosures for additional information.
Foreign exchange
(loss) gain consists of 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. Additionally, during the three and nine months ended September 30, 2016, the Company reclassified certain unrealized currency translation adjustments from accumulated other comprehensive income and
realized a gain of $3 million and $20 million, respectively, due to the liquidation of foreign subsidiaries.
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 three months ended September 30, 2015 and 2016 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
Affected Line Item in the
Statement of
Income
|
|
|
Reclassified from
Accumulated
Other
Comprehensive
Income
|
|
|
Reclassified from
Accumulated
Other
Comprehensive
Income
|
|
|
|
Realized losses on cash flow hedges, net of tax
|
|
$
|
869
|
|
|
$
|
1,838
|
|
|
Revenue
|
Realized losses on available-for-sale securities, net of tax
|
|
|
72
|
|
|
|
11
|
|
|
Other expense, net
|
Realized (gains) on foreign currency translation adjustments (CTA):
|
|
|
|
|
|
|
|
|
|
|
Liquidation of foreign subsidiary CTA reclassification
|
|
|
-
|
|
|
|
(2,863)
|
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
941
|
|
|
$
|
(1,014)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Reclassifications out of accumulated other comprehensive income for the nine months ended September 30,
2015 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
|
|
|
|
Reclassified from
Accumulated
Other
Comprehensive
Income
|
|
|
Reclassified from
Accumulated
Other
Comprehensive
Income
|
|
|
Affected Line Item in the
Statement of Income
|
|
|
|
Realized losses on cash flow hedges, net of tax
|
|
$
|
3,007
|
|
|
$
|
3,270
|
|
|
|
Revenue
|
|
Realized losses on available-for-sale securities, net of tax
|
|
|
74
|
|
|
|
206
|
|
|
|
Other expense, net
|
|
Realized (gains) losses on foreign currency translation adjustments (CTA):
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation of foreign subsidiary CTA reclassification
|
|
|
-
|
|
|
|
1,110
|
|
|
|
Restructuring charges, net
|
|
Liquidation of foreign subsidiary CTA reclassification
|
|
|
-
|
|
|
|
(20,473)
|
|
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
3,081
|
|
|
$
|
(15,887)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 Acquisitions and Dispositions
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 from the date of the
acquisition.
Separately, in connection with the acquisition, the Company is also recognizing stock-based compensation expense of $15 million over a
period of four years from the date of the acquisition. 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 was issued to the
founders, but is subject to forfeiture and will be released over four years from the date of the acquisition provided they remain employees of the Company (or a successor company).
The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):
|
|
|
|
|
|
|
Cash acquired
|
|
$
|
6,019
|
|
Other tangible assets acquired
|
|
|
12,057
|
|
Amortizable intangible assets:
|
|
|
|
|
Developed technology
|
|
|
17,550
|
|
Tradename
|
|
|
1,150
|
|
Customer contracts and related relationships
|
|
|
225
|
|
Goodwill
|
|
|
131,084
|
|
|
|
|
|
|
Total assets acquired
|
|
|
168,085
|
|
Liabilities assumed
|
|
|
(7,503)
|
|
|
|
|
|
|
Total
|
|
$
|
160,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
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 represented 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 and was subsequently impaired during the fourth quarter of 2015 as a result of the impairment testing performed by the Company on its reporting units as of October 31, 2015.
Other Acquisitions.
During the nine months ended September 30, 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 which was recorded in the EMEA segment was subsequently impaired during the fourth quarter of 2015 as a result of the impairment testing performed by the Company on its reporting units
as of October 31, 2015.
The Companys business combination completed during the nine months ended September 30, 2015 did not have a
material impact on the Companys condensed consolidated financial statements and therefore actual and pro forma disclosures have not been presented.
The
Company did not make any acquisitions during the nine months ended September 30, 2016.
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 five years following the date the Company entered into the agreement (Capture Period Patents). The Company recorded $61
million as a gain on the Sold Patents during 2014.
The amounts allocated to the license of the Existing Patents are being recorded as revenue over
the four-year payment period under the license when payments are due. The amounts allocated to the Capture Period Patents are being recorded as revenue over the five-year capture period. During both the three and nine months ended September 30,
2015 and 2016, the Company recognized $22 million and $65 million in revenue related to the Existing Patents and the Capture Period Patents.
During
both the three months ended September 30, 2015 and 2016, the Company did not have any patent sales. During the nine months ended September 30, 2015 and 2016, the Company sold certain patents and recorded a gain on sale of patents of
approximately $11 million and $2 million, respectively.
Sale of Santa Clara Property
On April 21, 2016, the Company entered into a purchase agreement to sell certain property located in Santa Clara, California. The total carrying
value of the property assets was $126 million, which mostly pertained to the land, and was reported within the Americas segment. The decision to sell this property was largely based upon a general lack of operational need for the land and recent
improvements in market conditions for commercial real estate in the area. The sale under the purchase agreement was finalized on June 16, 2016 for total proceeds of $246 million, net of closing costs of $4 million. During the nine months ended
September 30, 2016, the Company recorded a gain of $120 million, net of closing costs, on the sale of the property assets which is included in gain on sale of patents and land in our condensed consolidated statements of operations.
Pending Sale of the Operating Business to Verizon Communications Inc.
On July 23, 2016, the Company entered into a Stock Purchase Agreement (the Stock Purchase Agreement) with Verizon Communications Inc.
(Verizon), pursuant to which the Company has agreed to sell, and Verizon has agreed to purchase (the Sale), all of the outstanding shares of Yahoo Holdings, Inc., a newly formed wholly-owned subsidiary of the Company
(Yahoo Holdings) (and, if elected by Verizon, prior to the sale of Yahoo Holdings to cause Yahoo Holdings to sell to a foreign subsidiary of Verizon all of the equity interests in a foreign subsidiary of Yahoo Holdings that will hold
certain foreign subsidiaries relating to the operating business), which, immediately prior to the consummation of the Sale, will own the Companys operating business. The aggregate consideration to be paid to the Company by Verizon in
connection with the Sale is $4,825,800,000 in cash, subject to certain adjustments as provided in the Stock Purchase Agreement.
Concurrently with
the execution of the Stock Purchase Agreement, the Company entered into a Reorganization Agreement (the Reorganization Agreement) with Yahoo Holdings, pursuant to which the Company will transfer to Yahoo Holdings prior to the
consummation of the Sale all of its assets and liabilities relating to its operating business, other than specified excluded assets and retained liabilities (the Reorganization). Upon completion of the Sale, Verizon will also receive for
its benefit and that of its current and
19
certain of its future affiliates, a non-exclusive, worldwide, perpetual, royalty-free license to certain intellectual property not core to the operating business held by Excalibur IP, LLC, a
wholly-owned subsidiary of the Company (Excalibur), that is not being transferred to Yahoo Holdings with the operating business.
The
excluded assets include the Companys cash and marketable securities as of the closing of the Sale, the Companys shares in Alibaba Group and Yahoo Japan, certain other minority equity investments, and all of the equity in Excalibur. The
retained liabilities will include the Notes, securityholder litigation, and certain director and officer indemnification obligations. Following the closing of the Sale, the excluded assets and retained liabilities will remain in Yahoo which will be
renamed and will become an independent, publicly traded, management investment company registered under the Investment Company Act of 1940.
The
closing of the Sale is subject to certain conditions, including, among others, the approval of the Sale by the Companys stockholders, antitrust approvals, the closing of the Reorganization, and certain other customary closing conditions.
Note 5 Goodwill
The changes in the carrying amount of goodwill
for the nine months ended September 30, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
(1)
|
|
|
EMEA
(2)
|
|
|
Asia Pacific
(3)
|
|
|
Total
|
|
|
|
Net balance as of January 1, 2016
|
|
$
|
518,886
|
|
|
$
|
-
|
|
|
$
|
289,228
|
|
|
$
|
808,114
|
|
Goodwill impairment charge
|
|
|
(394,901)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(394,901)
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
24,396
|
|
|
|
24,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of September 30, 2016
|
|
$
|
123,985
|
|
|
$
|
-
|
|
|
$
|
313,624
|
|
|
$
|
437,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Gross goodwill balance for the Americas segment was $4.4 billion as of September 30, 2016. The Americas segment
includes accumulated impairment losses of $4.3 billion as of September 30, 2016.
|
(2)
|
The EMEA segment includes accumulated impairment losses of $1.2 billion as of September 30, 2016.
|
(3)
|
Gross goodwill balance for the Asia Pacific segment was $466 million as of September 30, 2016. The Asia Pacific
segment includes accumulated impairment losses of $159 million as of September 30, 2016.
|
Goodwill Impairment Testing
Goodwill is not amortized but is tested for impairment annually (as of October 31) at the reporting unit level 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 Companys operating segments. The Company 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 the Companys reportable
segments.
Determining the fair value of each reporting unit is judgmental in nature and requires the use of significant estimates and assumptions,
including revenue growth rates and operating margins, discount rates and future market conditions, among others. It is reasonably possible that a future decline in market conditions, and/or changes in the Companys market share could negatively
impact the market comparables, estimated future cash flows and discount rates used in the market and income approaches to determine the fair value of each reporting unit and could result in some portion or all of the remaining goodwill to become
impaired in the future.
After recording the goodwill impairment charge as of October 31, 2015 for Tumblr during the fourth quarter of 2015, the
fair value of the Tumblr reporting unit approximated its carrying value. As such, any significant unfavorable changes in the forecast would result in the fair value being less than the carrying value.
20
Goodwill Impairment Testing Performed During the Second Quarter of 2016
Subsequent to the most recent annual goodwill impairment assessment performed as of October 31, 2015, the Company has continued
to monitor the actual performance of its reporting units. During the second quarter of 2016, the Company determined that there were indicators present to suggest that it was more likely than not that the fair value of the Tumblr reporting unit was
less than its carrying amount. The significant changes for the Tumblr reporting unit subsequent to the annual goodwill impairment test performed as of October 31, 2015 included a decline in the 2016 and beyond forecasted revenue, operating
income and cash flows.
Step One
To test the Tumblr reporting unit for impairment, the Company used the two-step quantitative test. Consistent with methodology used for the prior
years annual goodwill impairment testing, the Company estimated the fair value of the Tumblr reporting unit using an income approach which was deemed to be the most indicative of fair value in an orderly transaction between market
participants. Under the income approach, the Company determined fair value based on estimated future cash flows of the Tumblr reporting unit discounted by an estimated weighted-average cost of capital, reflecting the overall level of inherent risk
of the Tumblr reporting unit and the rate of return an outside investor would expect to earn. The Company based its cash flow projections for the Tumblr reporting unit using a forecast of cash flows and a terminal value based on the Perpetuity
Growth Model. The forecast and related assumptions were derived from an updated financial forecast prepared during the second quarter of 2016. As a result of the analysis, the Company concluded that the carrying value of the Tumblr reporting unit
exceeded its estimated fair value.
Step Two
As identified above, in step one, the Tumblr reporting units carrying value exceeded its estimated fair value. The second step of the quantitative
test was performed by comparing the carrying value of the goodwill in the Tumblr reporting unit to its implied fair value. The implied fair value is calculated by allocating all of the assets and liabilities of the Tumblr 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.
The step two quantitative test for the Tumblr reporting unit resulted in an
impairment for the Tumblr reporting unit, and the Company recorded a goodwill impairment charge of $395 million during the second quarter of 2016.
The remaining goodwill related to the Tumblr reporting unit as of September 30, 2016 was $124 million, which is included in the Americas operating
segment. As of September 30, 2016, there was also goodwill remaining for Taiwan, Hong Kong, and Australia & New Zealand reporting units, which are included in the Asia Pacific operating segment.
As noted above, the Company recorded goodwill impairment charges in the Tumblr reporting unit during the second quarter of 2016. It is reasonably
possible that future 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. For
example, a future decline in market conditions, changes in our market share, and/or other factors could negatively impact the estimated future cash flows and discount rates used in the income approach to determine the fair value of the Tumblr
reporting unit and could result in one or more additional impairment charges in the future
.
Note
6 Intangible Assets, Net
The following table summarizes the Companys intangible assets, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
September 30, 2016
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
|
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
(*)
|
|
|
Charge
|
|
|
Net
|
|
|
|
Customer, affiliate, and advertiser related relationships
|
|
$
|
220,055
|
|
|
$
|
350,911
|
|
|
$
|
(170,517)
|
|
|
$
|
(66,680)
|
|
|
$
|
113,714
|
|
Developed technology and patents
|
|
|
86,909
|
|
|
|
128,732
|
|
|
|
(73,358)
|
|
|
|
-
|
|
|
|
55,374
|
|
Tradenames, trademarks, and domain names
|
|
|
40,305
|
|
|
|
66,631
|
|
|
|
(33,066)
|
|
|
|
(20,655)
|
|
|
|
12,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
347,269
|
|
|
$
|
546,274
|
|
|
$
|
(276,941)
|
|
|
$
|
(87,335)
|
|
|
$
|
181,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Cumulative foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities,
totaled approximately $18 million as of September 30, 2016.
|
21
As a result of the impairment testing performed in the fourth quarter of 2015, the entire carrying value of
the indefinite-lived intangible assets were fully impaired as of December 31, 2015 and the Company did not purchase any indefinite-lived intangibles during the nine months ended September 30, 2016. As of September 30, 2016, the
Company only had definite-lived intangible assets.
For the three months ended September 30, 2015 and 2016, the Company recognized amortization
expense for intangible assets of $34 million and $20 million, respectively, including $14 million and $9 million in cost of revenue other for the three months ended September 30, 2015 and 2016, respectively. For the nine months
ended September 30, 2015 and 2016, the Company recognized amortization expense for intangible assets of $102 million and $80 million, respectively, including $42 million and $33 million in cost of revenue other for the nine months
ended September 30, 2015 and 2016, respectively. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the remainder of 2016 and each of the succeeding years is as follows: three months
ending December 31, 2016: $20 million; 2017: $76 million; 2018: $55 million; 2019: $30 million; 2020 and cumulatively thereafter: $1 million.
Intangibles Impairment Testing
Definite-lived intangible assets are carried at cost and are amortized
over their estimated useful lives, generally on a straight-line basis over one to seven years as the pattern of use is ratable. The Company reviews identifiable amortizable 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. Measurement of impairment losses on definite-lived intangible assets are based on the excess of the carrying value of the asset over its fair value.
Intangibles Impairment Testing Performed During the Second Quarter of 2016
During the second quarter of 2016, the Company reviewed its Tumblr asset group for impairment as there were events and changes in circumstances that
indicated that the carrying value of the long-lived assets may not be recoverable. As a result, the Company performed a quantitative test comparing the fair value of the Tumblr long-lived assets with the carrying amounts and recorded an impairment
charge of $87 million associated with its definite-lived intangible assets, which were included within customer, affiliate, and advertiser related relationships and tradenames, trademarks, and domain names.
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 the incremental common shares issuable upon the exercise of stock options. The Company calculates potential tax windfalls and
shortfalls by including the impact of deferred tax assets.
The Company takes into account the effect on consolidated net income (loss) per share of
dilutive securities of entities in which the Company holds equity interests that are accounted for using the equity method.
Potentially dilutive
securities representing approximately 14 million and 6 million shares of common stock for the three and nine months ended September 30, 2015, respectively, and 2 million shares of common stock for the three months ended
September 30, 2016 were excluded from the computation of diluted earnings per share for these periods because their effect would have been anti-dilutive.
The Company has the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion of the
Notes. The Companys 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 also does not include any effect from
the note hedges. In future periods, the denominator for diluted net income (loss) per share will exclude any effect of the note hedges, if their effect would be anti-dilutive. In the event an actual conversion of any or all of the Notes occurs, the
shares that would be delivered to the Company under the note hedges are designed to reduce the dilutive effect of the shares that the Company would issue under the Notes. See Note 11Convertible Notes for additional information.
22
The following table sets forth the computation of basic and diluted net income (loss) per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc.
|
|
$
|
76,261
|
|
|
$
|
162,826
|
|
|
$
|
75,905
|
|
|
$
|
(376,319)
|
|
Less: Net income allocated to participating securities
|
|
|
-
|
|
|
|
(2)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc. common stockholders basic
|
|
$
|
76,261
|
|
|
$
|
162,824
|
|
|
$
|
75,905
|
|
|
$
|
(376,319)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
940,822
|
|
|
|
951,421
|
|
|
|
937,713
|
|
|
|
948,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc. common stockholders per sharebasic
|
|
$
|
0.08
|
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
|
$
|
(0.40)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc.
|
|
$
|
76,261
|
|
|
$
|
162,826
|
|
|
$
|
75,905
|
|
|
$
|
(376,319)
|
|
Less: Net income allocated to participating securities
|
|
|
-
|
|
|
|
(2)
|
|
|
|
-
|
|
|
|
-
|
|
Less: Effect of dilutive securities issued by equity investees
|
|
|
(1,112
|
)
|
|
|
(1,282)
|
|
|
|
(3,431
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc. common stockholdersdiluted
|
|
$
|
75,149
|
|
|
$
|
161,542
|
|
|
$
|
72,474
|
|
|
$
|
(376,319)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
940,822
|
|
|
|
951,421
|
|
|
|
937,713
|
|
|
|
948,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average effect of Yahoo! Inc. dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
4,551
|
|
|
|
4,373
|
|
|
|
5,155
|
|
|
|
-
|
|
Stock options and employee stock purchase plan
|
|
|
1,561
|
|
|
|
1,510
|
|
|
|
1,292
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
946,934
|
|
|
|
957,304
|
|
|
|
944,160
|
|
|
|
948,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc. common stockholders per sharediluted
|
|
$
|
0.08
|
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Investments in Equity Interests Accounted for Using the Equity
Method of Accounting
The
following table summarizes the Companys investments in equity interests accounted for using the equity method of accounting (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
Percent
Ownership
|
|
|
September 30,
2016
|
|
|
Percent
Ownership
|
|
|
|
Yahoo Japan
|
|
$
|
2,496,657
|
|
|
|
35.5%
|
|
|
$
|
3,020,804
|
|
|
|
35.5%
|
|
Other
|
|
|
6,572
|
|
|
|
20%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,503,229
|
|
|
|
|
|
|
$
|
3,020,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Equity Investment in Yahoo Japan
The investment in Yahoo Japan is accounted for using the equity method and the total investment, including net tangible assets, identifiable intangible
assets, and goodwill, is classified as part of the investments in equity interests balance on the Companys condensed consolidated balance sheets. The Company records its share of the results of Yahoo Japan, and any related amortization
expense, one quarter in arrears within earnings in equity interests in the condensed consolidated statements of operations.
The Company makes
adjustments to the earnings in equity interests line in the condensed consolidated statements of operations for any material differences between U.S. GAAP and International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board, the standards by which Yahoo Japans financial statements are prepared.
The fair value of the Companys
ownership interest in the common stock of Yahoo Japan, based on the quoted stock price, was $8.1 billion as of September 30, 2016.
During the
nine months ended September 30, 2015 and 2016, the Company received cash dividends from Yahoo Japan in the amount of $142 million and $157 million, net of withholding taxes, respectively, which were recorded as reductions to the
Companys investment in Yahoo Japan.
The following tables present summarized financial information derived from Yahoo Japans consolidated
financial statements, which are prepared on the basis of IFRS. The Company has made adjustments to the Yahoo Japan summarized financial information to address differences between IFRS and U.S. GAAP that materially impact the summarized financial
information below. Any other differences between U.S. GAAP and IFRS did not have any material impact on the Yahoo Japans summarized financial information presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
|
|
|
(In thousands)
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
911,735
|
|
|
$
|
1,126,615
|
|
|
$
|
2,840,393
|
|
|
$
|
3,147,894
|
|
Gross profit
|
|
$
|
712,561
|
|
|
$
|
875,570
|
|
|
$
|
2,254,511
|
|
|
$
|
2,461,125
|
|
Income from operations
|
|
$
|
402,865
|
|
|
$
|
466,435
|
|
|
$
|
1,266,084
|
|
|
$
|
1,040,561
|
|
Net income
|
|
$
|
274,567
|
|
|
$
|
324,820
|
|
|
$
|
836,081
|
|
|
$
|
700,785
|
|
Net income attributable to Yahoo Japan
|
|
$
|
273,636
|
|
|
$
|
325,553
|
|
|
$
|
832,611
|
|
|
$
|
705,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(In thousands)
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
6,150,688
|
|
|
$
|
6,377,258
|
|
Long-term assets
|
|
$
|
2,430,699
|
|
|
$
|
4,094,564
|
|
Current liabilities
|
|
$
|
2,003,960
|
|
|
$
|
2,456,712
|
|
Long-term liabilities
|
|
$
|
245,834
|
|
|
$
|
314,035
|
|
Noncontrolling interests
|
|
$
|
165,601
|
|
|
$
|
191,735
|
|
|
|
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 $57 million and $68 million for the three months ended September 30, 2015 and 2016,
respectively, and approximately $172 million and $190 million for the nine months ended September 30, 2015 and 2016, respectively. As of December 31, 2015 and September 30, 2016, the Company had net receivable balances from Yahoo
Japan of approximately $37 million and $48 million, respectively.
Alibaba Group
Equity Investment in Alibaba Group
.
The Company reflects the investment in Alibaba Group as an available-for-sale equity
security on the consolidated balance sheet and adjusts the investment to fair value each quarterly reporting period with changes in fair value recorded within other comprehensive loss, net of tax. See Note 2 Marketable Securities,
Investments and Fair Value Disclosures and the condensed consolidated statements of comprehensive loss for additional information. The Company does not currently intend to sell its shares of Alibaba Group in response to changes in the market
price of the shares.
24
Technology and Intellectual Property License Agreement (the TIPLA).
As a
result of the initial public offering of Alibaba Group in September 2014 (the Alibaba Group IPO), Alibaba Groups obligation to make royalty payments under the TIPLA ceased on September 24, 2014 and the Companys
recognition of the remaining TIPLA deferred revenue was completed on September 18, 2015. For the three and nine months ended September 30, 2015, the Company recognized approximately $60 million and $199 million, respectively, related to
the TIPLA.
Note 9 Foreign Currency Derivative Financial Instruments
The Company uses derivative financial
instruments, primarily forward contracts (and previously including option contracts), to mitigate risk associated with adverse movements in foreign currency exchange rates.
The Company records all derivatives in the condensed consolidated balance sheets at fair value, with assets included in prepaid expenses and other
current assets or other long-term assets, and liabilities included in accrued expenses and other current liabilities or other long-term liabilities. The Companys 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 loss as a part of the cumulative translation adjustment. The effective portions of cash flow hedges are recorded
in accumulated other comprehensive income until the hedged item is recognized in revenue on the condensed consolidated statements of operations when the underlying hedged revenue is recognized. Any ineffective portions of net investment hedges and
cash flow hedges are recorded in other expense, net on the Companys condensed consolidated statements of operations. For balance sheet hedges, changes in the fair value are recorded in other expense, net on the Companys condensed
consolidated statements of operations.
The Company has master netting arrangements, which are designed to reduce credit risk by permitting net
settlement of foreign exchange contracts with the same counterparty, subject to applicable requirements. The Company presents its derivative assets and liabilities at their gross fair values on the condensed consolidated balance sheets. The Company
is not required to pledge, and is not entitled to receive, cash collateral related to these derivative transactions.
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 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, 2015 and September 30, 2016. As such, the net investment hedge was considered to be effective.
Cash Flow
Hedges.
The Company entered into foreign currency forward contracts designated as cash flow hedges of varying maturities through January 31, 2017. The cash flow hedges were considered to be effective as of December 31, 2015
and September 30, 2016. All of the forward contracts designated as cash flow hedges that were settled were reclassified to revenue during the three and nine months ended September 30, 2015 and 2016. All current outstanding cash flow hedges
are expected to be reclassified into revenue during 2016. For the three and nine months ended September 30, 2015 and 2016, the amounts recorded in other expense, net as a result of hedge ineffectiveness were not material.
Not Designated as Hedging Instruments
Balance Sheet Hedges.
The Company hedges certain of its net recognized foreign currency assets and liabilities with foreign exchange
forward contracts to reduce the risk that its earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge monetary assets and liabilities, including intercompany transactions,
which are denominated in foreign currencies.
Notional amounts of the Companys outstanding derivative contracts as of December 31, 2015
and September 30, 2016 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Net investment hedge forward and option contracts
|
|
$
|
1,150
|
|
|
$
|
200
|
|
Cash flow hedge forwards
|
|
$
|
75
|
|
|
$
|
37
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Balance sheet hedges
|
|
$
|
225
|
|
|
$
|
80
|
|
|
|
25
Foreign currency derivative activity for the nine months ended September 30, 2015 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Recorded in
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
Settlement
|
|
|
Recorded in
|
|
|
Other
|
|
|
Recorded
|
|
|
|
|
|
|
Beginning
|
|
|
Payment
|
|
|
Other Expense,
|
|
|
Comprehensive
|
|
|
in
|
|
|
Ending Fair
|
|
|
|
Fair Value
|
|
|
(Receipt), Net
|
|
|
Net
|
|
|
(Loss) Income
|
|
|
Revenue
|
|
|
Value
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges
|
|
$
|
185
|
|
|
$
|
(92
|
)
|
|
$
|
1
|
|
|
$
|
7
|
(*)
|
|
$
|
-
|
|
|
$
|
101
|
|
Cash flow hedges
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet hedges
|
|
$
|
4
|
|
|
$
|
(22
|
)
|
|
$
|
17
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1)
|
|
|
|
(*)
|
This amount does not reflect the tax impact of $3 million recorded during the nine months ended September 30,
2015. The $4 million after tax impact of the gain recorded within other comprehensive (loss) income was included in accumulated other comprehensive income on the Companys condensed consolidated balance sheets.
|
Foreign currency derivative activity for the nine months ended September 30, 2016 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Recorded in
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
Settlement
|
|
|
Recorded in
|
|
|
Other
|
|
|
Recorded
|
|
|
|
|
|
|
Beginning
|
|
|
Payment
|
|
|
Other Expense,
|
|
|
Comprehensive
|
|
|
in
|
|
|
Ending Fair
|
|
|
|
Fair Value
|
|
|
(Receipt), Net
|
|
|
Net
|
|
|
(Loss) Income
|
|
|
Revenue
|
|
|
Value
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges
|
|
$
|
74
|
|
|
$
|
(30
|
)
|
|
$
|
-
|
|
|
$
|
(84
|
) (*)
|
|
$
|
-
|
|
|
$
|
(40)
|
|
Cash flow hedges
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
|
$
|
(5
|
)
|
|
$
|
(6)
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet hedges
|
|
$
|
2
|
|
|
$
|
(4
|
)
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
(*)
|
This amount does not reflect the tax impact of $30 million recorded during the nine months ended September 30, 2016.
The $54 million after tax impact of the loss recorded within other comprehensive (loss) income was included in accumulated other comprehensive income on the Companys condensed consolidated balance sheets.
|
Foreign currency derivative contracts balance sheet location and ending fair value was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
September 30,
|
|
|
|
Location
|
|
|
|
|
|
2015
|
|
|
|
|
|
2016
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges
|
|
|
Asset
(1)
|
|
|
|
|
|
|
$
|
|
|
|
|
79
|
|
|
|
|
|
|
$
|
|
|
|
|
-
|
|
|
|
|
Liability
(2)
|
|
|
|
|
|
|
$
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
$
|
|
|
|
|
(40)
|
|
Cash flow hedges
|
|
|
Asset
(1)
|
|
|
|
|
|
|
$
|
|
|
|
|
2
|
|
|
|
|
|
|
$
|
|
|
|
|
-
|
|
|
|
|
Liability
(2)
|
|
|
|
|
|
|
$
|
|
|
|
|
-
|
|
|
|
|
|
|
$
|
|
|
|
|
(6)
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet hedges
|
|
|
Asset
(1)
|
|
|
|
|
|
|
$
|
|
|
|
|
3
|
|
|
|
|
|
|
$
|
|
|
|
|
-
|
|
|
|
|
Liability
(2)
|
|
|
|
|
|
|
$
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
$
|
|
|
|
|
-
|
|
|
|
(1)
|
Included in prepaid expenses and other current assets or other long-term assets and investments on the condensed
consolidated balance sheets.
|
(2)
|
Included in other accrued expenses and current liabilities or other long-term liabilities on the condensed consolidated
balance sheets.
|
26
Note 10 Credit Agreement
On May 18, 2016, the Company delivered
notice to Citibank to terminate its credit agreement with Citibank, N.A., as Administrative Agent, entered into on October 19, 2012 (as amended on October 10, 2013, October 9, 2014, and July 24, 2015, the Credit
Agreement) which provided for a $750 million unsecured revolving credit facility. The termination of the Credit Agreement and $750 million unsecured revolving credit facility provided thereunder took effect on May 23, 2016.
Note 11 Convertible Notes
0.00%
Convertible Senior Notes
As of September 30, 2016, the Company had $1.4 billion in principal amount of Notes outstanding. The
Notes are senior unsecured obligations of Yahoo, the Notes do not bear regular interest, and the principal amount of the Notes was issued at par value. The Notes mature on December 1, 2018, unless previously purchased or converted in accordance
with their terms prior to such date. The Company may not redeem the Notes prior to maturity. However, holders of the Notes may convert them at certain times and upon the occurrence of certain events in the future, as outlined in the indenture
governing the Notes (the Indenture). Holders of the Notes who convert in connection with a make-whole fundamental change, as defined in the Indenture, may require Yahoo to purchase for cash all or any portion of their Notes
at a purchase price equal to 100 percent of the principal amount, plus accrued and unpaid special interest as defined in the Indenture, if any. The Notes are convertible, subject to certain conditions, into shares of Yahoo common stock at an initial
conversion rate of 18.7161 shares per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $53.43 per share), subject to adjustment upon the occurrence of certain events. Upon conversion of the Notes,
holders will receive cash, shares of Yahoos common stock or a combination thereof, at Yahoos election. The Companys intent is to settle the principal amount of the Notes in cash upon conversion. If the conversion value exceeds the
principal amount, the Company would deliver shares of its common stock with respect to the remainder of its conversion obligation in excess of the aggregate principal amount (conversion spread). As of September 30, 2016, none of the conditions
allowing holders of the Notes to convert had been met.
The Notes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Liability component:
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
1,437,500
|
|
|
$
|
1,437,500
|
|
Less: note discount
|
|
|
(204,015)
|
|
|
|
(154,498)
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
1,233,485
|
|
|
$
|
1,283,002
|
|
|
|
|
|
|
|
|
|
|
Equity component
(*)
|
|
$
|
305,569
|
|
|
$
|
305,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Recorded on the condensed consolidated balance sheets within additional paid-in capital.
|
The following table sets forth total interest expense recognized related to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Accretion of convertible note discount
|
|
$
|
15,867
|
|
|
$
|
16,723
|
|
|
$
|
46,984
|
|
|
$
|
49,517
|
|
|
|
The fair value of the Notes, which was determined based on inputs that are observable in the market (Level 2), and the
carrying value of debt instruments (carrying value excludes the equity component of the Notes classified in equity) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
September 30, 2016
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
Convertible senior notes
|
|
$
|
1,250,124
|
|
|
$
|
1,233,485
|
|
|
$
|
1,310,293
|
|
|
$
|
1,283,002
|
|
|
|
27
Note Hedge Transactions and Warrant Transactions
The Company entered into note hedge transactions with certain option counterparties (the Counterparties) to reduce the potential dilution with
respect to Yahoos 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. Separately, the Company also entered into privately negotiated warrant
transactions with the Counterparties giving them the right to purchase common stock from the Company. The warrant transactions could separately have a dilutive effect with respect to Yahoos common stock to the extent that the market price per
share of its common stock exceeds the strike price of the warrants. The initial strike price of the warrants was $71.24. Counterparties to the warrants may make adjustments to certain terms of the warrants upon the occurrence of specified events,
including the announcement of the Stock Purchase Agreement, if the event results in a material change to the trading price of Yahoos common stock or the value of the warrants. To date, two Counterparties have given the Company notices of
adjustment to their warrant exercise prices.
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 15 years which expire between 2016 and 2025. A summary of gross and net lease commitments as of September 30, 2016 was as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Operating
Lease
Commitments
|
|
|
Sublease
Income
|
|
|
Net Operating
Lease
Commitments
|
|
|
|
Three months ending December 31, 2016
|
|
$
|
31
|
|
|
$
|
(4)
|
|
|
$
|
27
|
|
Years ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
98
|
|
|
|
(15)
|
|
|
|
83
|
|
2018
|
|
|
76
|
|
|
|
(12)
|
|
|
|
64
|
|
2019
|
|
|
61
|
|
|
|
(9)
|
|
|
|
52
|
|
2020
|
|
|
47
|
|
|
|
(7)
|
|
|
|
40
|
|
2021
|
|
|
38
|
|
|
|
(6)
|
|
|
|
32
|
|
Due after 5 years
|
|
|
86
|
|
|
|
(2)
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross and net lease commitments
|
|
$
|
437
|
|
|
$
|
(55)
|
|
|
$
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease
|
|
|
|
Commitments
|
|
|
|
Three months ending December 31, 2016
|
|
$
|
4
|
|
Years ending December 31,
|
|
|
|
|
2017
|
|
|
11
|
|
2018
|
|
|
9
|
|
2019
|
|
|
5
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
Due after 5 years
|
|
|
3
|
|
|
|
|
|
|
Gross capital lease commitments
|
|
$
|
32
|
|
|
|
|
|
|
Less: interest
|
|
|
6
|
|
|
|
|
|
|
Net capital lease commitments included in other accrued expenses and current liabilities and
other long-term liabilities
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Commitments
.
The Company is obligated to make payments, which represent TAC, to its
Affiliates. As of September 30, 2016, these commitments totaled $985 million, of which $60 million will be payable in the remainder of 2016, $300 million will be payable in each year from 2017 through 2019, and $25 million will be payable in
2020.
28
Non-cancelable Obligations
.
The Company is obligated to make payments under various
non-cancelable arrangements with vendors and other business partners, principally for content, bandwidth, and marketing arrangements. As of September 30, 2016, these commitments totaled $124 million, of which $23 million will be payable in the
remainder of 2016, $47 million will be payable in 2017, $32 million will be payable in 2018, $9 million will be payable in 2019, $3 million will be payable in 2020, $3 million will be payable in 2021 and $7 million will be payable thereafter.
Intellectual Property Rights
.
The Company is committed to make certain payments under various intellectual property arrangements of
up to $13 million through 2023.
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 $53 million, of which $1 million will be payable in the remainder of 2016, $5 million will be payable in each year from 2017 through 2021, and $27
million will be payable thereafter.
Standby Letters of Credit.
As of September 30, 2016, the Company had
outstanding potential obligations relating to standby letters of credit of $38 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 Companys 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 Companys 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 Companys condensed consolidated financial statements.
As of September 30, 2016, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, the Company is not exposed to any financing,
liquidity, market, or credit risk that could arise if the Company had such relationships. In addition, the Company identified no variable interests currently held in entities for which it is the primary beneficiary.
Legal Contingencies
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.
On April 22, 2015, a stockholder action captioned
Cathy Buch v. David Filo, et al
., was filed in the Delaware Court of Chancery against the Company and certain of its current and former directors. The complaint
asserts both derivative claims, purportedly on behalf of Yahoo, and class action claims, purportedly on behalf of the plaintiff and all similarly situated stockholders, relating to the termination of, and severance payments made to, our former chief
operating officer, Henrique de Castro. The plaintiff claims that certain current and former board members allegedly violated or acquiesced in the violation of the Companys Bylaws when Mr. de Castro was terminated without cause, and
breached fiduciary duties by allowing Yahoo to make allegedly false and misleading statements regarding the value of his severance. The plaintiff has also asserted claims against Mr. de Castro. The plaintiff seeks to have the full Board
reassess the propriety of terminating Mr. de Castro without cause, potentially leading to disgorgement in favor of the Company of the severance paid to Mr. de Castro, an equitable accounting, monetary damages, declaratory relief,
injunctive relief, and an award of attorneys fees and costs. The Company and the individual defendants filed a motion to dismiss the action, which the Court denied in part and granted in part on July 27, 2016.
29
On January 27, 2016, a stockholder action captioned
UCFW Local 1500 Pension Fund v. Marissa Mayer,
et al
., was filed in the U.S. District Court for the Northern District of California against the Company, and certain current and former officers and directors of the Company. On April 29, 2016, the plaintiff filed an amended complaint. The
amended complaint asserts derivative claims, purportedly on behalf of Yahoo, for violations of the Investment Company Act of 1940, breach of fiduciary duty, unjust enrichment, violations of Delaware General Corporation Law Section 124, and
violations of California Business & Professions Code Section 17200. The amended complaint seeks to rescind Yahoos employment contracts with the individual defendants because those defendants allegedly caused Yahoo to illegally
operate as an unregistered investment company. The plaintiff seeks disgorgement in favor of Yahoo, rescission, and an award of attorneys fees and costs. In addition, the amended complaint asserts a direct claim against Yahoo for alleged
violation of Delaware General Corporation Law Section 124(1), based on the allegation that Yahoo has illegally operated as an unregistered investment company. Pursuant to this claim, the plaintiff seeks injunctive relief preventing Yahoo from
entering into any future contracts, including any contracts to sell its assets. On October 19, 2016, the District Court dismissed the amended complaint, with leave to amend.
TCPA Litigation Concerning Yahoo Messenger.
On March 21, 2014 and April 16, 2014, civil complaints were filed in the U.S.
District Court for the Northern District of Illinois by plaintiffs Rachel Johnson and Zenaida Calderin, respectively, against the Company, alleging that the process by which Yahoo Messenger sends a notification SMS message in addition to delivering
a users instant message to a recipients 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 were consolidated, seek statutory damages for a purported class of plaintiffs. In January 2016, the District Court denied class certification treatment proposed by plaintiff Calderin, who accepted a $1,500 offer of judgment to
resolve her case in its entirety. The District Court 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 Courts 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 also previously defended related
litigation in the United States District Court for the Southern District of California, which denied class certification in September 2015; that case was dismissed with prejudice in March 2016.
General.
The Company is regularly involved in claims, suits, government investigations, and proceedings arising from the ordinary
course of the Companys business, including actions with respect to intellectual property claims, privacy, consumer protection, information security, data protection or law enforcement matters, tax matters, labor and employment claims,
commercial claims, as well as actions involving content generated by users, stockholder derivative actions, purported class action lawsuits, and other matters.
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 Companys legal proceedings, including the matters described above, would not have a material adverse effect on the Companys consolidated financial position, results of operations or cash flows. Amounts accrued as of
September 30, 2016 were not material. The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties, and cannot be predicted with certainty. In the event of a determination adverse to Yahoo, its
subsidiaries, directors, or officers in these matters, the Company may incur substantial monetary liability, and be required to change its business practices. Either of these events could have a material adverse effect on the Companys
financial position, results of operations, or cash flows. The Company may also incur substantial legal fees, which are expensed as incurred, in defending against these claims.
Security Incident Contingencies
On September 22, 2016, the Company disclosed that, based on an ongoing investigation, a copy of certain user account information for at least 500 million
user accounts was stolen from Yahoos network in late 2014 (the Security Incident). To date, 23 putative consumer class action lawsuits have been filed against the Company in U.S. federal and state courts, and in foreign courts
relating to the Security Incident. The plaintiffs, who purport to represent various classes of users, generally claim to have been harmed by the Companys alleged actions and/or omissions in connection with the Security Incident and assert a
variety of common law and statutory claims seeking monetary damages or other related relief. Additional lawsuits and claims related to the Security Incident may be asserted by or on behalf of users, partners, shareholders, or others seeking damages
or other related relief.
While a loss from these matters is reasonably possible, the Company cannot reasonably estimate a range of possible losses
related to these legal proceedings at this time because the investigation into the Security Incident is ongoing, the legal proceedings remain in the early stages, alleged damages have not been specified, there is uncertainty as to the likelihood of
a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved. Based on current information, the Company does not believe that a loss from these matters is
probable and therefore has not recorded an accrual for litigation or other contingencies relating to the Security Incident. The Company will continue to evaluate information as it becomes known and will record an accrual for estimated losses at the
time or times it is determined that a loss is both probable and reasonably estimable.
30
Note 13 Stockholders Equity and Employee Benefits
Stock Options
.
The
Companys Stock Plan, the Directors Plan, and stock-based awards assumed through acquisitions (including stock-based commitments related to continued service of acquired employees, such as holdbacks by Yahoo of shares of Yahoo common
stock issued to founders of acquired companies in connection with certain of the Companys acquisitions) are collectively referred to as the Plans. Stock option activity under the Companys Plans for the nine months ended
September 30, 2016 is summarized as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
|
|
Outstanding at December 31, 2015
(1)
|
|
|
6,522
|
|
|
$
|
18.82
|
|
Options granted
|
|
|
-
|
|
|
$
|
-
|
|
Options exercised
(2)
|
|
|
(1,080)
|
|
|
$
|
14.36
|
|
Options expired
|
|
|
(433)
|
|
|
$
|
18.55
|
|
Options cancelled/forfeited
|
|
|
(369)
|
|
|
$
|
18.23
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
(1)
|
|
|
4,640
|
|
|
$
|
19.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes shares subject to performance-based stock options for which performance goals had not been set as of the date
shown.
|
(2)
|
The Company generally issues new shares to satisfy stock option exercises.
|
As of September 30, 2016, there was $12 million of unamortized stock-based compensation expense related to unvested stock options, which is expected
to be recognized over a weighted average period of 0.9 years.
Restricted Stock and Restricted Stock Units.
Restricted stock and
restricted stock unit activity under the Plans for the nine months ended September 30, 2016 is summarized as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
Per Share
|
|
|
|
Awarded and unvested at December 31, 2015
(1)
|
|
|
28,739
|
|
|
$
|
39.15
|
|
Granted
(2)
|
|
|
14,497
|
|
|
$
|
34.39
|
|
Vested
|
|
|
(11,386)
|
|
|
$
|
31.95
|
|
Forfeited
|
|
|
(6,144)
|
|
|
$
|
35.80
|
|
|
|
|
|
|
|
|
|
|
Awarded and unvested at September 30, 2016
(1)
|
|
|
25,706
|
|
|
$
|
40.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes the maximum number of shares issuable under the Companys performance-based restricted stock unit awards
(including future-year tranches for which performance goals had not been set) as of the date shown.
|
(2)
|
Includes the maximum number of shares issuable under the performance-based restricted stock unit awards granted during
the nine months ended September 30, 2016 (including future-year tranches for which performance goals had not been set during the period); excludes tranches of previously granted performance-based restricted stock units for which performance
goals were set during the nine months ended September 30, 2016.
|
As of September 30, 2016, there was $602 million of
unamortized stock-based compensation expense related to unvested restricted stock and restricted stock units, which is expected to be recognized over a weighted average period of 2.4 years.
During the nine months ended September 30, 2015 and 2016, 13.8 million shares and 11.4 million shares, respectively, that were subject to
previously granted restricted stock units, vested. These vested restricted stock units were net share settled. During the nine months ended September 30, 2015 and 2016, the Company withheld 5.3 million shares and 4.2 million shares,
respectively, based upon the Companys closing stock price on the vesting date, to satisfy the Companys tax withholding obligation relating to the employees minimum statutory obligation for the applicable income and other employment
taxes. The Company then remitted cash to the appropriate taxing authorities.
31
Total payments for the employees tax obligations to the relevant taxing authorities were $216 million
and $157 million, respectively, for the nine months ended September 30, 2015 and 2016 and are reflected as a financing activity within the condensed consolidated statements of cash flows. The payments were used for tax withholdings related to
the net share settlements of restricted stock units. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of
additional paid-in capital.
Performance Options
.
The financial performance stock options awarded by the Company in
November 2012 to Ms. Mayer 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
executives award agreement based on the Companys performance relative to goals. The financial performance goals are established at the beginning of each performance period and the portion (or tranche) of the award related to
each performance period is treated as a separate grant for accounting purposes. In March 2016, the Compensation Committee established performance goals under these stock options for the 2016 performance year. The 2016 financial performance metrics
(and their weightings) under the performance stock options are GAAP revenue (one-third), revenue ex-TAC (one-third), and adjusted EBITDA (one-third). The grant date fair value of the 2016 tranche of the November 2012 financial performance stock
options was $13 million, and is being recognized over the twelve-month service period. The Company began recording stock-based compensation expense for this tranche in March 2016, when the financial performance goals were established.
Performance RSUs
.
In March 2016, the Compensation Committee approved additional annual financial performance-based RSU awards
to Ms. Mayer and other senior officers, and established the 2016 annual performance goals for these awards as well as for the similar performance-based RSUs granted in February 2013, February 2014, and March 2015. The 2013, 2014, 2015, and
2016 performance-based RSU awards are generally eligible to vest in equal annual target amounts over four years (three years for Ms. Mayer) based on the Companys attainment of annual financial performance goals as well as the
executives continued employment through each vesting date. The number of shares that ultimately vest each year will range from 0 percent to 200 percent of the annual target amount, based on the Companys performance. Annual financial
performance metrics and goals are established for these RSU awards at the beginning of each year and the tranche of each RSU award related to that years performance goal is treated as a separate annual grant for accounting purposes. The 2016
financial performance metrics (and their weightings) established for the performance RSUs are: GAAP revenue (one-third), revenue ex-TAC (one-third), and adjusted EBITDA (one-third). The grant date fair value of the first tranche of the March 2016
performance RSUs was $10 million, the grant date fair value of the second tranche of the March 2015 performance RSUs was $8 million, the grant date fair value of the third tranche of the February 2014 performance RSUs was $4 million, and the grant
date fair value of the fourth tranche of the February 2013 performance RSUs was $8 million. These values are being recognized over the tranches twelve-month service periods. The Company began recording stock-based compensation expense for
these tranches in March 2016, when the financial performance goals were established.
Stock Repurchases
.
In November 2013,
the Board authorized a stock repurchase program with an authorized level of $5 billion. The November 2013 program, according to its terms, will expire in December 2016. The aggregate amount remaining under the November 2013 repurchase program was
approximately $726 million at September 30, 2016. In March 2015, the Board authorized an additional stock repurchase program with an authorized level of $2 billion. The March 2015 program, according to its terms, will expire in March 2018. The
aggregate amount available under the March 2015 repurchase program was $2 billion at September 30, 2016. 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 nine months ended September 30, 2016, the Company did not repurchase any of its outstanding common stock.
32
Note 14 Restructuring Charges, Net
Restructuring charges, net consists of employee
severance pay and related costs, accelerations of stock-based compensation expense, facility restructuring costs, contract termination and other non-cash charges associated with the exit of facilities, as well as reversals of restructuring charges
arising from changes in estimates.
Restructuring charges, net was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Employee severance pay and related costs
|
|
$
|
16,597
|
|
|
$
|
6,772
|
|
|
$
|
67,746
|
|
|
$
|
56,620
|
|
Non-cancelable lease, contract termination, and other charges
|
|
|
11,103
|
|
|
|
4,368
|
|
|
|
33,123
|
|
|
|
24,302
|
|
Reversals of previous charges
|
|
|
(2,590)
|
|
|
|
(1,029)
|
|
|
|
(6,611)
|
|
|
|
(2,947)
|
|
Non-cash accelerations of stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
2,705
|
|
|
|
7,374
|
|
Other non-cash (credits) charges, net
|
|
|
902
|
|
|
|
(149)
|
|
|
|
(31)
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
$
|
26,012
|
|
|
$
|
9,962
|
|
|
$
|
96,932
|
|
|
$
|
86,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has implemented multiple restructuring plans to reduce its cost structure, align resources with its product
strategy and improve efficiency, which have resulted in workforce reductions and the consolidation of certain real estate facilities and data centers. For the three months ended September 30, 2015, the Company recorded expense of $9 million and
$17 million related to the Americas and EMEA, respectively. For the nine months ended September 30, 2015, the Company recorded expense of $62 million, $31 million, and $4 million related to the Americas, EMEA, and Asia Pacific segments,
respectively. For the three months ended September 30, 2016, the Company recorded expense of $5 million and $5 million related to the Americas and EMEA segments, respectively. For the nine months ended September 30, 2016, the Company
recorded expense of $65 million, $18 million, and $4 million related to the Americas, EMEA, and Asia Pacific segments, respectively.
The amounts
recorded during the nine months ended September 30, 2016 were primarily related to the Companys announced plans in February 2016 to reduce the Companys workforce by approximately 15 percent by the end of 2016 and exit six offices in
Dubai, Mexico City, Buenos Aires, Madrid, Milan and Burbank, California, subject to applicable laws and consultation processes, as a part of the strategic plan to simplify Yahoos product portfolio. During the three months ended
September 30, 2016, in connection with this action, the Company incurred pre-tax cash charges of $1 million for severance pay expenses and related cash expenditures and pre-tax cash charges of $1 million related to the consolidation and exit of
facilities related to non-cancelable lease costs and other related costs. During the nine months ended September 30, 2016, in connection with this action, the Company incurred pre-tax cash charges of $47 million for severance pay expenses and
related cash expenditures, pre-tax cash charges of $17 million related to the consolidation and exit of facilities related to non-cancelable lease costs and other related costs, pre-tax non-cash charges of $7 million related to stock-based
compensation expense and less than $1 million related to impairment costs.
The Companys restructuring accrual activity for the nine months
ended September 30, 2016 is summarized as follows (in thousands):
|
|
|
|
|
|
|
Accrual balance as of December 31, 2015
|
|
$
|
65,891
|
|
Restructuring charges
|
|
|
86,576
|
|
Cash paid
|
|
|
(90,078)
|
|
Non-cash accelerations of stock-based compensation expense
|
|
|
(7,374)
|
|
Foreign currency translation and other adjustments
|
|
|
(1,012)
|
|
|
|
|
|
|
Accrual balance as of September 30, 2016
|
|
$
|
54,003
|
|
|
|
|
|
|
|
|
The $54 million restructuring liability as of September 30, 2016 consisted of $8 million for employee severance
expenses, which the Company expects to pay out by the end of the second quarter of 2017, and $46 million related to non-cancelable lease costs, which the Company expects to pay over the terms of the related obligations through the fourth quarter of
2025, less estimated sublease income.
33
The restructuring accruals by segment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
|
|
Americas
|
|
$
|
47,054
|
|
|
$
|
44,499
|
|
EMEA
|
|
|
18,389
|
|
|
|
9,264
|
|
Asia Pacific
|
|
|
448
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accruals
|
|
$
|
65,891
|
|
|
$
|
54,003
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15 Income Taxes
The Companys effective tax rate is the
result of the mix of income earned and losses incurred in various tax jurisdictions that apply a broad range of income tax rates. Historically, the Companys provision for income taxes has differed from the tax computed at the U.S. federal
statutory income tax rate due to state taxes, the effect of non-U.S. operations, non-deductible stock-based compensation expense, non-deductible acquisition-related costs, and adjustments to unrecognized tax benefits.
The Company recorded an income tax benefit of $93 million and $106 million for the three months ended September 30, 2015 and 2016, respectively. The
Company recorded an income tax benefit of $76 million and $125 million for the nine months ended September 30, 2015 and 2016, respectively. For the three and nine months ended September 30, 2015, the income tax benefit was primarily a
result of the Companys loss before income taxes and earnings in equity interests. The income tax benefit for the three months ended September 30, 2016 included tax expense associated with the Companys intention to repatriate
earnings from its wholly-owned foreign subsidiaries, offset by the benefit of foreign tax credits and the Companys loss before income taxes and earnings in equity interest. In addition, the tax benefit for the nine months ended
September 30, 2016 also included tax expenses associated with gain from sale of the Companys real estate property in Santa Clara, California, offset by tax benefits from Tumblr intangible assets impairment charge.
As of September 30, 2016, the Company intends to repatriate cumulative and future earnings from its wholly-owned foreign subsidiaries. The tax
implications of this repatriation (namely a $149 million increase to U.S. taxable income with an associated $66 million U.S. tax credit for foreign income taxes that have been paid on such earnings) have been included in the Companys income
tax benefit for the three and nine months ended September 30, 2016. The Company does not have a plan to repatriate approximately $3.1 billion of earnings related to its equity method investment in Yahoo Japan. If those earnings were to be
repatriated in the future, the Company may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits). It is not practicable to determine the income tax liability that might be incurred if these earnings were to be
repatriated.
During the nine months ended September 30, 2016, the Company received a cash tax refund of $190 million associated with the
Companys claim to carry back its 2015 losses and tax attributes to earlier taxable years.
The Companys gross amount of unrecognized tax
benefits as of September 30, 2016 was $1.1 billion, of which $1.0 billion is recorded on the condensed consolidated balance sheets. The gross unrecognized tax benefits as of September 30, 2016 decreased by $8 million from the recorded
balance as of December 31, 2015. The decrease is mainly related to audit settlements for prior tax years.
The Company is in various stages of
examination and appeal in connection with its taxes both in the United States and in foreign jurisdictions. Those audits generally span tax years 2005 through 2014. As of September 30, 2016, the Companys 2011 through 2013 U.S. federal
income tax returns are currently under examination. The Company has appealed the California Franchise Tax Boards proposed adjustments to the 2005 through 2008 returns, but no formal conclusions have been received to date. While it is difficult
to determine when the examinations will be settled or their final outcomes, certain examinations in various jurisdictions are expected to be resolved in the foreseeable future. The Company believes that it has adequately provided for any reasonably
foreseeable adverse adjustment to its tax returns and that any settlement will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows. It is reasonably possible that the Companys
unrecognized tax benefits could be reduced by up to approximately $24 million in the next twelve months.
In the nine months ended September 30,
2015, the Company satisfied the $3.3 billion income tax liability related to the sale by Yahoo! Hong Kong Holdings Limited, the Companys wholly-owned subsidiary, of Alibaba Group American Depositary Shares (ADSs) in the Alibaba
Group IPO on September 24, 2014. As of September 30, 2016 the Company accrued deferred tax liabilities of $16.4 billion associated with the 384 million ordinary shares of Alibaba Group (Alibaba Group shares) retained by
the Company. Such deferred tax liabilities are subject to periodic adjustments due to changes in the fair value of the Alibaba Group shares.
The
Company may have additional tax liabilities in China related to the sale to Alibaba Group of 523 million Alibaba Group shares that took place during the year ended December 31, 2012 and related to the sale of the 140 million Alibaba
Group ADSs sold in the Alibaba Group IPO that took place during the year ended December 31, 2014. Any taxes assessed and paid in China are expected to be ultimately offset and recovered in the United States through the use of foreign tax
credits.
34
Tax authorities from the Brazilian State of Sao Paulo have assessed certain indirect taxes against the
Companys Brazilian subsidiary, Yahoo! do Brasil Internet Ltda., related to online advertising services. The assessment is for calendar years 2008 through 2011 and as of September 30, 2016 totals approximately $115 million. The Company
currently believes the assessment is without merit. The Company believes the risk of loss is remote and has not recorded an accrual for the assessment.
Note 16 Segments
The Company continues to manage its business geographically. The primary areas of measurement and decision-making are Americas, EMEA (Europe, Middle
East, and Africa), and Asia Pacific. Management relies on an internal reporting process that provides revenue, revenue ex-TAC (which is defined as revenue less cost of revenueTAC), direct costs excluding TAC by segment, and consolidated loss
from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, the Companys segments.
The
following tables present summarized information by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
|
Revenue by segment
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
987,374
|
|
|
$
|
1,058,416
|
|
|
$
|
2,964,305
|
|
|
$
|
2,975,023
|
|
EMEA
|
|
|
79,614
|
|
|
|
98,654
|
|
|
|
246,530
|
|
|
|
278,711
|
|
Asia Pacific
|
|
|
158,685
|
|
|
|
148,136
|
|
|
|
484,073
|
|
|
|
446,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1,225,673
|
|
|
$
|
1,305,206
|
|
|
$
|
3,694,908
|
|
|
$
|
3,699,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAC by segment
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
201,855
|
|
|
$
|
394,838
|
|
|
$
|
549,332
|
|
|
$
|
1,012,903
|
|
EMEA
|
|
|
12,745
|
|
|
|
41,948
|
|
|
|
37,399
|
|
|
|
96,787
|
|
Asia Pacific
|
|
|
8,629
|
|
|
|
10,751
|
|
|
|
19,867
|
|
|
|
32,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TAC
|
|
$
|
223,229
|
|
|
$
|
447,537
|
|
|
$
|
606,598
|
|
|
$
|
1,141,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ex-TAC by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
785,519
|
|
|
$
|
663,578
|
|
|
$
|
2,414,973
|
|
|
$
|
1,962,120
|
|
EMEA
|
|
|
66,869
|
|
|
|
56,706
|
|
|
|
209,131
|
|
|
|
181,924
|
|
Asia Pacific
|
|
|
150,056
|
|
|
|
137,385
|
|
|
|
464,206
|
|
|
|
414,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue ex-TAC
|
|
|
1,002,444
|
|
|
|
857,669
|
|
|
|
3,088,310
|
|
|
|
2,558,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs by segment
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
74,495
|
|
|
|
63,069
|
|
|
|
214,079
|
|
|
|
201,343
|
|
EMEA
|
|
|
23,196
|
|
|
|
7,587
|
|
|
|
63,947
|
|
|
|
47,090
|
|
Asia Pacific
|
|
|
47,214
|
|
|
|
45,607
|
|
|
|
149,766
|
|
|
|
137,399
|
|
Global operating costs
(3)
|
|
|
613,302
|
|
|
|
539,403
|
|
|
|
1,942,565
|
|
|
|
1,676,710
|
|
Gain on sale of patents and land
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,100)
|
|
|
|
(121,559)
|
|
Asset impairment charge
|
|
|
41,699
|
|
|
|
-
|
|
|
|
41,699
|
|
|
|
-
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
394,901
|
|
Intangible assets impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,335
|
|
Depreciation and amortization
|
|
|
152,412
|
|
|
|
115,468
|
|
|
|
457,630
|
|
|
|
388,360
|
|
Stock-based compensation expense
|
|
|
110,426
|
|
|
|
128,892
|
|
|
|
351,252
|
|
|
|
369,263
|
|
Restructuring charges, net
|
|
|
26,012
|
|
|
|
9,962
|
|
|
|
96,932
|
|
|
|
86,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(86,312)
|
|
|
$
|
(52,319)
|
|
|
$
|
(218,460)
|
|
|
$
|
(709,209)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Commencing in the second quarter of 2016, TAC payments related to the Microsoft Search Agreement, which previously would
have been recorded as a reduction to revenue, began to be recorded as cost of revenueTAC due to a required change in revenue presentation. See Note 1The Company and Summary of Significant Accounting Policies and Note
17Microsoft Search Agreement for additional information.
|
35
(2)
|
Direct costs for each segment include certain cost of revenueother and costs associated with the local sales teams.
Prior to the second quarter of 2016, certain account management costs associated with Yahoo Properties were managed locally and included as direct costs for each segment. Prior period amounts have been revised to conform to the current presentation.
|
(3)
|
Global operating costs include product development, marketing, real estate workplace, general and administrative, account
management costs, and other corporate expenses that are managed on a global basis and that are not directly attributable to any particular segment. Beginning in the second quarter of 2016, certain account management costs associated with Yahoo
Properties are managed globally and included as global costs. Prior period amounts have been revised to conform to the current presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
|
Capital expenditures, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
(1)
|
|
$
|
139,796
|
|
|
$
|
35,407
|
|
|
$
|
378,516
|
|
|
$
|
(77,128)
|
|
EMEA
|
|
|
4,616
|
|
|
|
2,606
|
|
|
|
19,265
|
|
|
|
11,425
|
|
Asia Pacific
|
|
|
5,969
|
|
|
|
3,957
|
|
|
|
19,495
|
|
|
|
14,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures, net
|
|
$
|
150,381
|
|
|
$
|
41,970
|
|
|
$
|
417,276
|
|
|
$
|
(51,581)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The nine months ended September 30, 2016 includes net proceeds of $246 million associated with the sale of certain
property assets located in Santa Clara, California. See Note 4Acquisitions and Dispositions for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,447,995
|
|
|
$
|
1,177,265
|
|
Other
|
|
|
353
|
|
|
|
2,890
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
$
|
1,448,348
|
|
|
$
|
1,180,155
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
33,940
|
|
|
|
31,213
|
|
Asia Pacific
|
|
|
65,035
|
|
|
|
61,959
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
1,547,323
|
|
|
$
|
1,273,327
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 5Goodwill and Note 14Restructuring Charges, Net for additional information regarding
segments.
Enterprise Wide Disclosures
The following
tables present revenue for groups of similar services and revenue by U.S. and international markets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
|
Search
(1)(2)
|
|
$
|
515,841
|
|
|
$
|
703,130
|
|
|
$
|
1,586,148
|
|
|
$
|
1,906,507
|
|
Display
(1)
|
|
|
511,356
|
|
|
|
476,263
|
|
|
|
1,481,622
|
|
|
|
1,408,818
|
|
Other
(1)
|
|
|
198,476
|
|
|
|
125,813
|
|
|
|
627,138
|
|
|
|
384,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,225,673
|
|
|
$
|
1,305,206
|
|
|
$
|
3,694,908
|
|
|
$
|
3,699,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
|
Revenue:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
958,394
|
|
|
$
|
1,026,868
|
|
|
$
|
2,887,134
|
|
|
$
|
2,894,207
|
|
International
|
|
|
267,279
|
|
|
|
278,338
|
|
|
|
807,774
|
|
|
|
805,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,225,673
|
|
|
$
|
1,305,206
|
|
|
$
|
3,694,908
|
|
|
$
|
3,699,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
At the beginning of 2016, the Company reclassified certain amounts from other revenue to either search or display
revenue. Prior period amounts have been revised to conform to the current presentation. For the three months ended September 30, 2015, to conform to the current presentation, the Company reclassified $6.4 million and $2.7 million to search and
display revenue, respectively, previously included in other revenue. For the nine months ended September 30, 2015, to conform to the current presentation, the Company reclassified $23.9 million and $8.9 million to search and display revenue,
respectively, previously included in other revenue.
|
(2)
|
Commencing in the second quarter of 2016, TAC payments related to the Microsoft Search Agreement, which previously would
have been recorded as a reduction to revenue, began to be recorded as cost of revenueTAC due to a required change in revenue presentation. See Note 1The Company and Summary of Significant Accounting Policies and Note
17Microsoft Search Agreement for additional information.
|
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 Companys revenue for the three or nine months ended September 30, 2015 and 2016.
Note 17 Microsoft Search Agreement
On December 4, 2009, the Company entered
into the Microsoft Search Agreement. On February 18, 2010, the Company received regulatory clearance from both the U.S. Department of Justice and the European Commission and on February 23, 2010 the Company commenced implementation of the
Microsoft Search Agreement on a market-by-market basis.
On April 15, 2015, the Company and Microsoft entered into the Eleventh Amendment
pursuant to which the terms of the Microsoft Search Agreement were amended. Previously under the Microsoft Search Agreement, Microsoft was the exclusive algorithmic and paid search services provider to Yahoo on personal computers for Yahoo
Properties and for search services provided by Yahoo to Affiliate sites. Microsoft was the non-exclusive provider on mobile devices. Pursuant to the Eleventh Amendment, Microsoft will provide such services on a non-exclusive basis for Yahoo
Properties and Affiliate sites on all devices. Commencing on May 1, 2015, Yahoo agreed to the Volume Commitment and displays only Microsofts paid search results on such search result pages.
Prior to the Eleventh Amendment, the Company was entitled to receive the Revenue Share Rate with respect to revenue generated from paid search results on
Yahoo Properties and on Affiliate sites after deduction of the Affiliate sites share of revenue and certain Microsoft costs. The Revenue Share Rate was 88 percent for the first five years of the Microsoft Search Agreement and then increased to
90 percent on February 23, 2015. Pursuant to the Eleventh Amendment, the Revenue Share Rate increased to 93 percent, but Microsoft now receives its 7 percent revenue share before deduction of the Affiliate sites share of revenue. The
Company is responsible for paying the Affiliate for the Affiliate sites share of revenue.
Additionally, pursuant to the Eleventh Amendment,
the Company has the ability in response to queries on both personal computers and mobile devices to request algorithmic listings only, paid listings only or both algorithmic and paid listings from Microsoft. To the extent the Company requests
algorithmic listings only or requests paid listings but elects not to display such paid listings, the Company pays Microsoft serving costs but not a revenue share. In other cases and with respect to the Volume Commitment, the Revenue Share Rate
applies.
Previously under the Microsoft Search Agreement, Yahoo had sales exclusivity for both the Companys and Microsofts premium
advertisers. For reporting periods ending December 31, 2014 and 2015, and March 31, 2016, TAC related to the Companys Microsoft Search Agreement was recorded as a reduction to revenue. Pursuant to the Eleventh Amendment, the Company
completed the transition of its exclusive sales responsibilities to Microsoft for Microsofts paid search services to premium advertisers in the United States, Canada, and Europe on April 1, 2016 and in its remaining markets (other than
Taiwan and Hong Kong) on June 1, 2016. Following the transition in each respective market, Yahoo is considered the principal in the sale of traffic to Microsoft and other customers because Yahoo is the primary obligor in its arrangements with
Microsoft and has discretion in how search queries from Affiliate sites will be fulfilled and monetized. As a result, the amounts paid to Affiliates under the Microsoft Search Agreement in the transitioned markets are recorded as cost of
revenueTAC rather than as a reduction to GAAP revenue, resulting in GAAP revenue from the Microsoft Search Agreement being reported on a gross rather than net basis.
37
Effective June 3, 2016, the Company and Microsoft further amended the Microsoft Search Agreement to
provide that sales responsibilities for premium advertisers in Taiwan and Hong Kong will not be transitioned. TAC in those markets will continue to be reported as a reduction to revenue.
The term of the Microsoft Search Agreement is 10 years from its commencement date, February 23, 2010, subject to earlier termination as provided in
the Microsoft Search Agreement. As October 1, 2015, either the Company or Microsoft may terminate the Microsoft Search Agreement by delivering a written notice of termination to the other party. The Microsoft Search Agreement will remain in
effect for four months from the date of the termination notice to provide for a transition period; however, the Companys Volume Commitment will not apply in the third and fourth months of this transition period.
Approximately 33 percent and 39 percent of the Companys revenue for the three months ended September 30, 2015 and 2016, respectively, was
attributable to the Microsoft Search Agreement, and approximately 36 percent of the Companys revenue for both the nine months ended September 30, 2015 and 2016 was attributable to the Microsoft Search Agreement. Commencing in the second
quarter of 2016, TAC payments related to the Microsoft Search Agreement for transitioned markets, which previously would have been recorded as a reduction to revenue, began to be recorded as a cost of revenue due to a required change in revenue
presentation. During the three and nine months ended September 30, 2016, $258 million and $510 million of GAAP revenue and cost of revenueTAC, respectively, was due to the change in revenue presentation. See Note 1The Company
and Summary of Significant Accounting Policies for additional information on change in revenue presentation.
The Companys uncollected
revenue share in connection with the Microsoft Search Agreement was $267 million and $335 million, which is included in accounts receivable, net, as of December 31, 2015 and September 30, 2016, respectively.
On December 4, 2009, in connection with entering into the Microsoft Search Agreement, the Company also entered into a License Agreement with
Microsoft (as amended, the License Agreement). Under the License Agreement, Microsoft acquired an exclusive 10-year license to the Companys core search technology and has the ability to integrate this technology into its existing
Web search platforms. Pursuant to the Eleventh Amendment, the exclusive licenses granted to Microsoft under the License Agreement became non-exclusive. The Company also agreed pursuant to the Eleventh Amendment to license certain sales tools to
Microsoft to use solely in connection with Microsofts paid search services pursuant to the terms of the License Agreement.
38
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Yahoo! Inc., together with its consolidated subsidiaries (Yahoo, the Company, we, or us), is a guide to
digital information discovery, focused on informing, connecting, and entertaining our users through our search, communications, and digital content products. By creating highly personalized experiences, we help users discover the information that
matters most to them around the world on mobile or desktop. We create value for advertisers with a streamlined, simple advertising technology stack that leverages Yahoos data, content, and technology to connect advertisers with their
target audiences. Advertisers can build their businesses through advertising to targeted audiences on our online properties and services (Yahoo Properties) and a distribution network of third party entities (Affiliates) who
integrate our advertising offerings into their websites or other offerings (Affiliate sites). Our revenue is generated principally from search and display advertising. We continue to manage and measure our business geographically,
principally in the Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific. As of September 30, 2016, we had approximately 8,500 full-time employees and approximately 600 contractors.
In the following Managements Discussion and Analysis, we provide information regarding the following areas:
|
|
Significant Transactions;
|
|
|
Liquidity and Capital Resources;
|
|
|
Critical Accounting Policies and Estimates; and
|
|
|
Recent Accounting Pronouncements.
|
Recent Developments
Strategic Plan
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. This plan includes simplifying our product portfolio, reducing costs and exploring divestiture of non-core assets.
In the first half of 2016, we began simplifying our product portfolio and exited our Food, Health, Parenting, Makers, and Travel digital magazines, as
well as our Autos, Games, Real Estate and Smart TV products, and focused on our core verticals (News, Sports, Finance and Lifestyle). In the nine months ended September 30, 2016, we substantially completed six planned office closures and
reduced our workforce by 15 percent. Additionally, we completed the sale of our Santa Clara land and received $246 million in net cash proceeds.
Pending Sale of the Operating Business to Verizon Communications Inc.
On July 23, 2016, we entered
into a Stock Purchase Agreement (the Stock Purchase Agreement) with Verizon Communications Inc. (Verizon), pursuant to which we have agreed to sell, and Verizon has agreed to purchase (the Sale), all of the
outstanding shares of Yahoo Holdings, Inc., a newly formed wholly-owned subsidiary of Yahoo (Yahoo Holdings) (and, if elected by Verizon, prior to the sale of Yahoo Holdings to cause Yahoo Holdings to sell to a foreign subsidiary of
Verizon all of the equity interests in a foreign subsidiary of Yahoo Holdings that will hold certain foreign subsidiaries relating to the operating business), which, immediately prior to the consummation of the Sale, will own our operating business.
The aggregate consideration to be paid to us by Verizon in connection with the Sale is $4,825,800,000 in cash, subject to certain adjustments as provided in the Stock Purchase Agreement.
Concurrently with the execution of the Stock Purchase Agreement, we entered into a Reorganization Agreement (the Reorganization Agreement)
with Yahoo Holdings, pursuant to which we will transfer to Yahoo Holdings prior to the consummation of the Sale all of our assets and liabilities relating to our operating business, other than specified excluded assets and retained liabilities, (the
Reorganization). Upon completion of the Sale, Verizon will also receive for its benefit and that of its current and certain of its future affiliates, a non-exclusive, worldwide, perpetual, royalty-free license to certain intellectual
property not core to the operating business held by Excalibur IP, LLC, a wholly-owned subsidiary of the Company (Excalibur), that is not being transferred to Yahoo Holdings with the operating business.
39
The excluded assets include our cash and marketable securities as of the closing of the Sale, our shares in
Alibaba Group and Yahoo Japan, certain other minority equity investments, and all of the equity in Excalibur. The retained liabilities will include the 0.00% Convertible Senior Notes due 2018 (Notes) we issued in November 2013,
securityholder litigation, and certain director and officer indemnification obligations. Following the closing of the Sale, the excluded assets and retained liabilities will remain in Yahoo which will be renamed and will become an independent,
publicly traded, management investment company registered under the Investment Company Act of 1940.
The closing of the Sale is subject to certain
conditions, including, among others, the approval of the Sale by our stockholders, antitrust approvals, the closing of the Reorganization, and certain other customary closing conditions.
The Stock Purchase Agreement may be terminated by us or Verizon in certain circumstances. If the Stock Purchase Agreement is terminated, we may be
required to pay Verizon a termination fee of $144,774,000 in certain circumstances, including if we terminate the Stock Purchase Agreement to enter into a superior proposal satisfying certain requirements.
Under the terms of the Stock Purchase Agreement, each of our stock options outstanding immediately prior to the closing will, if not already vested,
become fully vested as of the closing and will remain outstanding in accordance with its terms, and we will retain all liabilities and obligations with respect to such outstanding stock options. Each restricted stock unit (an RSU) of the
Company that is outstanding immediately prior to the closing generally will be replaced with a cash-settled Verizon RSU award, and will be subject to the same vesting and other terms and conditions as the Yahoo RSUs.
The Sale is expected to close in the first quarter of 2017.
We filed
a preliminary proxy statement regarding the Sale with the U.S. Securities and Exchange Commission on September 9, 2016.
Security Incident
Description of Event
On September 22, 2016, we disclosed
that, based on an ongoing investigation, a copy of certain user account information for at least 500 million user accounts was stolen from Yahoos network in late 2014 (the Security Incident). We believe the user account information
was stolen by a state-sponsored actor. The user account information taken included names, email addresses, telephone numbers, dates of birth, hashed passwords (the vast majority with bcrypt) and, in some cases, encrypted or unencrypted security
questions and answers. Our investigation to date indicates that the stolen information did not include unprotected passwords, payment card data, or bank account information. Payment card data and bank account information are not stored in the system
that the investigation found to be affected. Based on the investigation to date, we do not have evidence that the state-sponsored actor is currently in or accessing the Companys network.
Investigation
In late July 2016, a hacker claimed to have
obtained certain Yahoo user data. After investigating this claim with the assistance of an outside forensic expert, the Company could not substantiate the hackers claim. Following this investigation, the Company intensified an ongoing broader
review of the Companys network and data security, including a review of prior access to the Companys network by a state-sponsored actor that the Company had identified in late 2014. Based on further investigation with an outside forensic
expert, the Company disclosed the Security Incident on September 22, 2016, and began notifying potentially affected users, regulators, and other stakeholders.
The Company, with the assistance of outside forensic experts, continues to investigate the Security Incident and related matters. The Company is actively
working with U.S. law enforcement authorities on this matter.
As described above, the Company had identified that a state-sponsored actor had access
to the Companys network in late 2014. An Independent Committee of the Board, advised by independent counsel and a forensic expert, is investigating, among other things, the scope of knowledge within the Company in 2014 and thereafter regarding
this access, the Security Incident, the extent to which certain users account information had been accessed, the Companys security measures, and related incidents and issues.
In addition, the forensic experts are currently investigating certain evidence and activity that indicates an intruder, believed to be the same
state-sponsored actor responsible for the Security Incident, created cookies that could have enabled such intruder to bypass the need for a password to access certain users accounts or account information.
Separately, on November 7, 2016, law enforcement authorities began sharing certain data that they indicated was provided by a hacker who claimed the
information was Yahoo user account data. Yahoo will, with the assistance of its forensic experts, analyze and investigate the hackers claim that the data is Yahoo user account data.
Current and Future Expenses and Losses
We recorded expenses
of $1 million related to the Security Incident in the quarter ended September 30, 2016. The Security Incident did not have a material adverse impact on our business, cash flows, financial condition, or results of operations for the quarter ended
September 30, 2016. However, we have subsequently incurred expenses related to the
40
Security Incident to investigate and take remedial actions to notify and protect our users, and expect to continue to incur investigatory, legal, and other expenses associated with the Security
Incident in the foreseeable future. We will recognize and include these expenses as part of our operating expenses as they are incurred. The Company does not have cybersecurity liability insurance.
Litigation, Claims, and Governmental Investigations
To date,
23 putative consumer class action lawsuits have been filed against the Company in U.S. federal and state courts, and in foreign courts relating to the Security Incident. The plaintiffs, who purport to represent various classes of users, generally
claim to have been harmed by the Companys alleged actions and/or omissions in connection with the Security Incident and assert a variety of common law and statutory claims seeking monetary damages or other related relief. Additional lawsuits
and claims related to the Security Incident may be asserted by or on behalf of users, partners, shareholders, or others seeking damages or other related relief.
In addition, the Company is cooperating with federal, state, and foreign governmental officials and agencies seeking information and/or documents about
the Security Incident and related matters, including the U.S. Federal Trade Commission, the U.S. Securities and Exchange Commission, a number of State Attorneys General, and the U.S. Attorneys office for the Southern District of New York.
Significant Transactions
Microsoft
Search Agreement
The term of the Search and Advertising Services and Sales Agreement (Microsoft Search Agreement) with
Microsoft Corporation (Microsoft) is 10 years from its commencement date, February 23, 2010, subject to earlier termination as provided in the Microsoft Search Agreement. Under the current terms of the Microsoft Search Agreement, as
amended on April 15, 2015 by the Eleventh Amendment to the Microsoft Search Agreement (the Eleventh Amendment), we are entitled to receive a percentage of the revenue (the Revenue Share Rate) generated from
Microsofts services on Yahoo Properties and on Affiliate sites equal to 93 percent. Microsoft receives its 7 percent revenue share before deduction of the Affiliate sites share of revenue. Yahoo is responsible for paying the Affiliate
for the Affiliate sites share of revenue. 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 our Affiliate sites and will display only Microsofts paid search results on such search result pages.
Traffic
acquisition costs (TAC) related to our Microsoft Search Agreement were recorded as a reduction to revenue through March 31, 2016. Pursuant to the Eleventh Amendment to the Microsoft Search Agreement, we completed the transition of
our exclusive sales responsibilities to Microsoft for Microsofts paid search services to premium advertisers in the United States, Canada, and Europe on April 1, 2016 and in the remaining markets (other than Taiwan and Hong Kong) on
June 1, 2016. Following the transition in each respective market, we are considered the principal in the sale of traffic to Microsoft and other customers because we are the primary obligor in our arrangements with Microsoft and have discretion
in how search queries from Affiliate sites will be fulfilled and monetized. As a result, amounts paid to Affiliates under the Microsoft Search Agreement in the transitioned markets are recorded as cost of revenue TAC rather than as a
reduction to revenue, resulting in GAAP revenue from the Microsoft Search Agreement being reported on a gross rather than a net basis.
Effective
June 3, 2016, Yahoo and Microsoft further amended the Microsoft Search Agreement to provide that sales responsibilities for premium advertisers in Taiwan and Hong Kong will not be transitioned. TAC in those markets will continue to be reported
as a reduction to revenue.
The table below presents how we accounted for amounts paid to Affiliates related to the Microsoft Search Agreement in
transitioned markets, and shows the impact of the implementation of the Eleventh Amendment in transitioned markets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Cost of revenue TAC in transitioned markets
(*)
|
|
$
|
-
|
|
|
$
|
257,601
|
|
|
$
|
-
|
|
|
$
|
509,932
|
|
Reduction to revenue in transitioned markets
|
|
$
|
299,710
|
|
|
$
|
-
|
|
|
$
|
987,601
|
|
|
$
|
273,705
|
|
|
|
(*)
|
For the three months ended September 30, 2016, cost of revenue TAC included $222 million in the Americas
segment, $34 million in the EMEA segment and $2 million in the Asia Pacific segment. For the nine months ended September 30, 2016, cost of revenue TAC included $440 million in the Americas segment, $67 million in the EMEA segment and $3
million in the Asia Pacific segment.
|
Revenue under the Microsoft Search Agreement represented approximately 33 percent and 39
percent of our revenue for the three months ended September 30, 2015 and 2016, respectively. The increase in revenue from Microsoft year-over-year is due to the change in revenue presentation related to the Eleventh Amendment that took place in
the second quarter of 2016 for which we now account for amounts paid to Affiliates in transitioned markets as cost of
41
revenue TAC rather than as a reduction to GAAP revenue, resulting in revenue from the Microsoft Search Agreement being reported on a gross rather than net basis. This was partially offset
by a shift in composition of revenue due to the use of Google and Gemini (our unified marketplace for search and native advertising on Yahoo Properties and Affiliate sites) to source search results and advertisements as allowed by the Eleventh
Amendment.
Revenue under the Microsoft Search Agreement represented approximately 36 percent of our revenue for both the nine months ended
September 30, 2015 and 2016.
See Note 17Microsoft Search Agreement in the Notes to our condensed consolidated financial
statements for additional information.
Key Financial Metrics
The key financial metrics we use are as follows:
revenue; revenue less traffic acquisition costs, or revenue ex-TAC; loss from operations; net income (loss) attributable to Yahoo! Inc.; adjusted EBITDA; 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
1,225,673
|
|
|
$
|
1,305,206
|
|
|
$
|
3,694,908
|
|
|
$
|
3,699,995
|
|
Revenue ex-TAC
|
|
$
|
1,002,444
|
|
|
$
|
857,669
|
|
|
$
|
3,088,310
|
|
|
$
|
2,558,209
|
|
Loss from operations
(1)
|
|
$
|
(86,312
|
)
|
|
$
|
(52,319
|
)
|
|
$
|
(218,460
|
)
|
|
$
|
(709,209)
|
|
Net income (loss) attributable to Yahoo! Inc.
|
|
$
|
76,261
|
|
|
$
|
162,826
|
|
|
$
|
75,905
|
|
|
$
|
(376,319)
|
|
Adjusted EBITDA
|
|
$
|
244,237
|
|
|
$
|
229,153
|
|
|
$
|
737,053
|
|
|
$
|
548,594
|
|
Net cash provided by (used in) operating activities
|
|
$
|
137,275
|
|
|
$
|
217,906
|
|
|
$
|
(2,515,712
|
)
|
|
$
|
993,604
|
|
Free cash flow
(2)(3)
|
|
$
|
18,028
|
|
|
$
|
167,119
|
|
|
$
|
(3,041,674
|
)
|
|
$
|
889,960
|
|
|
|
(1) Includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
110,426
|
|
|
$
|
128,892
|
|
|
$
|
351,252
|
|
|
$
|
369,263
|
|
Restructuring charges, net
|
|
$
|
26,012
|
|
|
$
|
9,962
|
|
|
$
|
96,932
|
|
|
$
|
86,576
|
|
Asset impairment charge
|
|
$
|
41,699
|
|
|
$
|
-
|
|
|
$
|
41,699
|
|
|
$
|
-
|
|
Goodwill impairment charge
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
394,901
|
|
Intangible assets impairment charge
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
87,335
|
|
|
|
(2)
|
During the nine months ended September 30, 2015, we satisfied the $3.3 billion income tax liability related to the
sale of Alibaba Group Holding Limited (Alibaba Group) American Depositary Shares (ADSs) in September 2014.
|
(3)
|
During the nine months ended September 30, 2016, we received net cash proceeds from the sale of land of $246 million
and a cash tax refund of $190 million associated with our claim to carry back our 2015 losses and tax attributes to earlier taxable years.
|
Revenue ex-TAC.
Revenue ex-TAC is a non-GAAP financial measure defined as GAAP revenue less TAC that has been recorded as a cost of
revenue. TAC consists of payments made to Affiliates and payments made to companies that direct consumer and business traffic to Yahoo Properties. TAC is recorded either as a reduction to revenue or as cost of revenue.
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 expense, net (which includes interest), earnings in equity interests, net income attributable to noncontrolling interests, and other gains, losses, and
expenses that we do not believe are indicative of our ongoing results.
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 acquisition of property and equipment, net (i.e., acquisition of property and equipment less proceeds received
from disposition of property and equipment including land), and dividends received from equity investees.
For additional information about these
non-GAAP financial measures, see Non-GAAP Financial Measures included in our Annual Report on Form 10-K for the year ended December 31, 2015 under the caption Managements Discussion and Analysis of Financial Condition
and Results of Operations.
42
In this Managements Discussion and Analysis, we also present adjusted GAAP revenue and cost of revenue
TAC amounts for the three and nine months ended September 30, 2016 that exclude the effect of the change in revenue presentation related to implementation of the Eleventh Amendment to the Microsoft Search Agreement. We believe providing
this additional information to investors is useful because it provides investors with comparable revenue and cost of revenue TAC measures for comparison to our historical reported financial information.
Revenue and Revenue ex-TAC (a Non-GAAP Financial Measure)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
% Change
|
|
|
2015
|
|
|
2016
|
|
|
% Change
|
|
|
|
|
|
(dollars in thousands)
|
|
Revenue
|
|
$
|
1,225,673
|
|
|
$
|
1,305,206
|
|
|
|
6%
|
|
|
$
|
3,694,908
|
|
|
$
|
3,699,995
|
|
|
|
0%
|
|
Less: TAC
|
|
|
223,229
|
|
|
|
447,537
|
|
|
|
100%
|
|
|
|
606,598
|
|
|
|
1,141,786
|
|
|
|
88%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ex-TAC
|
|
$
|
1,002,444
|
|
|
$
|
857,669
|
|
|
|
(14)%
|
|
|
$
|
3,088,310
|
|
|
$
|
2,558,209
|
|
|
|
(17)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2016, revenue and TAC increased $80 million and $224 million, respectively,
compared to the same period of 2015. For the three months ended September 30, 2016, revenue ex-TAC decreased $145 million compared to the same period of 2015. The increase in revenue for the three months ended September 30, 2016 was
primarily attributable to an increase in search revenue of $187 million, partially offset by a decline in display and other revenue of $35 million and $73 million, respectively. The increase in search revenue was primarily due to the change in
revenue presentation related to the implementation of the Eleventh Amendment to the Microsoft Search Agreement that took place in the second quarter of 2016 for which we now record amounts paid to Affiliates in transitioned markets as cost of
revenue TAC rather than as a reduction to GAAP revenue, resulting in revenue from the Microsoft Search Agreement being reported on a gross rather than net basis. The revenue and TAC increase from the change in revenue presentation was $258
million for the three months ended September 30, 2016. See Significant TransactionsMicrosoft Search Agreement, above, for further detail. Excluding the impact of the change in revenue presentation, noted above, search revenue
declined $70 million, or 14 percent, primarily in the Americas segment due to a decline in Paid Clicks on Yahoo Properties and Affiliate sites driven by a decline in traffic, partially offset by improved pricing on Affiliate sites. The decline in
display revenue was primarily due to a decline in revenue from Affiliate sites partially offset by an increase in revenue from Yahoo Properties. The decline in revenue from Affiliate sites was primarily driven by a decline in video advertising and,
to a lesser extent, audience and native advertising. The increase in revenue from Yahoo Properties was primarily driven by an increase in audience advertising and, to a lesser extent, video advertising, partially offset by a decline in premium
advertising. The decline in other revenue was primarily attributable to the completion of recognition of deferred revenue under the Technology and Intellectual Property License Agreement (the TIPLA) with Alibaba Group pursuant to which
we recognized $60 million in the three months ended September 30, 2015 (for which no similar revenue was recognized in 2016), and a decline in listings-based revenue of $8 million.
For the nine months ended September 30, 2016, revenue increased $5 million and TAC increased $535 million compared to the same period of 2015. For
the nine months ended September 30, 2016, revenue ex-TAC decreased $530 million, compared to the same period of 2015. The increase in revenue for the nine months ended September 30, 2016 was primarily attributable to an increase in search
revenue of $320 million, partially offset by declines in display revenue and other revenue of $73 million and $243 million, respectively. The increase in search revenue was primarily due to the change in revenue presentation related to the
implementation of the Eleventh Amendment to the Microsoft Search Agreement, as noted above. The revenue and TAC increase from the change in revenue presentation was $510 million for the nine months ended September 30, 2016. Excluding the impact
of the change in revenue presentation, search revenue declined $190 million, or 12 percent, primarily in the Americas segment due to a decline in Paid Clicks on Yahoo Properties and Affiliate sites driven by a decline in traffic, partially offset by
an increase in Affiliate site revenue due to improved pricing. The decline in display revenue was primarily associated with a decline in revenue on Affiliate sites due to a decline in video advertising and, to a lesser extent, audience advertising,
partially offset by an increase in native advertising. Additionally, display revenue on Yahoo Properties declined slightly for the nine months ended September 30, 2016 primarily due to a decline in premium advertising and, to a lesser extent,
native advertising, partially offset by an increase in audience advertising. The decline in other revenue was primarily attributable to the completion of recognition of deferred revenue under the TIPLA with Alibaba Group pursuant to which we
recognized $199 million in the nine months ended September 30, 2015 (for which no similar revenue was recognized in 2016), and a decline in listings-based revenue of $26 million.
Total revenue noted above included declines of $21 million and $56 million in revenue for the three and nine months ended September 30, 2016,
respectively, as compared to the same periods of 2015, associated with the agreement we entered into with Mozilla Corporation (Mozilla) in November 2014 to compensate Mozilla for making us the default search provider on certain of
Mozillas products in the United States. Total TAC noted above included declines of $20 million in TAC for both the three and nine months ended September 30, 2016, as compared to the same periods of 2015, associated with an amendment to
the agreement with Mozilla in the third quarter of 2016.
See Results of Operations for a more detailed discussion of the factors that
contributed to the changes in revenue and TAC during these periods.
43
We expect 2016 revenue to be slightly higher than the amount reported in 2015 primarily due to the change in
revenue presentation related to the Microsoft Search Agreement. Excluding the impact of the change in revenue presentation related to the Microsoft Search Agreement, revenue is expected to decline from the amount reported in 2015 as a result of the
completion of recognition of deferred revenue under the TIPLA with Alibaba Group, strategic product exits, declines in our legacy desktop display business and a decline in mobile and desktop search.
Mavens Revenue
One of our primary strategies is to invest in
and grow our Mavens offerings. Revenue from our Mavens offerings is generated from, without duplication, (i) mobile (as defined below), (ii) video ads and video ad packages, (iii) native ads, and (iv) Tumblr and Polyvore ads and
fees.
Mavens revenue for the three months ended September 30, 2016 increased to $524 million, compared to $422 million for the three months
ended September 30, 2015. Mavens revenue for the nine months ended September 30, 2016 increased to $1,420 million, compared to $1,189 million for the nine months ended September 30, 2015. The change in revenue presentation associated
with the Eleventh Amendment to the Microsoft Search Agreement contributed $127 million and $246 million to Mavens revenue in the three and nine months ended September 30, 2016, respectively. Excluding the impact of the revenue presentation
noted above, Mavens revenue would have been $397 million and $1,174 million, respectively, for the three and nine months ended September 30, 2016. For the three and nine months ended September 30, 2016, excluding the change in revenue
presentation, Mavens revenue declined $25 million, or 6 percent, and $15 million, or 1 percent, respectively, compared to the same periods of 2015. This decline in Mavens revenue for the three months ended September 30, 2016 was primarily
attributable to a decline in video advertising on Affiliate sites associated with pricing and demand. The decline in Mavens revenue for the nine months ended September 30, 2016 was primarily attributable to a decline in video advertising on
Affiliate sites associated with pricing and demand, partially offset by an increase in mobile advertising and social advertising.
We expect our
Mavens revenue to be higher in 2016 from the amount reported in 2015. Excluding the impact of the change in revenue presentation related to the Microsoft Search Agreement, Mavens revenue is expected to decline from the amount reported in 2015 based
on trends observed through the third quarter of 2016.
Mobile Revenue
With the significant platform shift to mobile devices, including smartphones and tablets, we continue to focus on mobile products and mobile ad formats.
In the third quarter of 2016, we continued to refresh the user experience on mobile with the launch of Yahoo Newsroom, Yahoo View, and Yahoo Fantasy Sports apps. As of September 30, 2016, 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 revenue also includes leads, listings and fees revenue
and e-commerce revenue allocated to user activity on mobile devices. For additional information about how we generate and recognize mobile revenue, see Key Financial Metrics
Revenue
Mobile Revenue
included in our Annual Report on Form 10-K for the year ended December 31, 2015 under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations.
Mobile revenue for the three months ended September 30, 2016 increased to $396 million, compared to $271 million for the three months ended
September 30, 2015. Mobile revenue for the nine months ended September 30, 2016 increased to $1,035 million, compared to $757 million for the nine months ended September 30, 2015. The change in revenue presentation associated with the
Eleventh Amendment to the Microsoft Search Agreement contributed $127 million and $246 million to mobile revenue in the three and nine months ended September 30, 2016, respectively. Excluding the impact of the revenue presentation, noted above,
mobile revenue would have been $269 million and $789 million, respectively, for the three and nine months ended September 30, 2016. For the three and nine months ended September 30, 2016, excluding the change in revenue presentation,
mobile revenue decreased $2 million, or 1 percent, and increased $32 million, or 4 percent, respectively, compared to the same periods of 2015. The increase in mobile revenue for the nine months ended September 30, 2016 was primarily
attributable to growth in native advertising as well as an increase in search advertising revenue (excluding the impact of the change in revenue presentation).
We expect our mobile revenue to be higher in 2016 from the amount reported in 2015. Excluding the impact of the change in revenue presentation related to
the Microsoft Search Agreement, mobile revenue is expected to increase slightly from the amount reported in 2015 based on trends observed through the third quarter of 2016.
TAC rates that we pay to Affiliates for Mavens and mobile are substantially consistent with our TAC rates for our other revenue streams.
44
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(dollars in thousands)
|
|
Total revenue
|
|
$
|
1,225,673
|
|
|
$
|
1,305,206
|
|
|
$
|
3,694,908
|
|
|
$
|
3,699,995
|
|
Total operating expenses
(1)
|
|
|
1,311,985
|
|
|
|
1,357,525
|
|
|
|
3,913,368
|
|
|
|
4,409,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(86,312)
|
|
|
$
|
(52,319)
|
|
|
$
|
(218,460)
|
|
|
$
|
(709,209)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
110,426
|
|
|
$
|
128,892
|
|
|
$
|
351,252
|
|
|
$
|
369,263
|
|
Restructuring charges, net
|
|
$
|
26,012
|
|
|
$
|
9,962
|
|
|
$
|
96,932
|
|
|
$
|
86,576
|
|
Asset impairment charge
|
|
$
|
41,699
|
|
|
$
|
-
|
|
|
$
|
41,699
|
|
|
$
|
-
|
|
Goodwill impairment charge
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
394,901
|
|
Intangible assets impairment charge
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
87,335
|
|
Items as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
Total operating expenses
|
|
|
107%
|
|
|
|
104%
|
|
|
|
106%
|
|
|
|
119%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7)%
|
|
|
|
(4)%
|
|
|
|
(6)%
|
|
|
|
(19)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
9%
|
|
|
|
10%
|
|
|
|
10%
|
|
|
|
10%
|
|
|
|
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, e-commerce transactions, royalties, patent licenses, and consumer and business fee-based services. For additional information about how we generate and recognize revenue, see Results of Operations
Revenue Search Revenue, Display Revenue, and Other Revenue included in our Annual Report on Form 10-K for the year ended December 31, 2015, under the caption Managements
Discussion and Analysis of Financial Condition and Results of Operations.
In the first quarter of 2016, we reclassified certain amounts from
other revenue to either search or display revenue. To conform to the current presentation, we reclassified $6.4 million and $2.7 million to search and display revenue, respectively, previously included in other revenue for the three months ended
September 30, 2015, and we reclassified $23.9 million and $8.9 million to search and display revenue, respectively, previously included in other revenue for the nine months ended September 30, 2015.
Search Revenue
The following table presents search revenue
and search revenue as a percentage of total revenue for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Search
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo Properties
|
|
$
|
441,979
|
|
|
$
|
456,370
|
|
|
$
|
1,397,961
|
|
|
$
|
1,343,967
|
|
Affiliate sites
|
|
|
73,862
|
|
|
|
246,760
|
|
|
|
188,187
|
|
|
|
562,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total search revenue
|
|
$
|
515,841
|
|
|
$
|
703,130
|
|
|
$
|
1,586,148
|
|
|
$
|
1,906,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Search as a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo Properties
|
|
|
36%
|
|
|
|
35%
|
|
|
|
38%
|
|
|
|
37%
|
|
Affiliate sites
|
|
|
6%
|
|
|
|
19%
|
|
|
|
5%
|
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total search revenue
|
|
|
42%
|
|
|
|
54%
|
|
|
|
43%
|
|
|
|
52%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Search revenue for the three and nine months ended September 30, 2016 increased $187 million and $320
million, respectively, compared to the same periods of 2015. The increase in search revenue was primarily due to the change in the revenue presentation associated with the Eleventh Amendment to the Microsoft Search Agreement that took place in the
second quarter of 2016 for which we now record amounts paid to Affiliates in transitioned markets as cost of revenue TAC rather than as a reduction to GAAP revenue, resulting in revenue from the Microsoft Search Agreement being reported on a
gross rather than net basis. The revenue and TAC increase from the change in revenue presentation was $258 million and $510 million for the three and nine months ended September 30, 2016, respectively. See Significant
TransactionsMicrosoft Search Agreement, above, for further detail. Excluding the impact of the change in revenue presentation, noted above, search revenue for the three and nine months ended September 30, 2016 declined $70 million,
or 14 percent, and $190 million, or 12 percent, respectively, primarily in the Americas segment due to a decline in Paid Clicks on Yahoo Properties and Affiliate sites driven by a decline in traffic. For the three and nine months ended
September 30, 2016, despite the decline in Paid Clicks on Affiliate sites, advertising revenue on Affiliate sites grew by $21 million and $82 million, respectively (excluding the impact of the change in revenue presentation), from improved
Price-per-Click in the Americas segment due to a significant reduction in lower monetizing Affiliate clicks as compared to the same periods of 2015.
Display
Revenue
The following table presents display revenue and display revenue as a percentage of total revenue for the periods presented (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Display
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo Properties
|
|
$
|
349,636
|
|
|
$
|
384,054
|
|
|
$
|
1,069,260
|
|
|
$
|
1,063,954
|
|
Affiliate sites
|
|
|
161,720
|
|
|
|
92,209
|
|
|
|
412,362
|
|
|
|
344,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total display revenue
|
|
$
|
511,356
|
|
|
$
|
476,263
|
|
|
$
|
1,481,622
|
|
|
$
|
1,408,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display as a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo Properties
|
|
|
29%
|
|
|
|
29%
|
|
|
|
29%
|
|
|
|
29%
|
|
Affiliate sites
|
|
|
13%
|
|
|
|
7%
|
|
|
|
11%
|
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total display revenue
|
|
|
42%
|
|
|
|
36%
|
|
|
|
40%
|
|
|
|
38%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2016, we changed the account coding for certain transactions to properly reflect the
allocation of display revenue between Yahoo Properties and Affiliate sites. Prior period amounts have been revised to conform to the current presentation, as follows: Yahoo Properties display revenue should have been $357 million, $363 million, $350
million and $421 million for the first, second, third and fourth quarters of 2015, respectively. Affiliate display revenue should have been $110 million, $140 million, $162 million, and $183 million for the first, second, third and fourth quarters
of 2015, respectively.
Display revenue for the three months ended September 30, 2016 decreased $35 million, or 7 percent, compared to the same
period of 2015. The decline in display revenue for the three months ended September 30, 2016 was due to a decline on Affiliate sites of $70 million, partially offset by an increase in advertising revenue from Yahoo Properties of $35 million,
respectively. The decline in revenue from Affiliate sites was primarily associated with a decline in video advertising due to declines in volume and pricing and, to a lesser extent, declines in volume of audience advertising and pricing of native
advertising. The increase in revenue from Yahoo Properties was primarily associated with an increase in audience advertising due to increases in volume and pricing and, to a lesser extent, video advertising due to an increase in volume, which was
partially offset by a decline in premium advertising driven by both volume and pricing declines.
Display revenue for the nine months ended
September 30, 2016 decreased $73 million, or 5 percent, compared to the same period of 2015. The decline in display revenue for the nine months ended September 30, 2016 was due to a decline on Yahoo Properties and Affiliate sites of $5
million and $67 million, respectively. The decline in revenue on Affiliate sites was primarily attributable to a decline in video advertising driven by volume and pricing declines and, to a lesser extent, audience advertising due to lower volume,
partially offset by an increase in native advertising due to higher volume. The slight decline in display revenue on Yahoo Properties was primarily due to a decline in premium advertising and, to a lesser extent, native advertising, partially offset
by an increase in audience advertising.
The total decrease in display revenue for the three and nine months ended September 30, 2016 described
above included the impact of unfavorable foreign exchange fluctuations of $4 million and $18 million, respectively, for the three and nine months ended September 30, 2016, using the foreign currency exchange rates from the three and nine months
ended September 30, 2015.
46
Other Revenue
The following table presents other revenue and other revenue as a percentage of total revenue for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Other revenue
|
|
$
|
198,476
|
|
|
$
|
125,813
|
|
|
$
|
627,138
|
|
|
$
|
384,670
|
|
Other revenue as a percentage of total revenue
|
|
|
16%
|
|
|
|
10%
|
|
|
|
17%
|
|
|
|
10%
|
|
|
|
Other revenue for the three and nine months ended September 30, 2016 decreased $73 million, or 37 percent, and $242
million, or 39 percent, respectively, compared to the same periods of 2015. The decrease in other revenue was attributable to a decline in fees and listings-based revenue of $64 million and $8 million, respectively, for the three months ended
September 30, 2016, and a decline in fees and listings-based revenue of $216 million and $26 million, respectively, for the nine months ended September 30, 2016. The decline in fees revenue was primarily due to the completion of
recognition of deferred revenue under the TIPLA with Alibaba Group pursuant to which we recognized $60 million and $199 million, respectively, in the three and nine months ended September 30, 2015. The decline in listings-based revenue for the
three and nine months ended September 30, 2016 was primarily attributable to partner agreements that ended in 2015 for which we have no similar revenue in 2016.
We expect other revenue to decline in 2016, as compared to 2015, as a result of completing the recognition of deferred revenue under the TIPLA with
Alibaba Group in the 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, 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 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 and Affiliate sites. Price-per-Ad is defined as display revenue from Yahoo Properties and Affiliate sites 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 and Affiliate sites.
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. Prior period amounts have been updated to conform to the current presentation.
Search Metrics
For both the three and nine months ended
September 30, 2016, Paid Clicks decreased 22 percent compared to the same periods of 2015, primarily due to a decline in Paid Clicks from Affiliate and Yahoo traffic, including on desktop.
For the three and nine months ended September 30, 2016, Price-per-Click increased 9 percent and 8 percent, respectively, compared to the same
periods of 2015, due to a mix shift toward Yahoo Properties and higher monetizing Affiliate clicks, which resulted from a significant reduction in lower monetizing Affiliate clicks.
Search click-driven revenue declined 15 percent and 16 percent for the three and nine months ended September 30, 2016, respectively, as compared to
the same periods of 2015, driven by the decline in traffic on Yahoo Properties.
Display Metrics
For the three months ended September 30, 2016, the number of Ads Sold and Price-per-Ad decreased 5 percent and increased 1 percent, respectively,
compared to the same period of 2015. The decline in number of Ads Sold was primarily attributable to a decline in premium Ads Sold on Yahoo Properties. The increase in Price-per-Ad was primarily due to an increase in pricing of audience ads on both
Yahoo Properties and Affiliate sites, offset by a decline in overall pricing of premium, video and native ad units sold.
47
For the nine months ended September 30, 2016, the number of Ads Sold and Price-per-Ad increased 4
percent and decreased 7 percent, respectively, compared to the same period of 2015. The increase in number of Ads Sold was primarily due to an increase in native and audience Ads Sold, partially offset by a decline in premium Ads Sold. Native Ads
Sold grew primarily due to our syndication (third-party, affiliate) business and an increase in native Ads Sold internationally. The decrease in Price-per-Ad was primarily due to a decline in overall pricing of premium, video and native ads units
sold, partially offset by an increase in pricing of audience Ads Sold on both Yahoo Properties and Affiliate sites.
Native ad units represented
approximately 46 percent of total Ads Sold for both the three and nine months ended September 30, 2016 compared to 45 percent and 42 percent of total Ads Sold for the three and nine months ended September 30, 2015, respectively.
Operating Costs and Expenses
Cost of Revenue TAC
TAC consists of payments made to
third-party entities that have integrated our advertising offerings into their Websites or other offerings and payments made to companies that direct consumer and business traffic to Yahoo Properties. We also have an agreement to compensate Mozilla
to make us the default search provider on certain of Mozillas 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Cost of revenue TAC
|
|
$
|
223,229
|
|
|
$
|
447,537
|
|
|
$
|
606,598
|
|
|
$
|
1,141,786
|
|
Cost of revenue TAC as a percentage of revenue
|
|
|
18%
|
|
|
|
34%
|
|
|
|
16%
|
|
|
|
31%
|
|
|
|
Cost of revenue TAC for the three and nine months ended September 30, 2016 increased $224 million and $535
million, respectively, compared to the same periods of 2015, primarily due to the change in revenue presentation related to the implementation of the Eleventh Amendment to the Microsoft Search Agreement that took place in the second quarter of 2016
for which we now record amounts paid to Affiliates in transitioned markets as cost of revenue TAC rather than as a reduction to GAAP revenue, resulting in revenue from the Microsoft Search Agreement being reported on a gross rather than net
basis. The revenue and TAC increase from the change in revenue presentation was $258 million and $510 million for the three and nine months ended September 30, 2016, respectively. See Significant TransactionsMicrosoft Search
Agreement above for further detail. For the three and nine months ended September 30, 2016, excluding the impact of the change in revenue presentation, TAC decreased $33 million, or 15 percent, and increased $25 million, or 4 percent,
respectively. The decline in TAC excluding the impact of the change in revenue presentation for the three months ended September 30, 2016 was primarily due to a decline in display TAC, partially offset by an increase in search TAC from Google
and Gemini. The remaining increase in cost of revenue TAC for the nine months ended September 30, 2016 was attributable to an increase in search TAC from Google and Gemini, partially offset by a decrease in display TAC. Additionally,
search TAC for the three and nine months ended September 30, 2016 was impacted by a $20 million decline associated with an amendment to our agreement with Mozilla.
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 Yahoos 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Cost of revenue other
|
|
$
|
302,846
|
|
|
$
|
255,421
|
|
|
$
|
884,041
|
|
|
$
|
806,491
|
|
Cost of revenue other as a percentage of revenue
|
|
|
25%
|
|
|
|
20%
|
|
|
|
24%
|
|
|
|
22%
|
|
|
|
Cost of revenue other for the three months ended September 30, 2016 decreased $47 million, or 16 percent,
compared to the same period of 2015, primarily due to declines in content expense of $19 million, depreciation and amortization expense of $9 million, compensation costs of $7 million, credit card costs of $4 million, and lower cost of revenue of $5
million related to a decline in algorithmic serving costs partially offset by an increase in costs associated with specialized ad campaigns, fraud prevention and ad verification fees. The decline in content expense was primarily due to original
content production costs in 2015 for which we have no similar costs in 2016.
48
Cost of revenue other for the nine months ended September 30, 2016 decreased $78 million, or 9
percent, compared to the same period of 2015. The decrease for the nine months ended September 30, 2016, compared to 2015, was primarily due to declines in content expense of $38 million, compensation costs of $21 million, credit card costs of
$15 million, partially offset by increases in other cost of revenue of $5 million related to an increase in costs associated with specialized ad campaigns, fraud prevention and ad verification fees partially offset by lower algorithmic serving
costs. The decline in content expense primarily due to original content production costs in 2015 for which we have no similar costs in 2016.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Sales and marketing expenses
|
|
$
|
274,329
|
|
|
$
|
212,654
|
|
|
$
|
823,990
|
|
|
$
|
674,711
|
|
Sales and marketing expenses as a percentage of revenue
|
|
|
22%
|
|
|
|
16%
|
|
|
|
22%
|
|
|
|
18%
|
|
|
|
Sales and marketing expenses for the three months ended September 30, 2016 decreased $62 million, or 22 percent,
compared to the same period of 2015, primarily due to declines in compensation costs of $25 million, marketing and public relations expense of $23 million, and bad debt expense of $9 million. The decline in compensation costs was primarily
attributable to a 22 percent decrease in headcount year-over-year, as well as a decline in commissions. The decline in marketing and public relations expense was primarily attributable to brand marketing campaigns in 2015 for which there were no
similar campaigns in 2016. The decline in bad debt expense reflected improved collections of total and aged accounts receivable balances.
Sales and
marketing expenses for the nine months ended September 30, 2016 decreased $149 million, or 18 percent, compared to the same period of 2015, primarily due to declines in compensation costs of $72 million, marketing and public relations expense
of $43 million, bad debt expense of $10 million, travel and entertainment expense of $8 million, and outside service provider expense of $7 million. The decline in compensation costs was primarily attributable to a 22 percent decrease in headcount
year-over-year, as well as a decline in commissions. The decline in marketing and public relations expense was primarily attributable to brand marketing campaigns in 2015 for which there were no similar campaigns in 2016. The decline in bad debt
expense reflected improved collections of total and aged accounts receivable balances.
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, research and development, and Yahoos 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Product development expenses
|
|
$
|
272,285
|
|
|
$
|
243,644
|
|
|
$
|
905,460
|
|
|
$
|
801,708
|
|
Product development expenses as a percentage of revenue
|
|
|
22%
|
|
|
|
19%
|
|
|
|
25%
|
|
|
|
22%
|
|
|
|
Product development expenses for the three months ended September 30, 2016 decreased $29 million, or 11 percent,
compared to the same period of 2015, primarily attributable to declines in depreciation and amortization expense of $20 million, compensation costs of $18 million, partially offset by an increase in stock-based compensation expense of $8 million.
The decline in depreciation and amortization expense is primarily associated with a decrease in depreciation from capitalized labor. The decline in compensation costs is primarily attributable to a 20 percent decline in headcount year-over-year. The
increase in stock-based compensation expense was primarily due to higher expense in the current year related to retention grants and performance equity awards.
Product development expenses for the nine months ended September 30, 2016 decreased $104 million, or 11 percent, compared to the same period of
2015, primarily attributable to declines in compensation costs of $72 million, depreciation and amortization expense of $53 million, and facilities and equipment expense of $13 million. These declines were partially offset by an increase in
stock-based compensation expense of $16 million, and an increase of $13 million related to product initiatives to drive search volume. The decline in compensation costs is primarily attributable to a 20 percent decline in headcount year-over-year.
The decline in depreciation and amortization expense is primarily associated with a decrease in depreciation from capitalized labor. The increase in stock-based compensation expense was primarily due to higher expense in the current year related to
retention grants and performance equity awards.
49
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
General and administrative expenses
|
|
$
|
151,963
|
|
|
$
|
176,713
|
|
|
$
|
506,071
|
|
|
$
|
490,519
|
|
General and administrative expenses as a percentage of revenue
|
|
|
12%
|
|
|
|
14%
|
|
|
|
14%
|
|
|
|
13%
|
|
|
|
General and administrative expenses for the three months ended September 30, 2016 increased $25 million, or 16
percent, compared to the same period of 2015, primarily attributable to increases in outside service provider expense of $24 million (including advisory fees) and stock-based compensation expense of $7 million, partially offset by a decline in
facilities and equipment expense of $7 million.
General and administrative expenses for the nine months ended September 30, 2016 decreased
$16 million, or 3 percent, compared to the same period of 2015, primarily attributable to declines in compensation costs of $23 million, facilities and equipment expense of $19 million, and travel and entertainment expense of $6 million,
partially offset by an increase in outside service provider expense of $30 million (including advisory fees). The decline in compensation costs was primarily attributable to a 15 percent decline in headcount year-over-year.
Amortization of Intangibles
We have purchased, and may
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Amortization of intangibles
|
|
$
|
19,622
|
|
|
$
|
11,594
|
|
|
$
|
59,677
|
|
|
$
|
46,736
|
|
Amortization of intangibles as a percentage of revenue
|
|
|
2%
|
|
|
|
1%
|
|
|
|
2%
|
|
|
|
1%
|
|
|
|
Amortization of intangibles for the three and nine months ended September 30, 2016 decreased $8 million, or 41
percent, and $13 million, or 22 percent, respectively, compared to the same periods of 2015, driven primarily by a decline in amortizable Tumblr assets as a result of the impairment recorded in the second quarter of 2016.
Gain on Sale of Patents and Land
The following table presents
gain on sale of patents and land and those gains as a percentage of revenue for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Gain on sale of patents and land
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(11,100
|
)
|
|
$
|
(121,559
|
)
|
Gain on sale of patents and land as a percentage of revenue
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
(3)%
|
|
|
|
During the three months ended September 30, 2016 and 2015, we did not have any patent or land sales.
During the nine months ended September 30, 2016, we sold certain property located in Santa Clara, California and recorded a gain on sale of land of
$120 million. See Note 4Acquisitions and Dispositions in the Notes to our condensed consolidated financial statements for additional information. Also, during the nine months ended September 30, 2016, we sold certain patents
and recorded gain on sale of patents of approximately $2 million. During the nine months ended September 30, 2015, we sold certain patents and recorded gain on sale of patents of approximately $11 million.
50
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Asset impairment charge
|
|
$
|
41,699
|
|
|
$
|
|
|
|
$
|
41,699
|
|
|
$
|
|
|
Asset impairment charge as a percentage of revenue
|
|
|
4%
|
|
|
|
0%
|
|
|
|
1%
|
|
|
|
0%
|
|
|
|
During the three and nine months ended September 30, 2015, we recorded an asset impairment charge of $14 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. This content included programming such as Community and Sin City Saints.
Goodwill Impairment Charge
The following table presents goodwill impairment charge and those charges as a percentage of revenue for the periods presented (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Goodwill impairment charge
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
394,901
|
|
Goodwill impairment charge as a percentage of revenue
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
11%
|
|
|
|
After recording the goodwill impairment charge as of October 31, 2015, for Tumblr during the fourth quarter of 2015,
the fair value of the Tumblr reporting unit approximated its carrying value. As such, any significant unfavorable changes in the forecast would result in the fair value being less than the carrying value. Subsequent to the most recent annual
goodwill impairment assessment performed as of October 31, 2015, we have continued to monitor the actual performance of our reporting units. During the three months ended June 30, 2016, we determined that there were indicators present to
suggest that it was more likely than not that the fair value of the Tumblr reporting unit was less than its carrying amount. The significant changes for the Tumblr reporting unit subsequent to the annual goodwill impairment test performed as of
October 31, 2015 included a decline in the 2016 and beyond forecasted revenue, operating income and cash flows.
As mentioned above, we recorded
goodwill impairment charges in the Tumblr reporting unit during the second quarter of 2016. It is reasonably possible that future 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. For example, a future decline in market conditions, changes in our market share, and/or other factors could negatively impact the estimated
future cash flows and discount rates used in the income approach to determine the fair value of the Tumblr reporting unit and could result in one or more additional impairment charges in the future.
During the nine months ended September 30, 2016, we recorded a goodwill impairment charge of $395 million. See Note 5Goodwill
in the Notes to our condensed consolidated financial statements for additional information.
Intangible Assets Impairment Charge
The following table presents intangible assets impairment charge and those charges as a percentage of revenue for the periods presented (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Intangible assets impairment charge
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,335
|
|
Intangible assets impairment charge as a percentage of revenue
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
2%
|
|
|
|
During the second quarter of 2016, we reviewed our Tumblr asset group for impairment as there were events and changes in
circumstances that indicated that the carrying value of the long-lived assets may not be recoverable. As a result, we performed a quantitative test comparing the fair value of the Tumblr long-lived assets with the carrying amounts and recorded an
impairment charge of $87 million associated with its definite-lived intangible assets, which were included within customer, affiliate, and advertiser related relationships and tradenames, trademarks, and domain names. See
Note 6Intangible Assets, Net in the Notes to our condensed consolidated financial statements for additional information.
51
Restructuring Charges, Net
Restructuring charges, net was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Employee severance pay and related costs
|
|
$
|
16,597
|
|
|
$
|
6,772
|
|
|
$
|
67,746
|
|
|
$
|
56,620
|
|
Non-cancelable lease, contract termination, and other charges
|
|
|
11,103
|
|
|
|
4,368
|
|
|
|
33,123
|
|
|
|
24,302
|
|
Reversals of previous charges
|
|
|
(2,590)
|
|
|
|
(1,029)
|
|
|
|
(6,611)
|
|
|
|
(2,947)
|
|
Non-cash accelerations of stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,705
|
|
|
|
7,374
|
|
Other non-cash (credits) charges, net
|
|
|
902
|
|
|
|
(149)
|
|
|
|
(31)
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
$
|
26,012
|
|
|
$
|
9,962
|
|
|
$
|
96,932
|
|
|
$
|
86,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. For the three months ended September 30, 2016, we recorded expense of $5 million and $5 million
related to the Americas and EMEA segments, respectively. For the three months ended September 30, 2015, we recorded expense of $9 million and $17 million related to the Americas and EMEA segments, respectively. For the nine months ended
September 30, 2016, we recorded expense of $65 million, $18 million, and $4 million related to the Americas, EMEA, and Asia Pacific segments, respectively. For the nine months ended September 30, 2015, we recorded expense of $62 million,
$31 million, and $4 million related to the Americas, EMEA, and Asia Pacific segments, respectively.
The amounts recorded during the three and nine
months ended September 30, 2016 were primarily related to the plans we announced in February 2016 to reduce our workforce by approximately 15 percent by the end of 2016 and exit six offices in Dubai, Mexico City, Buenos Aires, Madrid, Milan and
Burbank, California, subject to applicable laws and consultation processes, as a part of the strategic plan to simplify our product portfolio. During the three months ended September 30, 2016, in connection with this action, we incurred pre-tax
cash charges of $1 million for severance pay expenses and related cash expenditures and pre-tax cash charges of $1 million related to the consolidation and exit of facilities related to non-cancelable lease costs and other related costs. During the
nine months ended September 30, 2016, in connection with this action, we incurred pre-tax cash charges of $47 million for severance pay expenses and related cash expenditures, pre-tax cash charges of $17 million related to the consolidation and
exit of facilities related to non-cancelable lease costs and other related costs, pre-tax non-cash charges of $7 million related to stock-based compensation expense and less than $1 million related to impairment costs. The amounts recorded during
the three and nine months ended September 30, 2015 were primarily related to severance, facility and other related costs pursuant to a restructuring plan that we initiated in 2015.
The $54 million restructuring liability as of September 30, 2016 consisted of $8 million for employee severance pay expenses, which we expect to pay
out by the end of the second quarter of 2017, and $46 million relating to non-cancelable lease costs, which we expect to pay over the terms of the related obligations through the fourth quarter of 2025, less estimated sublease income.
See Note 14Restructuring Charges, Net in the Notes to our condensed consolidated financial statements for additional information.
Other Expense, Net
Other expense, net was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Interest and investment income
|
|
$
|
8,010
|
|
|
$
|
17,013
|
|
|
$
|
24,888
|
|
|
$
|
42,534
|
|
Interest expense
|
|
|
(18,411)
|
|
|
|
(18,513)
|
|
|
|
(53,540)
|
|
|
|
(55,238)
|
|
Loss on Hortonworks warrants
|
|
|
(12,782)
|
|
|
|
(8,493)
|
|
|
|
(19,241)
|
|
|
|
(49,930)
|
|
Foreign exchange (loss) gain
|
|
|
(1,490)
|
|
|
|
3,180
|
|
|
|
(21,017)
|
|
|
|
22,006
|
|
Other
|
|
|
718
|
|
|
|
691
|
|
|
|
2,151
|
|
|
|
2,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
$
|
(23,955)
|
|
|
$
|
(6,122)
|
|
|
$
|
(66,759)
|
|
|
$
|
(38,476)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Interest and investment income increased $9 million and $18 million for the three and nine months ended
September 30, 2016, respectively, compared to the same periods of 2015, primarily due to an increase in interest income.
Interest expense was
flat and increased $2 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods of 2015. Interest expense is primarily related to the accreted non-cash interest expense related to the Notes we
issued in November 2013.
During the three and nine months ended September 30, 2016, we recorded losses of $8 million and $50 million,
respectively, due to the decline in fair value of the Hortonworks warrants.
Foreign exchange gain (loss) consists of 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. The
foreign exchange gain in the three and nine months ended September 30, 2016 compared to the foreign exchange loss in the three and nine months ended September 30, 2015 is attributable to the write off of foreign currency translation
adjustments associated with liquidation of foreign subsidiaries.
Other consists of gains from other non-operational items.
Income Taxes
Our effective tax rate is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Historically,
our provision for income taxes has differed from the tax computed at the U.S. federal statutory income tax rate due to state taxes, the effect of non-U.S. operations, non-deductible stock-based compensation expense and adjustments to unrecognized
tax benefits.
We recorded an income tax benefit of $93 million and $106 million for the three months ended September 30, 2015 and 2016,
respectively. We recorded an income tax benefit of $76 million and $125 million for the nine months ended September 30, 2015 and 2016, respectively. For the three and nine months ended September 30, 2015, the income tax benefit was
primarily a result of our loss before income taxes and earnings in equity interests. The income tax benefit for the three months ended September 30, 2016 included tax expense associated with our intention to repatriate earnings from our
wholly-owned foreign subsidiaries, offset by the benefit of foreign tax credits and our loss before income taxes and earnings in equity interest. In addition, our tax benefit for the nine months ended September 30, 2016 also included tax
expenses associated with gain from sale of our real estate property in Santa Clara, California, offset by tax benefits from Tumblr intangible assets impairment charge.
As of September 30, 2016, we intend to repatriate cumulative and future earnings from our wholly-owned foreign subsidiaries. The tax implications of
this repatriation (namely a $149 million increase to U.S. taxable income with an associated $66 million U.S. tax credit for foreign income taxes that have been paid on such earnings) have been included in our income tax benefit for the three and
nine months ended September 30, 2016. As of September 30, 2016, we do not have a plan to repatriate approximately $3.1 billion of earnings related to our equity method investment in Yahoo Japan. If those earnings were to be repatriated in
the future, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits). It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated.
In the first quarter of 2016, we received a cash tax refund of $190 million associated with our claim to carry back 2015 losses and tax attributes to
earlier taxable years.
Our gross amount of unrecognized tax benefits as of September 30, 2016 was $1.1 billion, of which $1.0 billion is
recorded on our condensed consolidated balance sheets. The gross unrecognized tax benefits as of September 30, 2016 decreased by $8 million from the recorded balance as of December 31, 2015. The decrease mainly related to audit settlements
for prior tax years.
We are in various stages of examination and appeal in connection with our taxes both in the United States and in foreign
jurisdictions. Those audits generally span tax years 2005 through 2014. As of September 30, 2016, our 2011 through 2013 U.S. federal income tax returns are currently under examination. We have appealed the proposed California Franchise Tax
Boards adjustments to the 2005 through 2008 returns, but no conclusions have been reached to date. While it is difficult to determine when the examinations will be settled or their final outcomes, certain examinations in various jurisdictions
are expected to be resolved in the foreseeable future. We believe that we have adequately provided for any reasonably foreseeable adverse adjustment to our tax returns and that any settlement will not have a material adverse effect on our
consolidated financial position, results of operations, or cash flows. It is reasonably possible that our unrecognized tax benefits could be reduced by up to approximately $24 million in the next twelve months.
In the first quarter of 2015, we satisfied the $3.3 billion income tax liability related to the sale by Yahoo! Hong Kong Holdings Limited, our
wholly-owned subsidiary, of Alibaba Group ADSs in the Alibaba Group IPO on September 24, 2014. As of September 30, 2016, we accrued deferred tax liabilities of $16.4 billion associated with the Alibaba Group shares that we
retained. Such deferred tax liabilities will be subject to periodic adjustments due to changes in the fair value of the Alibaba Group shares.
53
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 United States through the use of foreign tax credits.
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 is for calendar years 2008 through 2011
and, translated into U.S. dollars as of September 30, 2016, totals approximately $115 million. We currently believe the assessment is without merit. We believe the risk of loss is remote and have not recorded an accrual for 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 condensed consolidated statements of operations.
The following table presents earnings in equity interests for the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Earnings in equity interests
|
|
$
|
95,195
|
|
|
$
|
116,228
|
|
|
$
|
290,726
|
|
|
$
|
249,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings in equity interests for the three and nine months ended September 30, 2016 increased $21 million and
decreased $41 million, respectively, compared to the same periods of 2015. See Note 8Investments in Equity Interests Using the Equity Method of Accounting in the Notes to our condensed consolidated financial statements for
additional information.
Noncontrolling Interests
Noncontrolling interests represent the noncontrolling holders percentage share of income or losses from the subsidiaries in which we hold a
majority, but less than 100 percent, ownership interest and the results of which are consolidated in our condensed consolidated financial statements. Noncontrolling interests recorded in the three and nine months ended September 30, 2015
and 2016 were related to the Yahoo!7 venture in Australia and New Zealand.
Net Income (Loss) Attributable to
Yahoo! Inc.
Net income attributable to Yahoo! Inc. for the three months ended September 30, 2016 increased $87 million to $163
million, primarily attributable to an increase in earnings in equity interests and decreases in sales and marketing expense, cost of revenue other, product development, restructuring charges, net, other expense, net and a decline in cost of
revenue TAC (excluding the impact of the change in revenue presentation associated with the Eleventh Amendment). Additionally, there were no asset impairment charges in the three months ended September 30, 2016 for which we recorded such
expenses in 2015. This was partially offset by a decrease in revenue (excluding the impact of the change in revenue presentation associated with the Eleventh Amendment) and an increase in general and administrative expenses.
Net loss attributable to Yahoo! Inc. for the nine months ended September 30, 2016 was $376 million, a decline of $452 million compared to the same
period of 2015, primarily attributable to a decrease in revenue (excluding the impact of the change in revenue presentation associated with the Eleventh Amendment), goodwill and intangible assets impairment charges, and, to a lesser extent, a
decline in earnings in equity interests and an increase in cost of revenue TAC (excluding the impact of the change in revenue presentation associated with the Eleventh Amendment). This was partially offset by a gain on sale of land, declines
in sales and marketing, product development expense and cost of revenue other and, to a lesser extent, declines in asset impairment charge and other expense, net, and an increase in benefit for income taxes.
54
Adjusted EBITDA (a Non-GAAP Financial Measure)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(dollars in thousands)
|
|
Net income (loss) attributable to Yahoo! Inc.
|
|
$
|
76,261
|
|
|
$
|
162,826
|
|
|
$
|
75,905
|
|
|
$
|
(376,319)
|
|
Advisory fees
|
|
|
|
|
|
|
27,150
|
|
|
|
8,000
|
|
|
|
51,427
|
|
Gain on sale of land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120,059)
|
|
Depreciation and amortization
|
|
|
152,412
|
|
|
|
115,468
|
|
|
|
457,630
|
|
|
|
388,360
|
|
Stock-based compensation expense
|
|
|
110,426
|
|
|
|
128,892
|
|
|
|
351,252
|
|
|
|
369,263
|
|
Asset impairment charge
|
|
|
41,699
|
|
|
|
|
|
|
|
41,699
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394,901
|
|
Intangible assets impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,335
|
|
Restructuring charges, net
|
|
|
26,012
|
|
|
|
9,962
|
|
|
|
96,932
|
|
|
|
86,576
|
|
Other expense, net
|
|
|
23,955
|
|
|
|
6,122
|
|
|
|
66,759
|
|
|
|
38,476
|
|
Benefit for income taxes
|
|
|
(93,208)
|
|
|
|
(105,513)
|
|
|
|
(75,613)
|
|
|
|
(124,736)
|
|
Earnings in equity interests, net of tax
|
|
|
(95,195)
|
|
|
|
(116,228)
|
|
|
|
(290,726)
|
|
|
|
(249,579)
|
|
Net income attributable to noncontrolling interests
|
|
|
1,875
|
|
|
|
474
|
|
|
|
5,215
|
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
244,237
|
|
|
$
|
229,153
|
|
|
$
|
737,053
|
|
|
$
|
548,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Yahoo! Inc. as a percentage of revenue
|
|
|
6%
|
|
|
|
12%
|
|
|
|
2%
|
|
|
|
(10)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA as a percentage of revenue ex-TAC
(1)
|
|
|
24%
|
|
|
|
27%
|
|
|
|
24%
|
|
|
|
21%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Revenue ex-TAC is calculated as GAAP revenue less cost of revenue TAC.
|
For the three and nine months ended September 30, 2016, adjusted EBITDA decreased $15 million, or 6 percent, and $188 million or 26 percent,
compared to the same periods of 2015, mainly due to a decline in revenue ex-TAC (as described above) partially offset by a decline in global operating costs as well as a decline in direct costs across the segments, as described in Segment
Reporting below.
Revenue ex-TAC, as noted above, was impacted by the completion of recognition of deferred revenue under the TIPLA with
Alibaba Group in the third quarter of 2015 for which no similar revenue was recognized in the three or nine months ended September 30, 2016.
55
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 loss from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, our segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Percent
|
|
|
Nine Months Ended September 30,
|
|
|
Percent
|
|
|
|
2015
|
|
|
2016
|
|
|
Change
|
|
|
2015
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
(dollars in thousands)
|
|
Revenue by segment
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
987,374
|
|
|
$
|
1,058,416
|
|
|
|
7%
|
|
|
$
|
2,964,305
|
|
|
$
|
2,975,023
|
|
|
|
0%
|
|
EMEA
|
|
|
79,614
|
|
|
|
98,654
|
|
|
|
24%
|
|
|
|
246,530
|
|
|
|
278,711
|
|
|
|
13%
|
|
Asia Pacific
|
|
|
158,685
|
|
|
|
148,136
|
|
|
|
(7)%
|
|
|
|
484,073
|
|
|
|
446,261
|
|
|
|
(8)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,225,673
|
|
|
$
|
1,305,206
|
|
|
|
6%
|
|
|
$
|
3,694,908
|
|
|
$
|
3,699,995
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAC by segment
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
201,855
|
|
|
$
|
394,838
|
|
|
|
96%
|
|
|
$
|
549,332
|
|
|
$
|
1,012,903
|
|
|
|
84%
|
|
EMEA
|
|
|
12,745
|
|
|
|
41,948
|
|
|
|
229%
|
|
|
|
37,399
|
|
|
|
96,787
|
|
|
|
159%
|
|
Asia Pacific
|
|
|
8,629
|
|
|
|
10,751
|
|
|
|
25%
|
|
|
|
19,867
|
|
|
|
32,096
|
|
|
|
62%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TAC
|
|
$
|
223,229
|
|
|
$
|
447,537
|
|
|
|
100%
|
|
|
$
|
606,598
|
|
|
$
|
1,141,786
|
|
|
|
88%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ex-TAC by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
785,519
|
|
|
$
|
663,578
|
|
|
|
(16)%
|
|
|
$
|
2,414,973
|
|
|
$
|
1,962,120
|
|
|
|
(19)%
|
|
EMEA
|
|
|
66,869
|
|
|
|
56,706
|
|
|
|
(15)%
|
|
|
|
209,131
|
|
|
|
181,924
|
|
|
|
(13)%
|
|
Asia Pacific
|
|
|
150,056
|
|
|
|
137,385
|
|
|
|
(8)%
|
|
|
|
464,206
|
|
|
|
414,165
|
|
|
|
(11)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue ex-TAC
|
|
|
1,002,444
|
|
|
|
857,669
|
|
|
|
(14)%
|
|
|
|
3,088,310
|
|
|
|
2,558,209
|
|
|
|
(17)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs by segment
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
74,495
|
|
|
|
63,069
|
|
|
|
(15)%
|
|
|
|
214,079
|
|
|
|
201,343
|
|
|
|
(6)%
|
|
EMEA
|
|
|
23,196
|
|
|
|
7,587
|
|
|
|
(67)%
|
|
|
|
63,947
|
|
|
|
47,090
|
|
|
|
(26)%
|
|
Asia Pacific
|
|
|
47,214
|
|
|
|
45,607
|
|
|
|
(3)%
|
|
|
|
149,766
|
|
|
|
137,399
|
|
|
|
(8)%
|
|
Global operating costs
(3)
|
|
|
613,302
|
|
|
|
539,403
|
|
|
|
(12)%
|
|
|
|
1,942,565
|
|
|
|
1,676,710
|
|
|
|
(14)%
|
|
Gain on sale of patents and land
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
|
(11,100)
|
|
|
|
(121,559)
|
|
|
|
995%
|
|
Asset impairment charge
|
|
|
41,699
|
|
|
|
|
|
|
|
(100)%
|
|
|
|
41,699
|
|
|
|
|
|
|
|
(100)%
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
|
|
|
|
|
394,901
|
|
|
|
100%
|
|
Intangible assets impairment charge
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
|
|
|
|
|
87,335
|
|
|
|
100%
|
|
Depreciation and amortization
|
|
|
152,412
|
|
|
|
115,468
|
|
|
|
(24)%
|
|
|
|
457,630
|
|
|
|
388,360
|
|
|
|
(15)%
|
|
Stock-based compensation expense
|
|
|
110,426
|
|
|
|
128,892
|
|
|
|
17%
|
|
|
|
351,252
|
|
|
|
369,263
|
|
|
|
5%
|
|
Restructuring charges, net
|
|
|
26,012
|
|
|
|
9,962
|
|
|
|
(62)%
|
|
|
|
96,932
|
|
|
|
86,576
|
|
|
|
(11)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(86,312)
|
|
|
$
|
(52,319)
|
|
|
|
(39)%
|
|
|
$
|
(218,460)
|
|
|
$
|
(709,209)
|
|
|
|
225%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Commencing in the second quarter of 2016, TAC payments related to the Microsoft Search Agreement, which previously would
have been recorded as a reduction to revenue, began to be recorded as cost of revenue TAC due to a required change in revenue presentation. See Note 1 The Company and Summary of Significant Accounting Policies and Note
17Microsoft Search Agreement in the Notes to our condensed consolidated financial statements for additional information.
|
(2)
|
Direct costs for each segment include costs associated with the local sales teams and other cost of revenue. Prior to the
second quarter of 2016, certain account management costs associated with Yahoo Properties were managed locally and included as direct costs for each segment. Prior period amounts have been revised to conform to the current presentation.
|
(3)
|
Global operating costs include product development, marketing, real estate workplace, general and administrative, account
management costs and other corporate expenses that are managed on a global basis and that are not directly attributable to any particular segment. Beginning in the second quarter of 2016, certain account management costs associated with Yahoo
Properties are managed globally and included as global costs. Prior period amounts have been revised to conform to the current presentation.
|
56
Revenue and Revenue ex-TAC by Segment
Americas
Americas revenue for the three and nine months ended
September 30, 2016 increased $71 million, or 7 percent, and $11 million, roughly flat, respectively, compared to the same periods of 2015. The increase in Americas revenue for the three months ended September 30, 2016 was primarily
attributable to an increase in search revenue of $159 million, partially offset by declines in other revenue and display revenue of $69 million and $19 million, respectively. The increase in Americas revenue for the nine months ended
September 30, 2016 was primarily attributable to an increase in search revenue of $278 million, partially offset by declines in other revenue and display revenue of $228 million and $40 million, respectively. The increase in Americas search
revenue was primarily due to the change in revenue presentation associated with the implementation of the Eleventh Amendment to the Microsoft Search Agreement. The revenue and TAC increase from the change in revenue presentation was $222 million and
$440 million for the three and nine months ended September 30, 2016, respectively. See Significant TransactionsMicrosoft Search Agreement above for further detail. Excluding the impact of the change in revenue presentation,
noted above, search revenue declined $62 million, or 14 percent, and $161 million, or 12 percent, for the three and nine months ended September 30, 2016, respectively, primarily due to a decline in Paid Clicks on Yahoo Properties and Affiliate
sites driven by a decline in traffic, partially offset by an increase in Affiliate site revenue due to improved pricing. The decline in Americas other revenue was primarily due to a decline in fees revenue and, to a lesser extent, a decline in
listings-based revenue. The decline in fees revenue was primarily due to the completion of recognition of deferred revenue pursuant to the TIPLA with Alibaba Group in which we recognized $60 million and $199 million in the three and nine months
ended September 30, 2015. Listings-based revenue for the three and nine months ended September 30, 2016 declined $6 million and $19 million, respectively, compared to the same periods of 2015, primarily as a result of the loss of revenue
from partner agreements that terminated in 2015 for which we have no similar revenue in 2016. The decline in Americas display revenue for the three and nine months ended September 30, 2016 was attributable to a decline in premium advertising
and, to a lesser extent, video and native advertising, partially offset by an increase in audience advertising.
Revenue in the Americas accounted
for approximately 81 percent and 80 percent of total revenue for the three and nine months ended September 30, 2016, respectively, compared to 81 percent and 80 percent of total revenue for the three and nine months ended
September 30, 2015, respectively.
Americas revenue ex-TAC for the three and nine months ended September 30, 2016 decreased $122 million,
or 16 percent, and $453 million, or 19 percent, compared to the same periods of 2015, primarily due to declines in revenue of $150 million and $429 million excluding the impact of the change in revenue presentation (described further above). TAC for
the three months ended September 30, 2016 decreased $28 million (excluding the impact of the change in revenue presentation) due to a decline in display TAC partially offset by an increase in search TAC from Google and Gemini. TAC for the nine
months ended September 30, 2016 increased $24 million (excluding the impact of the change in revenue presentation) due to an increase in search TAC from Google and Gemini, partially offset by a decline in display TAC. Additionally, search TAC
for the three and nine months ended September 30, 2016 was impacted by a $20 million decline associated with an amendment to our agreement with Mozilla.
Revenue ex-TAC in the Americas accounted for approximately 77 percent of total revenue ex-TAC for both the three and nine months ended
September 30, 2016, compared to 78 percent of total revenue ex-TAC for both the three and nine months ended September 30, 2015.
EMEA
EMEA revenue for the three and nine months ended September 30, 2016 increased $19 million, or 24 percent, and $32 million, or 13 percent,
respectively, compared to the same periods of 2015. The increase in EMEA revenue for the three months ended September 30, 2016 was attributable to an increase in search revenue of $27 million, partially offset by a decline in display revenue of
$7 million. The increase in EMEA revenue for the nine months ended September 30, 2016 was attributable to an increase in search revenue of $48 million, partially offset by a decline in display revenue of $11 million and other revenue of $4
million. The increase in EMEA search revenue was primarily due to the change in revenue presentation associated with the implementation of the Eleventh Amendment to the Microsoft Search Agreement. The revenue and TAC increase from the change in
revenue presentation was $34 million and $67 million for the three and nine months ended September 30, 2016, respectively. Excluding the impact of the change in revenue presentation, noted above, search revenue declined $7 million, or 26
percent, and $20 million, or 23 percent, for the three and nine months ended September 30, 2016, respectively, primarily due to a decline in Paid Clicks. The decline in display revenue for the three and nine months ended September 30, 2016
was primarily due to a decline in premium advertising and, to a lesser extent, audience advertising, partially offset by an increase in native advertising.
Revenue in EMEA accounted for approximately 8 percent of total revenue for both the three and nine months ended September 30, 2016, compared to
6 percent and 7 percent of total revenue for the three and nine months ended September 30, 2015, respectively.
EMEA revenue ex-TAC for the
three and nine months ended September 30, 2016 decreased $10 million, or 15 percent, and $27 million, or 13 percent, respectively, compared to the same periods of 2015, primarily due to revenue declines exceeding the TAC declines
(excluding the impact of the change in revenue presentation).
Revenue ex-TAC in EMEA accounted for approximately 7 percent of total revenue for both
the three and nine months ended September 30, 2016 and 2015.
57
Asia Pacific
Asia Pacific revenue for the three and nine months ended September 30, 2016 decreased $11 million, or 7 percent, and $38 million, or 8 percent,
respectively, compared to the same periods of 2015. The decline in Asia Pacific revenue for the three months ended September 30, 2016 was primarily due to declines in display revenue of $9 million and other revenue of $3 million. The decline in
Asia Pacific revenue for the nine months ended September 30, 2016 was primarily due to declines in display, other, and search revenue of $21 million, $11 million, and $6 million, respectively. The decline in display revenue for the nine months
ended September 30, 2016 was primarily attributable to a decline in premium advertising partially offset by an increase in native advertising.
Revenue in Asia Pacific accounted for approximately 11 percent and 12 percent of total revenue for the three and nine months ended September 30,
2016, respectively, compared to 13 percent of total revenue for both the three and nine months ended September 30, 2015.
Asia Pacific revenue
ex-TAC for the three and nine months ended September 30, 2016 decreased $13 million, or 8 percent, and $50 million, or 11 percent, respectively, compared to the same periods of 2015, primarily due to a decrease in revenue as discussed above.
The decline in revenue ex-TAC for the nine months ended September 30, 2016 was also attributable to an increase in display TAC of $10 million.
Revenue ex-TAC in Asia Pacific accounted for approximately 16 percent of total revenue ex-TAC for both the three and nine months ended September 30,
2016, compared to 15 percent of total revenue ex-TAC for both the three and nine months ended September 30, 2015.
Direct Costs by Segment
Americas
For the three and nine months ended
September 30, 2016, direct costs attributable to the Americas segment decreased $11 million, or 15 percent, and $13 million, or 6 percent, respectively, compared to the same periods of 2015. The decline in direct costs attributable to the
Americas segment for the three months ended September 30, 2016 was primarily related to declines in compensation costs of $8 million and other cost of revenue of $3 million. The decline in direct costs attributable to the Americas segment for
the nine months ended September 30, 2016 was primarily attributable to declines in compensation costs of $9 million, other cost of revenue of $5 million, and bad debt expense of $3 million, partially offset by an increase in marketing and
public relations expense of $5 million.
Direct costs attributable to the Americas segment represented approximately 10 percent of Americas revenue
ex-TAC for both the three and nine months ended September 30, 2016, compared to 9 percent for both the three and nine months ended September 30, 2015.
EMEA
For the three and nine months ended September 30,
2016, direct costs attributable to the EMEA segment decreased $16 million, or 67 percent, and $17 million, or 26 percent, respectively, compared to the same periods of 2015. The decline in direct costs attributable to the EMEA segment for the three
months ended September 30, 2016 was primarily attributable to declines in bad debt expense of $8 million and compensation costs of $7 million. The decline in direct costs attributable to the EMEA segment for the nine months ended
September 30, 2016 was primarily related to declines in compensation costs of $11 million, bad debt expense of $7 million and other cost of revenue of $2 million, partially offset by an increase in marketing and public relations expense of $4
million.
Direct costs attributable to the EMEA segment represented approximately 13 percent and 26 percent of EMEA revenue ex-TAC for the three and
nine months ended September 30, 2016, respectively, compared to 35 percent and 31 percent for the three and nine months ended September 30, 2015, respectively.
Asia Pacific
For the three and nine months ended
September 30, 2016, direct costs attributable to the Asia Pacific segment decreased $2 million, or 3 percent, and $12 million, or 8 percent, respectively, compared to the same periods of 2015. The decline in direct costs attributable to the
Asia Pacific segment for the three months ended September 30, 2016 was primarily attributable to declines in marketing and public relations expense and compensation costs, partially offset by an increase in other cost of revenue. The decline in
direct costs attributable to the Asia Pacific segment for the nine months ended September 30, 2016 was primarily attributable to declines in compensation costs of $9 million and marketing and public relations expense of $4 million.
Direct costs attributable to the Asia Pacific segment represented approximately 33 percent of Asia Pacific revenue ex-TAC for both the three and nine
months ended September 30, 2016, compared to 31 percent and 32 percent for the three and nine months ended September 30, 2015, respectively.
58
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
|
|
|
September 30,
2016
|
|
|
|
|
|
(dollars in thousands)
|
|
Cash and cash equivalents
|
|
$
|
1,631,911
|
|
|
|
|
|
|
$
|
1,411,308
|
|
Short-term marketable securities
|
|
|
4,225,112
|
|
|
|
|
|
|
|
5,189,207
|
|
Long-term marketable securities
|
|
|
975,961
|
|
|
|
|
|
|
|
1,170,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities
|
|
$
|
6,832,984
|
|
|
|
|
|
|
$
|
7,771,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total assets
|
|
|
15%
|
|
|
|
|
|
|
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Cash Flow Highlights
|
|
2015
|
|
|
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(2,515,712)
|
|
|
|
|
|
|
$
|
993,604
|
|
Net cash provided by (used in) investing activities
|
|
$
|
1,529,517
|
|
|
|
|
|
|
$
|
(1,092,217)
|
|
Net cash used in financing activities
|
|
$
|
(363,577)
|
|
|
|
|
|
|
$
|
(156,549)
|
|
|
|
For the nine months ended September 30, 2016, our operating activities generated adequate cash to meet our operating
needs. Our operating activities for the nine months ended September 30, 2015 did not generate positive cash flow as we satisfied the $3.3 billion income tax liability related to the sale of Alibaba Group ADSs in September 2014.
As of September 30, 2016, we had cash, cash equivalents, and marketable securities (excluding Alibaba Group and Hortonworks equity securities)
totaling $7.8 billion compared to $6.8 billion at December 31, 2015. During the nine months ended September 30, 2016, we received cash proceeds from the sale of certain property in Santa Clara, California of $246 million (net of
closing costs of $4 million) and a cash tax refund of $190 million associated with our claim to carry back 2015 losses and tax attributes to earlier taxable years.
Our foreign subsidiaries held $426 million of our total $7.8 billion of cash and cash equivalents and marketable securities (excluding Alibaba Group and
Hortonworks equity securities) as of September 30, 2016. As of September 30, 2016, we intend to repatriate cumulative and future earnings from our wholly-owned foreign subsidiaries. The tax implications of the repatriation (namely a $149
million increase to U.S. taxable income with an associated $66 million U.S. tax credit for foreign income taxes that have been paid on such earnings) have been included in our income tax benefit for the three and nine months ended September 30,
2016. As of September 30, 2016, we do not have a plan to repatriate approximately $3.1 billion of earnings related to our equity method investment in Yahoo Japan. If those earnings were to be repatriated in the future, we may be subject to
additional U.S. income taxes (subject to an adjustment for foreign tax credits). It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated.
We currently hedge a portion of our net investment in Yahoo Japan with forward 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.
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 use cash generated by operations as our primary source of liquidity
and believe that existing cash, cash equivalents, and investments in marketable securities, together with any cash generated from operations, will be sufficient to meet normal operating requirements and capital expenditures for the next twelve
months.
Cash Flow Changes
Net cash (used in) provided by operating activities
.
Cash flows from operating activities for the nine months ended
September 30, 2016 were driven by a net source of cash from working capital of $445 million (which included a $190 million cash tax refund), dividends received from equity investees of $157 million and non-cash adjustments of $1,015 million,
reduced by a net loss of $373 million and earnings in equity interests of $250 million.
For the nine months ended September 30, 2015, cash
flows from operating activities were reduced by changes in working capital of $3,339 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
$291 million offset by net income of $81 million, dividends received from equity investees of $142 million and non-cash adjustments of $891 million.
59
Net cash provided by (used in) investing activities
.
In the nine months ended
September 30, 2016, the $1,092 million used in investing activities was due to purchases of marketable securities, net of proceeds from sales and maturities, of $1,175 million, partially offset by net proceeds from disposition of property and
equipment of $52 million and $39 million in net proceeds from settlement of derivative hedge contracts.
In the nine months ended September 30,
2015, the $1,530 million provided by investing activities was due to proceeds from sales and maturities of marketable securities, net of purchases, of $1,983 million, $29 million proceeds from the sale of patents, and $114 million in net proceeds
from settlement of derivative hedge contracts, partially offset by $417 million used for capital expenditures, net, $175 million used for acquisitions, and $4 million used for the purchase of intangibles and other activities.
Net cash used in financing activities
.
In the nine months ended September 30, 2016, the $157 million used in financing
activities was due to $168 million used for tax withholding payments related to net share settlements of restricted stock units and other financing activities and $6 million used for distribution to noncontrolling interests. This use of cash was
partially offset by $16 million in cash proceeds received from employee stock option exercises.
In the nine months ended September 30, 2015,
the $364 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
$230 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 $52 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 $33 million.
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.
For the nine months ended September 30, 2016, we had a net benefit of $52
million primarily associated with net cash proceeds of $246 million received from the sale of land in Santa Clara, California. Excluding the proceeds received from the land sale, capital expenditures, net for the nine months ended September 30,
2016 were $194 million. For the nine months ended September 30, 2015, capital expenditures, net were $417 million. The $223 million decrease in capital expenditures was a result of the completion of certain Company initiatives, facilities
expansions and improvements in 2015 and more efficient use of existing data center capacity and overall increased controls over expense and capital expenditures.
Excluding the net cash proceeds of $246 million received from the sale of land, we expect capital expenditures, net to be up to $300 million for the year
ending December 31, 2016. We expect these expenditures to be funded by our cash flows from operating activities.
Free Cash Flow (a Non-GAAP Financial Measure)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(dollars in thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
137,275
|
|
|
$
|
217,906
|
|
|
$
|
(2,515,712)
|
|
|
$
|
993,604
|
|
Acquisition of property and equipment, net
|
|
|
(150,381)
|
|
|
|
(41,970)
|
|
|
|
(417,276)
|
|
|
|
51,581
|
|
Excess tax benefits from stock-based awards
|
|
|
31,509
|
|
|
|
(8,817)
|
|
|
|
33,359
|
|
|
|
1,743
|
|
Dividends received from equity investee
|
|
|
(375)
|
|
|
|
|
|
|
|
(142,045)
|
|
|
|
(156,968)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
18,028
|
|
|
$
|
167,119
|
|
|
$
|
(3,041,674)
|
|
|
$
|
889,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2016, free cash flow increased $149 million, as compared to the same period
of 2015, primarily due to a decline in capital expenditures, net and a decline in cash outflow from working capital year-over-year.
For the nine
months ended September 30, 2016, free cash flow increased $3.9 billion, as compared to the same period of 2015, due to the satisfaction of the $3.3 billion income tax liability related to the sale of Alibaba Group ADSs in the first quarter of
2015 for which there were no similar transactions in 2016, the net cash proceeds from disposition of property and equipment associated with the sale of land in the second quarter of 2016, and a cash tax refund of $190 million associated with our
claim to carry back our 2015 losses and tax attributes to earlier taxable years.
60
Stock Repurchases
During the nine months ended September 30, 2016, we did not repurchase any shares of our common stock. The following table provides the remaining
authorization and repurchases by program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2013
Program
|
|
|
March 2015
Program
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
January 1, 2016
|
|
$
|
726
|
|
|
$
|
2,000
|
|
|
$
|
2,726
|
|
Total repurchases in the first quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
Total repurchases in the second quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
Total repurchases in the third quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
$
|
726
|
|
|
$
|
2,000
|
|
|
$
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations and Commitments
The following table presents certain payments due under contractual obligations with minimum commitments as of September 30, 2016 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Due in
2016
|
|
|
Due in
2017-2018
|
|
|
Due in
2019-2020
|
|
|
Thereafter
|
|
|
|
Convertible notes
(1)
|
|
$
|
1,438
|
|
|
$
|
-
|
|
|
$
|
1,438
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note payable obligations
|
|
|
53
|
|
|
|
1
|
|
|
|
10
|
|
|
|
10
|
|
|
|
32
|
|
Operating lease obligations
(2) (3)
|
|
|
437
|
|
|
|
31
|
|
|
|
174
|
|
|
|
108
|
|
|
|
124
|
|
Capital lease obligations
|
|
|
32
|
|
|
|
4
|
|
|
|
20
|
|
|
|
5
|
|
|
|
3
|
|
Affiliate commitments
(4)
|
|
|
985
|
|
|
|
60
|
|
|
|
600
|
|
|
|
325
|
|
|
|
-
|
|
Non-cancelable obligations
(5)
|
|
|
124
|
|
|
|
23
|
|
|
|
79
|
|
|
|
12
|
|
|
|
10
|
|
Intellectual property rights
(6)
|
|
|
13
|
|
|
|
3
|
|
|
|
5
|
|
|
|
2
|
|
|
|
3
|
|
Uncertain tax positions, including interest and penalties
(7)
|
|
|
1,153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
4,235
|
|
|
$
|
122
|
|
|
$
|
2,326
|
|
|
$
|
462
|
|
|
$
|
1,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the year ended December 31, 2013, we completed an offering of the Notes, which are due in 2018. The amount
above represents the principal balance to be repaid. See Note 11Convertible Notes in the Notes to our condensed consolidated financial statements for additional information.
|
(2)
|
We have entered into various non-cancelable operating lease agreements for our offices throughout the Americas, EMEA, and
Asia Pacific regions with original lease periods up to 15 years, expiring between 2016 and 2025. See Note 12Commitments and Contingencies in the Notes to our condensed consolidated financial statements for additional
information.
|
(3)
|
In May 2013, we entered into a 12 year operating lease agreement for four floors of the former New York Times building in
New York City with a total expected minimum lease commitment of $125 million. We have the option to renew the lease for an additional five years.
|
(4)
|
We are obligated to make minimum payments under contracts to provide sponsored search and/or display advertising services
to our Affiliates which represent TAC.
|
(5)
|
We are obligated to make payments under various arrangements with vendors and other business partners, principally for
content, bandwidth, and marketing arrangements.
|
(6)
|
We are committed to make certain payments under various intellectual property arrangements.
|
(7)
|
As of September 30, 2016, unrecognized tax benefits and potential interest and penalties resulted in accrued
liabilities of $1,153 million, classified as deferred and other long-term tax liabilities, net on our condensed consolidated balance sheets. As of September 30, 2016, the settlement period for the $1,153 million income tax liabilities cannot be
determined. See Note 15Income Taxes in the Notes to our condensed consolidated financial statements for additional information.
|
Standby Letters of Credit
.
As of September 30, 2016, we had outstanding potential obligations relating to standby letters
of credit of $38 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.
61
Other Commitments and Off-Balance Sheet Arrangements
.
In the ordinary course of
business, we 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 our breach of agreements or representations and warranties made by us, services to be provided by us, 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 our conduct of the business and tax matters prior to the sale, lease, or assignment of assets. In addition, we have entered into indemnification agreements with our directors
and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We have also agreed to indemnify certain former
officers, directors, and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our 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, we have not incurred material costs as a result
of obligations under these agreements and we have not accrued any material liabilities related to such indemnification obligations in our condensed consolidated financial statements.
As of September 30, 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly we are not exposed to any financing, liquidity, market,
or credit risk that could arise if we had such relationships. In addition, we identified no variable interests currently held in entities for which we are the primary beneficiary. In addition, as of September 30, 2016, we had no off-balance
sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial
condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed 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. Our estimates form the basis for our judgments about 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 condensed
consolidated financial statements. We believe that our critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the condensed consolidated financial statements.
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.
Determining the fair value of each reporting unit is judgmental in nature and requires the use of significant estimates
and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. It is reasonably possible that a future decline in market conditions and/or changes in our market share could
negatively impact the market comparables, estimated future cash flows and discount rates used in the market and income approaches to determine the fair value of each reporting unit and could result in some portion or all of the remaining goodwill to
become impaired in the foreseeable future.
After recording the goodwill impairment charge as of October 31, 2015 for Tumblr during the fourth
quarter of 2015, the fair value of the Tumblr reporting unit approximated its carrying value. As such, any significant unfavorable changes in the forecast would result in the fair value being less than the carrying value. Subsequent to the most
recent annual goodwill impairment assessment performed as of October 31, 2015, we have continued to monitor actual performance of our reporting units. During the three months ended June 30, 2016, we determined that there were indicators
present to suggest that it was more likely than not that the fair value of the Tumblr reporting unit was less than its carrying amount. The significant changes for the Tumblr reporting unit subsequent to the annual goodwill impairment test performed
as of October 31, 2015 included a decline in the 2016 and beyond forecasted revenue, operating income and cash flows.
62
Step One
To test the Tumblr reporting unit for impairment, we used the two-step quantitative test. Consistent with methodology used for the prior years
annual goodwill impairment testing, we estimated the fair value of the Tumblr reporting unit using an income approach which was deemed to be the most indicative of fair value in an orderly transaction between market participants. Under the income
approach, we determined fair value based on estimated future cash flows of the Tumblr reporting unit discounted by an estimated weighted-average cost of capital, reflecting the overall level of inherent risk of the Tumblr reporting unit and the rate
of return an outside investor would expect to earn. We base cash flow projections for the Tumblr reporting unit using a forecast of cash flows and a terminal value based on the Perpetuity Growth Model. The forecast and related assumptions were
derived from an updated financial forecast prepared during the second quarter of 2016. As a result of the analysis, we concluded that the carrying value of the Tumblr reporting unit exceeded its estimated fair value.
Step Two
As identified above, in step one, the
Tumblr reporting units carrying value exceeded its estimated fair value. The second step of the quantitative test was performed by comparing the carrying value of the goodwill in the Tumblr reporting unit to its implied fair value. The implied
fair value is calculated by allocating all of the assets and liabilities of the Tumblr 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.
The step two quantitative test for the Tumblr reporting unit resulted in an impairment for the Tumblr reporting unit and we recorded a goodwill
impairment charge of $395 million during the second quarter of 2016.
The remaining goodwill related to the Tumblr reporting unit as of
September 30, 2016 was $124 million, which is in the Americas operating segment. As of September 30, 2016, there was also goodwill remaining for Taiwan, Hong Kong, and Australia & New Zealand reporting units, which are included in
the Asia Pacific operating segment.
In determining the fair value of the Tumblr reporting unit, we used the following assumptions:
|
|
Expected cash flows underlying our business plans for the periods 2016 through 2027.
|
|
|
Cash flows beyond 2026 are projected to grow at a perpetual growth rate.
|
|
|
In order to risk adjust the cash flow projections in determining fair value, we utilized a discount rate of 15 percent.
|
As noted above, we recorded goodwill impairment charges in the Tumblr reporting unit during the second quarter of 2016. It is
reasonably possible that future 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.
For example, a future decline in market conditions, changes in our market share, and/or other factors could negatively impact the estimated future cash flows and discount rates used in the income approach to determine the fair value of the Tumblr
reporting unit and could result in one or more additional impairment charges in the future.
See Operating Costs and ExpensesGoodwill
Impairment Charge and Note 5Goodwill in the Notes to our condensed consolidated financial statements for additional information.
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.
See Operating Costs and ExpensesIntangible Assets Impairment Charge and Note 5Goodwill in the Notes to our condensed consolidated financial statements for additional information.
For a complete discussion of our critical accounting policies and estimates, see Critical Accounting Policies and Estimates included in our
Annual Report on Form 10-K for the year ended December 31, 2015 under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations. Other than as discussed above, we have made no significant
changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2015.
63
Recent Accounting Pronouncements
See Note 1The Company and Summary of
Significant Accounting Policies in the Notes to our condensed consolidated financial statements.