Item 1. Condensed Consolidated Financial Statements (unaudited)
Yahoo! Inc.
Condensed
Consolidated Balance Sheets
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December 31,
2015
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June 30,
2016
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(Unaudited, in thousands
except par values)
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ASSETS
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Current assets:
|
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|
Cash and cash equivalents
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|
$
|
1,631,911
|
|
|
$
|
1,325,404
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|
Short-term marketable securities
|
|
|
4,225,112
|
|
|
|
5,055,683
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|
Accounts receivable, net
|
|
|
1,047,504
|
|
|
|
991,185
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|
Prepaid expenses and other current assets
|
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|
602,792
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|
|
|
224,729
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|
|
|
|
|
|
|
|
|
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Total current assets
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|
7,507,319
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|
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|
7,597,001
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Long-term marketable securities
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|
975,961
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|
|
|
1,284,026
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|
Property and equipment, net
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|
1,547,323
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|
|
|
1,326,242
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|
Goodwill
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|
808,114
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|
|
|
431,366
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|
Intangible assets, net
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|
|
347,269
|
|
|
|
202,116
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|
Other long-term assets and investments
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|
342,390
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|
245,123
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Investment in Alibaba Group
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31,172,361
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|
30,504,958
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Investments in equity interests
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|
2,503,229
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|
|
|
2,623,463
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|
|
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Total assets
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|
$
|
45,203,966
|
|
|
$
|
44,214,295
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LIABILITIES AND EQUITY
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Current liabilities:
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Accounts payable
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$
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208,691
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$
|
171,621
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|
Other accrued expenses and current liabilities
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|
934,658
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|
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|
982,860
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Deferred revenue
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|
134,031
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|
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|
122,026
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|
|
|
|
|
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Total current liabilities
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1,277,380
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|
1,276,507
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Convertible notes
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|
1,233,485
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1,266,279
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Long-term deferred revenue
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27,801
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|
33,557
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Other long-term liabilities
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|
118,689
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|
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|
125,826
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Deferred tax liabilities related to investment in Alibaba Group
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|
12,611,867
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|
12,339,927
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Deferred and other long-term tax liabilities
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|
855,324
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|
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775,895
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Total liabilities
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16,124,546
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15,817,991
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Commitments and contingencies (Note 12)
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Yahoo! Inc. stockholders equity:
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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 967,825 shares issued and 950,751 shares outstanding as of June 30, 2016
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959
|
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|
964
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Additional paid-in capital
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8,807,273
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|
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8,978,802
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|
Treasury stock at cost, 17,105 shares as of December 31, 2015 and 17,074 shares as of June 30, 2016
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(911,533)
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(910,117)
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Retained earnings
|
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|
4,570,807
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|
4,030,249
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Accumulated other comprehensive income
|
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|
16,576,031
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16,263,996
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Total Yahoo! Inc. stockholders equity
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29,043,537
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28,363,894
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Noncontrolling interests
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35,883
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32,410
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Total equity
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29,079,420
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28,396,304
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Total liabilities and equity
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$
|
45,203,966
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$
|
44,214,295
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Yahoo! Inc.
Condensed Consolidated Statements of Operations
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Three Months Ended June 30,
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Six Months Ended June 30,
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2015
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2016
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2015
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2016
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(Unaudited, in thousands
except per share amounts)
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Revenue
|
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$
|
1,243,265
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|
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$
|
1,307,637
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$
|
2,469,235
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$
|
2,394,789
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Operating expenses:
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Cost of revenue traffic acquisition costs
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200,230
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|
466,486
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383,369
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|
694,249
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|
Cost of revenue other
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295,932
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|
268,483
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|
581,195
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|
551,070
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Sales and marketing
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274,304
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|
226,024
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|
549,661
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462,057
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Product development
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|
306,428
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|
280,035
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|
633,175
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|
558,064
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General and administrative
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180,595
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|
158,355
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|
354,108
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|
313,806
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|
Amortization of intangibles
|
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19,982
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|
16,369
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|
40,055
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35,142
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Gain on sale of patents and land
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(9,100)
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|
(120,059)
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(11,100)
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(121,559)
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Goodwill impairment charge
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-
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|
394,901
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-
|
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|
394,901
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Intangible assets impairment charge
|
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-
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|
|
|
87,335
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|
-
|
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|
87,335
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|
Restructuring charges, net
|
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|
19,688
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|
|
|
19,384
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|
|
|
70,920
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|
76,614
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|
|
|
|
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Total operating expenses
|
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|
1,288,059
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|
|
|
1,797,313
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|
2,601,383
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3,051,679
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Loss from operations
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(44,794)
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(489,676)
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(132,148)
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(656,890)
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Other (expense) income, net
|
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|
(11,741)
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|
15,062
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|
(42,804)
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(32,354)
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Loss before income taxes and earnings in equity interests
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(56,535)
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(474,614)
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(174,952)
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|
(689,244)
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|
(Provision) benefit for income taxes
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(58,495)
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|
(15,543)
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|
(17,595)
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|
19,223
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|
Earnings in equity interests, net of tax
|
|
|
95,841
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|
|
|
51,777
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|
|
|
195,531
|
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|
133,351
|
|
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|
|
|
|
|
|
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|
|
|
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|
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Net (loss) income
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|
(19,189)
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|
|
(438,380)
|
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|
|
2,984
|
|
|
|
(536,670)
|
|
Net income attributable to noncontrolling interests
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|
(2,365)
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|
|
|
(1,533)
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|
|
(3,340)
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|
|
(2,475)
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|
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|
Net loss attributable to Yahoo! Inc.
|
|
$
|
(21,554)
|
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|
$
|
(439,913)
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|
$
|
(356)
|
|
|
$
|
(539,145)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss attributable to Yahoo! Inc. common stockholders per share basic
|
|
$
|
(0.02)
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$
|
(0.46)
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$
|
(0.00)
|
|
|
$
|
(0.57)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss attributable to Yahoo! Inc. common stockholders per share diluted
|
|
$
|
(0.02)
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|
|
$
|
(0.46)
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|
|
$
|
(0.00)
|
|
|
$
|
(0.57)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Shares used in per share calculation basic
|
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|
937,569
|
|
|
|
948,432
|
|
|
|
936,159
|
|
|
|
947,076
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|
|
|
|
|
|
|
|
|
|
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|
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Shares used in per share calculation diluted
|
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|
937,569
|
|
|
|
948,432
|
|
|
|
936,159
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|
|
|
947,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Stock-based compensation expense by function:
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|
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|
|
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|
|
|
|
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|
Cost of revenue other
|
|
$
|
7,200
|
|
|
$
|
7,910
|
|
|
$
|
13,209
|
|
|
$
|
16,436
|
|
Sales and marketing
|
|
|
39,978
|
|
|
|
38,944
|
|
|
|
78,099
|
|
|
|
71,831
|
|
Product development
|
|
|
50,762
|
|
|
|
58,474
|
|
|
|
98,983
|
|
|
|
106,462
|
|
General and administrative
|
|
|
27,190
|
|
|
|
26,636
|
|
|
|
50,535
|
|
|
|
45,642
|
|
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
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|
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|
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|
|
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|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
Net (loss) income
|
|
$
|
(19,189)
|
|
|
$
|
(438,380)
|
|
|
$
|
2,984
|
|
|
$
|
(536,670)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on available-for-sale securities, net of taxes of $149,980 and $(76,651) for the three months ended
June 30, 2015 and 2016, respectively, and $3,388,114 and $286,431 for the six months ended June 30, 2015 and 2016, respectively
|
|
|
(212,465)
|
|
|
|
111,715
|
|
|
|
(4,926,084)
|
|
|
|
(404,823)
|
|
Reclassification adjustment for realized (gains) losses on available-for-sale securities included in net (loss) income, net of
taxes of $49 and $4 for the three months ended June 30, 2015 and 2016, respectively, and $(2) and $(107) for the six months ended June 30, 2015 and 2016, respectively
|
|
|
(81)
|
|
|
|
(8)
|
|
|
|
2
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized (losses) gains on available-for-sale securities, net of tax
|
|
|
(212,546)
|
|
|
|
111,707
|
|
|
|
(4,926,082)
|
|
|
|
(404,628)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (CTA):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign CTA gains (losses), net of taxes of $(128) and $(43) for the three months ended June 30, 2015 and 2016, respectively,
and $454 and $(379) for the six months ended June 30, 2015 and 2016, respectively
|
|
|
38,140
|
|
|
|
165,751
|
|
|
|
(233,102)
|
|
|
|
167,934
|
|
Net investment hedge CTA gains (losses), net of taxes of $(9,153) and $13,322 for the three months ended June 30, 2015 and
2016, respectively, and $(10,744) and $30,253 for the six months ended June 30, 2015 and 2016, respectively
|
|
|
15,404
|
|
|
|
(24,165)
|
|
|
|
18,038
|
|
|
|
(54,875)
|
|
Reclassification adjustment for realized (gains) losses included in CTA, net of taxes of $0, for all periods presented
|
|
|
-
|
|
|
|
(16,500)
|
|
|
|
-
|
|
|
|
(16,500)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign CTA losses, net of tax
|
|
|
53,544
|
|
|
|
125,086
|
|
|
|
(215,064)
|
|
|
|
96,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedges, net of taxes of $(1,065) and $1,637 for the three months ended June 30, 2015
and 2016, respectively, and $(689) and $2,975 for the six months ended June 30, 2015 and 2016, respectively
|
|
|
5,875
|
|
|
|
(2,972)
|
|
|
|
(5,281)
|
|
|
|
(5,398)
|
|
Reclassification adjustment for realized losses (gains) on cash flow hedges included in net income, net of taxes of $529 and
$(512) for the three months ended June 30, 2015 and 2016, respectively, and $718 and $(789) for the six months ended June 30, 2015 and 2016, respectively
|
|
|
478
|
|
|
|
930
|
|
|
|
2,138
|
|
|
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses) on cash flow hedges, net of tax
|
|
|
6,353
|
|
|
|
(2,042)
|
|
|
|
(3,143)
|
|
|
|
(3,966)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(152,649)
|
|
|
|
234,751
|
|
|
|
(5,144,289)
|
|
|
|
(312,035)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(171,838)
|
|
|
|
(203,629)
|
|
|
|
(5,141,305)
|
|
|
|
(848,705)
|
|
Less: comprehensive income attributable to noncontrolling interests
|
|
|
(2,365)
|
|
|
|
(1,533)
|
|
|
|
(3,340)
|
|
|
|
(2,475)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Yahoo! Inc.
|
|
$
|
(174,203)
|
|
|
$
|
(205,162)
|
|
|
$
|
(5,144,645)
|
|
|
$
|
(851,180)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Yahoo! Inc.
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,984
|
|
|
$
|
(536,670)
|
|
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
236,694
|
|
|
|
213,054
|
|
Amortization of intangible assets
|
|
|
68,524
|
|
|
|
59,838
|
|
Accretion of convertible notes discount
|
|
|
31,117
|
|
|
|
32,794
|
|
Stock-based compensation expense
|
|
|
243,531
|
|
|
|
247,745
|
|
Non-cash goodwill impairment charge
|
|
|
-
|
|
|
|
394,901
|
|
Non-cash intangible assets impairment charge
|
|
|
-
|
|
|
|
87,335
|
|
Non-cash restructuring (reversals) charges
|
|
|
(933)
|
|
|
|
1,376
|
|
Non-cash accretion on marketable debt securities
|
|
|
23,557
|
|
|
|
18,494
|
|
Foreign exchange loss (gain)
|
|
|
21,318
|
|
|
|
(36,433)
|
|
Gain on sale of assets and other
|
|
|
(28)
|
|
|
|
(1,831)
|
|
Gain on sale of patents and land
|
|
|
(11,100)
|
|
|
|
(121,559)
|
|
Loss on Hortonworks warrants
|
|
|
6,460
|
|
|
|
41,437
|
|
Earnings in equity interests
|
|
|
(195,531)
|
|
|
|
(133,351)
|
|
Tax (detriments) benefits from stock-based awards
|
|
|
(3,617)
|
|
|
|
1,816
|
|
Excess tax benefits from stock-based awards
|
|
|
(1,850)
|
|
|
|
(10,560)
|
|
Deferred income taxes
|
|
|
(13,218)
|
|
|
|
(93,543)
|
|
Dividends received from equity investee
|
|
|
141,670
|
|
|
|
156,968
|
|
Changes in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
32,881
|
|
|
|
58,199
|
|
Prepaid expenses and other
|
|
|
(90,078)
|
|
|
|
343,422
|
|
Accounts payable
|
|
|
37,505
|
|
|
|
(1,104)
|
|
Accrued expenses and other liabilities
|
|
|
232,210
|
|
|
|
59,847
|
|
Incomes taxes payable related to sale of Alibaba Group ADSs
|
|
|
(3,282,293)
|
|
|
|
-
|
|
Deferred revenue
|
|
|
(132,790)
|
|
|
|
(6,477)
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,652,987)
|
|
|
|
775,698
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(267,390)
|
|
|
|
(154,336)
|
|
Proceeds from sales of property and equipment
|
|
|
495
|
|
|
|
247,887
|
|
Purchases of marketable securities
|
|
|
(2,326,886)
|
|
|
|
(4,257,001)
|
|
Proceeds from sales of marketable securities
|
|
|
473,775
|
|
|
|
167,961
|
|
Proceeds from maturities of marketable securities
|
|
|
3,584,596
|
|
|
|
2,942,666
|
|
Acquisitions, net of cash acquired
|
|
|
(21,291)
|
|
|
|
-
|
|
Proceeds from sales of patents
|
|
|
20,000
|
|
|
|
1,500
|
|
Purchases of intangible assets
|
|
|
(4,611)
|
|
|
|
(1,965)
|
|
Proceeds from settlement of derivative hedge contracts
|
|
|
64,767
|
|
|
|
37,815
|
|
Payments for settlement of derivative hedge contracts
|
|
|
(3,882)
|
|
|
|
(5,164)
|
|
Payments for equity investments in privately held companies
|
|
|
-
|
|
|
|
(9)
|
|
Other investing activities, net
|
|
|
(153)
|
|
|
|
(93)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,519,420
|
|
|
|
(1,020,739)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Yahoo! Inc.
Condensed Consolidated Statements of Cash Flows (continued)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
46,777
|
|
|
|
10,924
|
|
Repurchases of common stock
|
|
|
(203,771)
|
|
|
|
-
|
|
Excess tax benefits from stock-based awards
|
|
|
1,850
|
|
|
|
10,560
|
|
Tax withholdings related to net share settlements of restricted stock awards and restricted stock units
|
|
|
(149,960)
|
|
|
|
(91,425)
|
|
Distributions to noncontrolling interests
|
|
|
(15,847)
|
|
|
|
(5,948)
|
|
Other financing activities, net
|
|
|
(9,015)
|
|
|
|
(7,567)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(329,966)
|
|
|
|
(83,456)
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(12,396)
|
|
|
|
21,990
|
|
Net change in cash and cash equivalents
|
|
|
(1,475,929)
|
|
|
|
(306,507)
|
|
Cash and cash equivalents at beginning of period
|
|
|
2,664,098
|
|
|
|
1,631,911
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,188,169
|
|
|
$
|
1,325,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change in non-cash acquisitions of property and equipment
|
|
$
|
4,905
|
|
|
$
|
(1,273)
|
|
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 six months ended June 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 illustrates the impact of the implementation of the Eleventh Amendment for the periods
presented and sets out the amounts paid to Affiliates related to the Microsoft Search Agreement during the three and six months ended June 30, 2015 and 2016 that were recorded as cost of revenueTAC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Cost of revenueTAC
(*)
|
|
$
|
-
|
|
|
$
|
252,331
|
|
|
$
|
-
|
|
|
$
|
252,331
|
|
Reduction of revenue
|
|
$
|
332,589
|
|
|
$
|
2,377
|
|
|
$
|
687,891
|
|
|
$
|
273,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Includes $218 million in the Americas segment, $33 million in the EMEA segment and $1 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 of revenue or as cost of revenueTAC. For reporting periods ended December 31, 2014 and 2015, and March 31, 2016, TAC related to the Microsoft Search
Agreement was recorded as a reduction of revenue. 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.
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.
10
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.
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 will be 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.
11
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Cost
Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
|
Government and agency securities
|
|
$
|
629,573
|
|
|
$
|
667
|
|
|
$
|
(18)
|
|
|
$
|
630,222
|
|
Corporate debt securities, commercial paper, time deposits, and bank certificates of deposit
|
|
|
5,705,266
|
|
|
|
4,677
|
|
|
|
(456)
|
|
|
|
5,709,487
|
|
Alibaba Group equity securities
|
|
|
2,713,484
|
|
|
|
27,791,474
|
|
|
|
-
|
|
|
|
30,504,958
|
|
Hortonworks equity securities
|
|
|
26,246
|
|
|
|
14,866
|
|
|
|
-
|
|
|
|
41,112
|
|
Other corporate equity securities
|
|
|
7,984
|
|
|
|
62
|
|
|
|
(1,495)
|
|
|
|
6,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable securities
|
|
$
|
9,082,553
|
|
|
$
|
27,811,746
|
|
|
$
|
(1,969)
|
|
|
$
|
36,892,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
June 30,
2016
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Short-term marketable securities
|
|
$
|
4,225,112
|
|
|
$
|
5,055,683
|
|
Long-term marketable securities
|
|
|
975,961
|
|
|
|
1,284,026
|
|
Investment in Alibaba Group
|
|
|
31,172,361
|
|
|
|
30,504,958
|
|
Other long-term assets and investments
|
|
|
84,420
|
|
|
|
47,663
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,457,854
|
|
|
$
|
36,892,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term, highly liquid investments of $667 million and $520 million as of December 31, 2015 and June 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 six months ended June 30, 2015 and 2016.
12
The remaining contractual maturities of available-for-sale marketable debt securities were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
June 30,
2016
|
|
|
|
Due within one year
|
|
$
|
4,225,112
|
|
|
$
|
5,055,683
|
|
Due after one year through five years
|
|
|
975,961
|
|
|
|
1,284,026
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable debt securities
|
|
$
|
5,201,073
|
|
|
$
|
6,339,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 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
|
|
$
|
96,661
|
|
|
$
|
(18)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
96,661
|
|
|
$
|
(18)
|
|
Corporate debt securities, commercial paper, and bank certificates of deposit
|
|
|
905,162
|
|
|
|
(413)
|
|
|
|
88,852
|
|
|
|
(43)
|
|
|
|
994,014
|
|
|
|
(456)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable debt securities
|
|
$
|
1,001,823
|
|
|
$
|
(431)
|
|
|
$
|
88,852
|
|
|
$
|
(43)
|
|
|
$
|
1,090,675
|
|
|
$
|
(474)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
13
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the financial assets and liabilities, measured at fair value, by level within the fair
value hierarchy as of June 30, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Money market funds
(1)
|
|
$
|
448,078
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
448,078
|
|
Available-for-sale marketable debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agency securities
(1)
|
|
|
-
|
|
|
|
630,222
|
|
|
|
-
|
|
|
|
630,222
|
|
Commercial paper and bank certificates of deposit
(1)
|
|
|
-
|
|
|
|
2,316,960
|
|
|
|
-
|
|
|
|
2,316,960
|
|
Corporate debt securities
(1)
|
|
|
-
|
|
|
|
3,416,494
|
|
|
|
-
|
|
|
|
3,416,494
|
|
Time deposits
(1)
|
|
|
-
|
|
|
|
47,682
|
|
|
|
-
|
|
|
|
47,682
|
|
Available-for-sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other corporate equity securities
(2)
|
|
|
6,551
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,551
|
|
Alibaba Group equity securities
|
|
|
30,504,958
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,504,958
|
|
Hortonworks equity securities
(2)
|
|
|
41,112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,112
|
|
Hortonworks warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
37,424
|
|
|
|
37,424
|
|
Foreign currency derivative contracts
(3)
|
|
|
-
|
|
|
|
205
|
|
|
|
-
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets at fair value
|
|
$
|
31,000,699
|
|
|
$
|
6,411,563
|
|
|
$
|
37,424
|
|
|
$
|
37,449,686
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
(3)
|
|
|
-
|
|
|
|
(48,881)
|
|
|
|
-
|
|
|
|
(48,881)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets and liabilities at fair value
|
|
$
|
31,000,699
|
|
|
$
|
6,362,682
|
|
|
$
|
37,424
|
|
|
$
|
37,400,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
14
(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 $0.7 billion,
including contracts designated as net investment hedges of $0.5 billion, as of June 30, 2016.
|
The amount of cash included in
cash and cash equivalents as of December 31, 2015 and June 30, 2016 was $965 million and $806 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 six months ended June 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 $37 million as of December 31, 2015 and June 30, 2016, respectively,
which is included in other long-term assets and investments on the condensed consolidated balance sheets. During the three and six months ended June 30, 2015, the Company recorded a gain of $5 million and a loss of $6 million, respectively, and
during the three and six months ended June 30, 2016, the Company recorded losses of $2 million and $41 million, respectively, due to the change in estimated fair value of the Hortonworks warrants during the respective periods, which was
included within other (expense) income, net in the Companys condensed consolidated statements of operations. The estimated fair value of the Hortonworks warrants was determined using a Black-Scholes model.
Assets and Liabilities at Fair Value on a Nonrecurring Basis:
Convertible Senior Notes.
In 2013, the Company issued $1.4 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
June 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 June 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.
15
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
|
|
|
June 30,
2016
|
|
|
|
Unrealized gains on available-for-sale securities, net of tax
|
|
$
|
16,918,539
|
|
|
$
|
16,513,911
|
|
Unrealized gains (losses) on cash flow hedges, net of tax
|
|
|
482
|
|
|
|
(3,484)
|
|
Foreign currency translation, net of tax
|
|
|
(342,990)
|
|
|
|
(246,431)
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
16,576,031
|
|
|
$
|
16,263,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
Interests
Noncontrolling interests were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
|
Beginning noncontrolling interests
|
|
$
|
43,755
|
|
|
$
|
35,883
|
|
Distributions to noncontrolling interests
|
|
|
(15,847)
|
|
|
|
(5,948)
|
|
Net income attributable to noncontrolling interests
|
|
|
3,340
|
|
|
|
2,475
|
|
|
|
|
|
|
|
|
|
|
Ending noncontrolling interests
|
|
$
|
31,248
|
|
|
$
|
32,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense)
Income, Net
Other (expense) income, net was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Interest, dividend, and investment income
|
|
$
|
8,034
|
|
|
$
|
14,039
|
|
|
$
|
16,879
|
|
|
$
|
25,521
|
|
Interest expense
|
|
|
(17,558)
|
|
|
|
(18,332)
|
|
|
|
(35,128)
|
|
|
|
(36,725)
|
|
Gain (loss) on Hortonworks warrants
|
|
|
5,449
|
|
|
|
(2,287)
|
|
|
|
(6,460)
|
|
|
|
(41,437)
|
|
Foreign exchange (loss) gain
|
|
|
(8,186)
|
|
|
|
20,964
|
|
|
|
(19,527)
|
|
|
|
18,826
|
|
Other
|
|
|
520
|
|
|
|
678
|
|
|
|
1,432
|
|
|
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income, net
|
|
$
|
(11,741)
|
|
|
$
|
15,062
|
|
|
$
|
(42,804)
|
|
|
$
|
(32,354)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, dividend and investment income consists of income earned from cash and cash equivalents in bank accounts and
investments made in marketable debt securities.
Interest expense is related to the Notes and notes payable related to building and capital lease
obligations for data centers.
During the three and six months ended June 30, 2015, the Company recorded a gain of $5 million and a loss of $6
million, respectively, and during the three and six months ended June 30, 2016, the Company recorded losses of $2 million and $41 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 second quarter of 2016, the Company reclassified certain unrealized currency translation adjustments from accumulated other comprehensive income and realized a gain of $18 million
due to the liquidation of foreign subsidiaries.
Other consists of gains from other non-operational items.
16
Reclassifications Out of Accumulated Other Comprehensive Income
Reclassifications out of accumulated other comprehensive income for the three months ended June 30, 2015 and 2016 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
2015
|
|
|
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
|
|
$
|
478
|
|
|
$
|
930
|
|
|
|
Revenue
|
|
Realized gains on available-for-sale securities, net of tax
|
|
|
(81)
|
|
|
|
(8)
|
|
|
|
Other (expense) income, 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
|
|
|
-
|
|
|
|
(17,610)
|
|
|
|
Other (expense) income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
397
|
|
|
$
|
(15,578)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2015 and 2016 were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2015
|
|
|
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
|
|
$
|
2,138
|
|
|
$
|
1,432
|
|
|
|
Revenue
|
|
Realized losses on available-for-sale securities, net of tax
|
|
|
2
|
|
|
|
195
|
|
|
|
Other (expense) income, 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
|
|
|
-
|
|
|
|
(17,610)
|
|
|
|
Other (expense) income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
2,140
|
|
|
$
|
(14,873)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 Acquisitions and Dispositions
During the six months ended June 30, 2015,
the Company acquired one company which was accounted for as a business combination. The total purchase price for this acquisition was $23 million. The 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.
17
The Companys business combination completed during the six months ended June 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 six months ended June 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 the three and six months ended
June 30, 2015 and 2016, the Company recognized $22 million and $43 million, respectively, in revenue related to the Existing Patents and the Capture Period Patents.
During the three and six months ended June 30, 2015, the Company sold certain patents and recorded gains on sales of patents of approximately $9
million and $11 million, respectively. During the three months ended June 30, 2016, the Company did not have any patent sales. During the six months ended June 30, 2016, the Company sold certain patents and recorded gains on sales of
patents of approximately $2 million.
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. 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.
Note 5 Goodwill
The changes in the carrying amount of goodwill for the six
months ended June 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
|
|
|
-
|
|
|
|
-
|
|
|
|
18,153
|
|
|
|
18,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of June 30, 2016
|
|
$
|
123,985
|
|
|
$
|
-
|
|
|
$
|
307,381
|
|
|
$
|
431,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Gross goodwill balance for the Americas segment was $4.4 billion as of June 30, 2016. The Americas segment includes
accumulated impairment losses of $4.3 billion as of June 30, 2016.
|
(2)
|
Gross goodwill balance for the EMEA segment was $1.2 billion as of June 30, 2016. The EMEA segment includes
accumulated impairment losses of $1.2 billion as of June 30, 2016.
|
(3)
|
Gross goodwill balance for the Asia Pacific segment was $466 million as of June 30, 2016. The Asia Pacific segment
includes accumulated impairment losses of $159 million as of June 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.
18
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.
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 three months ended June 30, 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 bases 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 June 30, 2016 was $124 million,
which is included in the Americas operating segment. There is also goodwill remaining for Taiwan, Hong Kong, and Australia & New Zealand reporting units, which are included in the Asia Pacific operating segment.
Given the impairment recorded in the Tumblr reporting unit during the second quarter of 2016, it is reasonably possible that changes in judgments,
assumptions and estimates we made in assessing the fair value of goodwill could cause us to consider some portion or all of the remaining goodwill of the Tumblr reporting unit to become impaired. 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.
19
Note 6 Intangible Assets, Net
The following table summarizes the
Companys intangible assets, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
June 30, 2016
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
|
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
(*)
|
|
|
Charge
|
|
|
Net
|
|
|
|
Customer, affiliate, and advertiser related relationships
|
|
$
|
220,055
|
|
|
$
|
350,913
|
|
|
$
|
(159,804)
|
|
|
$
|
(66,680)
|
|
|
$
|
124,429
|
|
Developed technology and patents
|
|
|
86,909
|
|
|
|
129,278
|
|
|
|
(65,775)
|
|
|
|
-
|
|
|
|
63,503
|
|
Tradenames, trademarks, and domain names
|
|
|
40,305
|
|
|
|
66,631
|
|
|
|
(31,792)
|
|
|
|
(20,655)
|
|
|
|
14,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
347,269
|
|
|
$
|
546,822
|
|
|
$
|
(257,371)
|
|
|
$
|
(87,335)
|
|
|
$
|
202,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Cumulative foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities,
totaled approximately $18 million as of June 30, 2016.
|
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 first half of 2016. As of June 30, 2016,
the Company only had definite-lived intangible assets.
For the three months ended June 30, 2015 and 2016, the Company recognized amortization
expense for intangible assets of $34 million and $28 million, respectively, including $14 million and $11 million in cost of revenue other for the three months ended June 30, 2015 and 2016, respectively. For the six months ended
June 30, 2015 and 2016, the Company recognized amortization expense for intangible assets of $68 million and $60 million, respectively, including $28 million and $25 million in cost of revenue other for the six months ended
June 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: six months ending
December 31, 2016: $40 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.
During the three months ended June 30, 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.
20
Note 7 Basic And Diluted Net 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.
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 neutralize the dilutive effect of the shares that the Company would issue under the Notes.
See Note 11Convertible Notes for additional information.
The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Yahoo! Inc.
|
|
$
|
(21,554
|
)
|
|
$
|
(439,913)
|
|
|
$
|
(356)
|
|
|
$
|
(539,145)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Yahoo! Inc. common stockholdersbasic
|
|
$
|
(21,554
|
)
|
|
$
|
(439,913)
|
|
|
$
|
(356)
|
|
|
$
|
(539,145)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
937,569
|
|
|
|
948,432
|
|
|
|
936,159
|
|
|
|
947,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Yahoo! Inc. common stockholders per sharebasic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.46)
|
|
|
$
|
(0.00)
|
|
|
$
|
(0.57)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Yahoo! Inc.
|
|
$
|
(21,554
|
)
|
|
$
|
(439,913)
|
|
|
$
|
(356)
|
|
|
$
|
(539,145)
|
|
Less: Effect of dilutive securities issued by equity investees
|
|
|
(1,125
|
)
|
|
|
-
|
|
|
|
(2,319
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Yahoo! Inc. common stockholdersdiluted
|
|
$
|
(22,679
|
)
|
|
$
|
(439,913)
|
|
|
$
|
(2,675)
|
|
|
$
|
(539,145)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
937,569
|
|
|
|
948,432
|
|
|
|
936,159
|
|
|
|
947,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Yahoo! Inc. common stockholders per sharediluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
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
|
|
|
June 30,
2016
|
|
|
Percent
Ownership
|
|
|
|
Yahoo Japan
|
|
$
|
2,496,657
|
|
|
|
35.5%
|
|
|
$
|
2,623,463
|
|
|
|
35.5%
|
|
Other
|
|
|
6,572
|
|
|
|
20%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,503,229
|
|
|
|
|
|
|
$
|
2,623,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $8.9 billion as of June 30, 2016.
During the three
and six months ended June 30, 2015 and the three and six months ended June 30, 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 March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(In thousands)
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
987,417
|
|
|
$
|
1,062,418
|
|
|
$
|
1,928,658
|
|
|
$
|
2,021,279
|
|
Gross profit
|
|
$
|
790,966
|
|
|
$
|
830,816
|
|
|
$
|
1,541,950
|
|
|
$
|
1,585,555
|
|
Income from operations
|
|
$
|
438,166
|
|
|
$
|
229,175
|
|
|
$
|
863,219
|
|
|
$
|
574,126
|
|
Net income
|
|
$
|
274,721
|
|
|
$
|
141,451
|
|
|
$
|
561,514
|
|
|
$
|
375,965
|
|
Net income attributable to Yahoo Japan
|
|
$
|
274,129
|
|
|
$
|
145,233
|
|
|
$
|
558,975
|
|
|
$
|
379,896
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(In thousands)
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
6,150,688
|
|
|
$
|
6,226,784
|
|
Long-term assets
|
|
$
|
2,430,699
|
|
|
$
|
3,635,489
|
|
Current liabilities
|
|
$
|
2,003,960
|
|
|
$
|
2,444,089
|
|
Long-term liabilities
|
|
$
|
245,834
|
|
|
$
|
274,929
|
|
Noncontrolling interests
|
|
$
|
165,601
|
|
|
$
|
169,966
|
|
|
|
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 $55 million and $60 million for the three months ended June 30, 2015 and 2016, respectively, and
approximately $115 million and $122 million for the six months ended June 30, 2015 and 2016, respectively. As of December 31, 2015 and June 30, 2016, the Company had net receivable balances from Yahoo Japan of approximately $37
million and $43 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.
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 six months ended June 30, 2015, the Company recognized approximately $69 million and $139 million, respectively, related to the TIPLA.
Note 9 Foreign Currency Derivative Financial Instruments
The Company uses derivative financial
instruments, primarily forward contracts and option contracts, to mitigate risk associated with adverse movements in foreign currency exchange rates.
The Company records all derivatives in the 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) income, net on the Companys condensed consolidated statements of operations. For balance sheet hedges, changes in the fair value are recorded in other (expense) income, net on the Companys
condensed consolidated statements of operations.
The Company enters into 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 and option contracts to reduce the risk that its investment in Yahoo Japan will be adversely affected by foreign currency exchange rate fluctuations. The total of the after-tax net investment hedge was less than the Yahoo Japan investment
balance as of both December 31, 2015 and June 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 June 30, 2016. All of the forward contracts designated as cash flow hedges that were settled were reclassified to revenue during the three and six months ended June 30, 2015 and 2016. All current outstanding cash flow hedges are
expected to be reclassified into revenue during 2016. For the three and six months ended June 30, 2015 and 2016, the amounts recorded in other (expense) income, net as a result of hedge ineffectiveness were not material.
23
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 June 30, 2016 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Net investment hedge forward and option contracts
|
|
$
|
1,150
|
|
|
$
|
494
|
|
Cash flow hedge forwards
|
|
$
|
75
|
|
|
$
|
54
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Balance sheet hedges
|
|
$
|
225
|
|
|
$
|
115
|
|
|
|
Foreign currency derivative activity for the six months ended June 30, 2015 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Recorded in
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
Settlement
|
|
|
Recorded in
|
|
|
Other
|
|
|
Recorded
|
|
|
|
|
|
|
Beginning
|
|
|
Payment
|
|
|
Other (Expense)
|
|
|
Comprehensive
|
|
|
in
|
|
|
Ending Fair
|
|
|
|
Fair Value
|
|
|
(Receipt), Net
|
|
|
Income, Net
|
|
|
Loss
|
|
|
Revenue
|
|
|
Value
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges
|
|
$
|
185
|
|
|
$
|
(38
|
)
|
|
$
|
(2
|
)
|
|
$
|
29
|
(*)
|
|
$
|
-
|
|
|
$
|
174
|
|
Cash flow hedges
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet hedges
|
|
$
|
4
|
|
|
$
|
(22
|
)
|
|
$
|
14
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4)
|
|
|
|
(*)
|
This amount does not reflect the tax impact of $11 million recorded during the six months ended June 30, 2015.
The $18 million after tax impact of the gain recorded within other comprehensive loss was included in accumulated other comprehensive income on the Companys condensed consolidated balance sheets.
|
Foreign currency derivative activity for the six months ended June 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
|
|
|
Income, Net
|
|
|
Loss
|
|
|
Revenue
|
|
|
Value
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges
|
|
$
|
74
|
|
|
$
|
(30
|
)
|
|
$
|
1
|
|
|
$
|
(85
|
) (*)
|
|
$
|
-
|
|
|
$
|
(40)
|
|
Cash flow hedges
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
(6
|
)
|
|
$
|
(2
|
)
|
|
$
|
(8)
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet hedges
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1)
|
|
|
|
(*)
|
This amount does not reflect the tax impact of $30 million recorded during the six months ended June 30, 2016.
The $55 million after tax impact of the loss recorded within other comprehensive loss was included in accumulated other comprehensive income on the Companys condensed consolidated balance sheets.
|
24
Foreign currency derivative contracts balance sheet location and ending fair value was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
June 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)
|
|
|
|
|
|
|
$
|
|
|
|
|
-
|
|
|
|
|
|
|
$
|
|
|
|
|
(8)
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet hedges
|
|
|
Asset
(1)
|
|
|
|
|
|
|
$
|
|
|
|
|
3
|
|
|
|
|
|
|
$
|
|
|
|
|
-
|
|
|
|
|
Liability
(2)
|
|
|
|
|
|
|
$
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
$
|
|
|
|
|
(1)
|
|
|
|
(1)
|
Included in prepaid expenses and other current assets or other long-term assets on the condensed consolidated balance
sheets.
|
(2)
|
Included in accrued expenses and other current liabilities or other long-term liabilities on the condensed consolidated
balance sheets.
|
Note 10 Credit Agreement
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 June 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 June 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,
|
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Liability component:
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
1,437,500
|
|
|
$
|
1,437,500
|
|
Less: note discount
|
|
|
(204,015)
|
|
|
|
(171,221)
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
1,233,485
|
|
|
$
|
1,266,279
|
|
|
|
|
|
|
|
|
|
|
Equity component
(*)
|
|
$
|
305,569
|
|
|
$
|
305,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Recorded on the condensed consolidated balance sheets within additional paid-in capital.
|
25
The following table sets forth total interest expense recognized related to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Accretion of convertible note discount
|
|
$
|
15,660
|
|
|
$
|
16,505
|
|
|
$
|
31,117
|
|
|
$
|
32,794
|
|
|
|
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
|
|
|
June 30, 2016
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
Convertible senior notes
|
|
$
|
1,250,124
|
|
|
$
|
1,233,485
|
|
|
$
|
1,301,113
|
|
|
$
|
1,266,279
|
|
|
|
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 June 30, 2016 was as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Operating
Lease
Commitments
|
|
|
Sublease
Income
|
|
|
Net Operating
Lease
Commitments
|
|
|
|
Six months ending December 31, 2016
|
|
$
|
58
|
|
|
$
|
(8)
|
|
|
$
|
50
|
|
Years ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
93
|
|
|
|
(15)
|
|
|
|
78
|
|
2018
|
|
|
67
|
|
|
|
(11)
|
|
|
|
56
|
|
2019
|
|
|
52
|
|
|
|
(9)
|
|
|
|
43
|
|
2020
|
|
|
39
|
|
|
|
(7)
|
|
|
|
32
|
|
2021
|
|
|
30
|
|
|
|
(6)
|
|
|
|
24
|
|
Due after 5 years
|
|
|
86
|
|
|
|
(2)
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross and net lease commitments
|
|
$
|
425
|
|
|
$
|
(58)
|
|
|
$
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
Capital Lease
|
|
|
|
Commitments
|
|
|
|
Six months ending December 31, 2016
|
|
$
|
6
|
|
Years ending December 31,
|
|
|
|
|
2017
|
|
|
11
|
|
2018
|
|
|
9
|
|
2019
|
|
|
5
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
Due after 5 years
|
|
|
3
|
|
|
|
|
|
|
Gross capital lease commitments
|
|
$
|
34
|
|
|
|
|
|
|
Less: interest
|
|
|
6
|
|
|
|
|
|
|
Net capital lease commitments included in other accrued expenses and current liabilities and
other long-term liabilities
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Commitments
.
The Company is obligated to make payments, which represent TAC, to its
Affiliates. As of June 30, 2016, these commitments totaled $1,344 million, of which $188 million will be payable in the remainder of 2016, $375 million will be payable in each year from 2017 through 2019, and $31 million will be payable in
2020.
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 June 30, 2016, these commitments totaled $139 million, of which $54 million will be payable in the remainder of 2016, $40 million will be
payable in 2017, $29 million will be payable in 2018, $4 million will be payable in 2019, $3 million will be payable in 2020, $2 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 $54 million, of which $2 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 June 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 June 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.
27
Legal Contingencies
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.
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.
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. The Company has filed a motion to dismiss the action.
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. Trial is scheduled for November 2016. 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; the case was dismissed with prejudice in March 2016.
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 June 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.
28
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
six months ended June 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)
|
|
|
(736)
|
|
|
$
|
14.84
|
|
Options expired
|
|
|
(422)
|
|
|
$
|
18.61
|
|
Options cancelled/forfeited
|
|
|
(356)
|
|
|
$
|
18.34
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
(1)
|
|
|
5,008
|
|
|
$
|
19.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes shares subject to performance-based stock options for which performance goals had not been set as of the date
shown.
|
(2)
|
The Company generally issues new shares to satisfy stock option exercises.
|
As of June 30, 2016, there was $17 million of unamortized stock-based compensation expense related to unvested stock options, which is expected to
be recognized over a weighted average period of 1 year.
Restricted Stock and Restricted Stock Units.
Restricted stock and restricted
stock unit activity under the Plans for the six months ended June 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)
|
|
|
14,057
|
|
|
$
|
34.14
|
|
Vested
|
|
|
(7,266)
|
|
|
$
|
31.45
|
|
Forfeited
|
|
|
(4,593)
|
|
|
$
|
35.82
|
|
|
|
|
|
|
|
|
|
|
Awarded and unvested at June 30, 2016
(1)
|
|
|
30,937
|
|
|
$
|
39.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 six months ended June 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 six months ended June 30, 2016.
|
As of June 30, 2016, there was $724 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 2.5 years.
During the six months ended June 30, 2015 and 2016, 9.1 million shares and 7.3 million shares, respectively, that were subject to
previously granted restricted stock units, vested. These vested restricted stock units were net share settled. During the six months ended June 30, 2015 and 2016, the Company withheld 3.4 million shares and 2.7 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.
29
Total payments for the employees tax obligations to the relevant taxing authorities were $150 million
and $91 million, respectively, for the six months ended June 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 June 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 June 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 six months ended June 30, 2016, the Company did not repurchase any of its outstanding common stock.
30
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Employee severance pay and related costs
|
|
$
|
7,149
|
|
|
$
|
5,052
|
|
|
$
|
51,149
|
|
|
$
|
49,848
|
|
Non-cancelable lease, contract termination, and other charges
|
|
|
13,403
|
|
|
|
14,030
|
|
|
|
22,020
|
|
|
|
19,934
|
|
Reversals of previous charges
|
|
|
(790)
|
|
|
|
(712)
|
|
|
|
(4,021)
|
|
|
|
(1,918)
|
|
Non-cash accelerations of stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
2,705
|
|
|
|
7,374
|
|
Other non-cash (credits) charges, net
|
|
|
(74)
|
|
|
|
1,014
|
|
|
|
(933)
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
$
|
19,688
|
|
|
$
|
19,384
|
|
|
$
|
70,920
|
|
|
$
|
76,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2015, the Company recorded expense of $12 million, $7
million, and $1 million related to the Americas, EMEA, and Asia Pacific segments, respectively. For the six months ended June 30, 2015, the Company recorded expense of $53 million, $14 million, and $4 million related to the Americas, EMEA, and
Asia Pacific segments, respectively. For the three months ended June 30, 2016, the Company recorded expense of $12 million, $5 million, and $2 million related to the Americas, EMEA, and Asia Pacific segments, respectively. For the six months
ended June 30, 2016, the Company recorded expense of $60 million, $13 million, and $4 million related to the Americas, EMEA, and Asia Pacific segments, respectively.
The amounts recorded during the six months ended June 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 June 30, 2016, in connection with this action, the Company incurred pre-tax cash charges of $2 million for severance pay expenses and related cash
expenditures and pre-tax cash charges of $13 million related to the consolidation and exit of facilities related to non-cancelable lease costs and other related costs. During the six months ended June 30, 2016, in connection with this action,
the Company incurred pre-tax cash charges of $46 million for severance pay expenses and related cash expenditures, pre-tax cash charges of $16 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 six months ended June 30, 2016 is summarized as follows (in thousands):
|
|
|
|
|
|
|
Accrual balance as of December 31, 2015
|
|
$
|
65,891
|
|
Restructuring charges
|
|
|
76,614
|
|
Cash paid
|
|
|
(71,479)
|
|
Non-cash accelerations of stock-based compensation expense
|
|
|
(7,374)
|
|
Foreign currency translation and other adjustments
|
|
|
(1,355)
|
|
|
|
|
|
|
Accrual balance as of June 30, 2016
|
|
$
|
62,297
|
|
|
|
|
|
|
|
|
The $62 million restructuring liability as of June 30, 2016 consisted of $11 million for employee severance
expenses, which the Company expects to pay out by the end of the second quarter of 2017, and $51 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.
31
The restructuring accruals by segment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
June 30,
2016
|
|
|
|
Americas
|
|
$
|
47,054
|
|
|
$
|
50,628
|
|
EMEA
|
|
|
18,389
|
|
|
|
11,063
|
|
Asia Pacific
|
|
|
448
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accruals
|
|
$
|
65,891
|
|
|
$
|
62,297
|
|
|
|
|
|
|
|
|
|
|
|
|
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 income tax expense of $58 million and $16 million for the three months ended June 30, 2015 and 2016, respectively. The Company
recorded income tax expense of $18 million and income tax benefit of $19 million for the six months ended June 30, 2015 and 2016, respectively. For the three and six months ended June 30, 2015, despite the pre-tax loss, the Company
recorded income tax expense, based on forecasted tax expense for fiscal year 2015 as a result of tax expense in profitable jurisdictions being higher than tax benefits anticipated in loss jurisdictions. The income tax provision/benefit for the three
and six months ended June 30, 2016 included tax expenses associated with the Companys gain from sale of its real estate property in Santa Clara, California, offset by tax benefits from the Companys loss before income taxes and
earnings in equity interests and its Tumblr intangible assets impairment charge.
As of June 30, 2016, the Company does not anticipate
repatriating its undistributed foreign earnings of approximately $3.3 billion. Those earnings are principally related to its equity method investment in Yahoo Japan. If those earnings were to be repatriated in the future, the Company may be subject
to additional U.S. income taxes (subject to an adjustment for foreign tax credits). It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated.
During the six months ended June 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 June 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 June 30, 2016 increased by $6 million from the recorded balance as of December 31, 2015. The
increase mainly related to transfer prices in different tax jurisdictions, offset by audit settlements for previous taxable 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 June 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 audits 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 $10 million in the next twelve months.
In the six months ended
June 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 June 30, 2016 the Company accrued deferred tax liabilities of $12.3 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.
32
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 June 30, 2016 totals approximately $110 million. The Company
currently believes the assessment is without merit. The Company believes the risk of loss is remote and has not recorded an accrual for the assessment.
Note 16 Segments
The Company continues to manage its business geographically. The primary areas of measurement and decision-making are Americas, EMEA (Europe, Middle
East, and Africa), and Asia Pacific. Management relies on an internal reporting process that provides revenue, revenue ex-TAC (which is defined as revenue less cost of 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Revenue by segment
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
992,210
|
|
|
$
|
1,055,068
|
|
|
$
|
1,976,931
|
|
|
$
|
1,916,607
|
|
EMEA
|
|
|
85,830
|
|
|
|
103,134
|
|
|
|
166,916
|
|
|
|
180,057
|
|
Asia Pacific
|
|
|
165,225
|
|
|
|
149,435
|
|
|
|
325,388
|
|
|
|
298,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1,243,265
|
|
|
$
|
1,307,637
|
|
|
$
|
2,469,235
|
|
|
$
|
2,394,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAC by segment
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
180,822
|
|
|
$
|
413,194
|
|
|
$
|
347,477
|
|
|
$
|
618,065
|
|
EMEA
|
|
|
12,950
|
|
|
|
42,330
|
|
|
|
24,654
|
|
|
|
54,839
|
|
Asia Pacific
|
|
|
6,458
|
|
|
|
10,962
|
|
|
|
11,238
|
|
|
|
21,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TAC
|
|
$
|
200,230
|
|
|
$
|
466,486
|
|
|
$
|
383,369
|
|
|
$
|
694,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ex-TAC by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
811,388
|
|
|
$
|
641,874
|
|
|
$
|
1,629,454
|
|
|
$
|
1,298,542
|
|
EMEA
|
|
|
72,880
|
|
|
|
60,804
|
|
|
|
142,262
|
|
|
|
125,218
|
|
Asia Pacific
|
|
|
158,767
|
|
|
|
138,473
|
|
|
|
314,150
|
|
|
|
276,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue ex-TAC
|
|
|
1,043,035
|
|
|
|
841,151
|
|
|
|
2,085,866
|
|
|
|
1,700,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs by segment
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
78,705
|
|
|
|
65,766
|
|
|
|
139,584
|
|
|
|
138,274
|
|
EMEA
|
|
|
20,567
|
|
|
|
18,894
|
|
|
|
40,751
|
|
|
|
39,503
|
|
Asia Pacific
|
|
|
51,820
|
|
|
|
47,144
|
|
|
|
102,552
|
|
|
|
91,792
|
|
Global operating costs
(3)
|
|
|
647,340
|
|
|
|
552,271
|
|
|
|
1,329,263
|
|
|
|
1,137,307
|
|
Gain on sale of patents and land
|
|
|
(9,100)
|
|
|
|
(120,059)
|
|
|
|
(11,100)
|
|
|
|
(121,559)
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
394,901
|
|
|
|
-
|
|
|
|
394,901
|
|
Intangible assets impairment charge
|
|
|
-
|
|
|
|
87,335
|
|
|
|
-
|
|
|
|
87,335
|
|
Depreciation and amortization
|
|
|
153,679
|
|
|
|
133,227
|
|
|
|
305,218
|
|
|
|
272,892
|
|
Stock-based compensation expense
|
|
|
125,130
|
|
|
|
131,964
|
|
|
|
240,826
|
|
|
|
240,371
|
|
Restructuring charges, net
|
|
|
19,688
|
|
|
|
19,384
|
|
|
|
70,920
|
|
|
|
76,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(44,794)
|
|
|
$
|
(489,676)
|
|
|
$
|
(132,148)
|
|
|
$
|
(656,890)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 of 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.
|
33
(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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Capital expenditures, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
(1)
|
|
$
|
139,935
|
|
|
$
|
(176,879)
|
|
|
$
|
238,720
|
|
|
$
|
(112,535)
|
|
EMEA
|
|
|
6,978
|
|
|
|
3,949
|
|
|
|
14,648
|
|
|
|
8,819
|
|
Asia Pacific
|
|
|
8,529
|
|
|
|
3,280
|
|
|
|
13,527
|
|
|
|
10,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures, net
|
|
$
|
155,442
|
|
|
$
|
(169,650)
|
|
|
$
|
266,895
|
|
|
$
|
(93,551)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The three and six months ended June 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
|
|
|
June 30,
2016
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,447,995
|
|
|
$
|
1,229,100
|
|
Other
|
|
|
353
|
|
|
|
2,440
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
$
|
1,448,348
|
|
|
$
|
1,231,540
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
33,940
|
|
|
|
31,883
|
|
Asia Pacific
|
|
|
65,035
|
|
|
|
62,819
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
1,547,323
|
|
|
$
|
1,326,242
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Search
(1)(2)
|
|
$
|
528,215
|
|
|
$
|
711,496
|
|
|
$
|
1,070,307
|
|
|
$
|
1,203,377
|
|
Display
(1)
|
|
|
503,328
|
|
|
|
469,537
|
|
|
|
970,266
|
|
|
|
932,556
|
|
Other
(1)
|
|
|
211,722
|
|
|
|
126,604
|
|
|
|
428,662
|
|
|
|
258,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,243,265
|
|
|
$
|
1,307,637
|
|
|
$
|
2,469,235
|
|
|
$
|
2,394,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Revenue:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
965,228
|
|
|
$
|
1,026,540
|
|
|
$
|
1,928,739
|
|
|
$
|
1,867,339
|
|
International
|
|
|
278,037
|
|
|
|
281,097
|
|
|
|
540,496
|
|
|
|
527,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,243,265
|
|
|
$
|
1,307,637
|
|
|
$
|
2,469,235
|
|
|
$
|
2,394,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
(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 June 30, 2015, to conform to the current presentation, the Company reclassified $7.1 million and $3.0 million to search and
display revenue, respectively, previously included in other revenue. For the six months ended June 30, 2015, to conform to the current presentation, the Company reclassified $17.5 million and $6.2 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 of 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 six months ended June 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 of 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.
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.
35
Approximately 37 percent and 40 percent of the Companys revenue for the three months ended
June 30, 2015 and 2016, respectively, was attributable to the Microsoft Search Agreement, and approximately 38 percent and 35 percent of the Companys revenue for the six months ended June 30, 2015 and 2016, respectively, 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 of revenue, began to
be recorded as a cost of revenue due to a required change in revenue presentation. During the three months ended June 30, 2016, $252 million of GAAP revenue and cost of revenueTAC 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 $357 million, which is included in accounts receivable, net, as of December 31, 2015 and June 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.
Note
18 Subsequent Events
Definitive Agreement with Verizon
.
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 agreed to sell, and Verizon 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), which, immediately prior to the consummation of the Sale, will own the Companys operating business. The consideration to be paid by Verizon to the Company 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, prior to the consummation of the Sale, transfer
all of its assets and liabilities relating to the operating business of Yahoo, other than specific excluded assets and retained liabilities, to Yahoo Holdings (the Reorganization). Verizon will also receive for its benefit and that of
its current and certain 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 conveyed with the operating business.
The excluded assets include cash and marketable securities as of
the consummation of the Sale, the Companys equity interests in Alibaba Group, Yahoo Japan, certain other minority equity investments, and all of the equity in Excalibur. The retained liabilities will include the Notes. Following the closing of
the Sale, the excluded assets and retained liabilities will remain in the Company, which will be renamed and will become an independent, publicly traded management investment company registered under the Investment Company Act of 1940.
The consummation of the Sale is subject to certain conditions, including, among others, the approval of the Sale by Yahoos stockholders, antitrust
approvals, the closing of the Reorganization, and certain other customary closing conditions.
36
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 June 30, 2016, we had approximately 8,800 full-time employees after excluding employees under notice of termination and approximately 700 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 six months ended June 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.
In February, 2016, our Board
formed a Strategic Review Committee of independent directors to consider strategic alternatives for the Company, including a sale of our operating business. 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), 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, prior to the consummation of the Sale, transfer all of our assets and liabilities relating to
our operating business, other than specific excluded assets and retained liabilities, to Yahoo Holdings (the Reorganization). Verizon will also receive for its benefit and that of its current and certain 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 conveyed
with the operating business.
37
The excluded assets include cash and marketable securities as of the closing of the Sale, our equity
interests in Alibaba Group, 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.
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, 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 will generally receive in substitution therefor 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.
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.
For
reporting periods ended December 31, 2014 and 2015, and March 31, 2016, TAC related to our Microsoft Search Agreement was recorded as a reduction of revenue. Pursuant to the Eleventh Amendment to the Microsoft Search Agreement, 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, 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 illustrates the impact of the implementation of the Eleventh Amendment for the periods presented and sets out the amounts paid to Affiliates related to the Microsoft Search Agreement during the three and six months ended June 30, 2015 and
2016, respectively, that that were recorded as cost of revenue TAC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Cost of revenue TAC
(*)
|
|
$
|
-
|
|
|
$
|
252,331
|
|
|
$
|
-
|
|
|
$
|
252,331
|
|
Reduction of revenue
|
|
$
|
332,589
|
|
|
$
|
2,377
|
|
|
$
|
687,891
|
|
|
$
|
273,705
|
|
|
|
(*)
|
Includes $218 million in the Americas segment, $33 million in the EMEA segment and $1 million in the Asia Pacific
segment.
|
Revenue under the Microsoft Search Agreement represented approximately 37 percent and 40 percent of our revenue for the
three months ended June 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 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.
38
Revenue under the Microsoft Search Agreement represented approximately 38 percent and 35 percent of our
revenue for the six months ended June 30, 2015 and 2016, respectively. The decline in revenue from Microsoft year-over-year is due to the use of Google and Gemini. This was partially offset by an increase in revenue from Microsoft due to the
change in revenue presentation related to the Eleventh Amendment to the Microsoft Search Agreement, noted above.
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 (TAC), or revenue ex-TAC; loss from operations; adjusted EBITDA; net loss attributable to Yahoo! Inc.; net cash provided by (used in) operating activities; and free cash
flow. Revenue ex-TAC, adjusted EBITDA, and free cash flow are financial measures that are not defined in accordance with U.S. generally accepted accounting principles (GAAP). We use these non-GAAP financial measures for internal
managerial purposes and to facilitate period-to-period comparisons.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
1,243,265
|
|
|
$
|
1,307,637
|
|
|
$
|
2,469,235
|
|
|
$
|
2,394,789
|
|
Revenue ex-TAC
|
|
$
|
1,043,035
|
|
|
$
|
841,151
|
|
|
$
|
2,085,866
|
|
|
$
|
1,700,540
|
|
Loss from operations
(1)
|
|
$
|
(44,794
|
)
|
|
$
|
(489,676
|
)
|
|
$
|
(132,148
|
)
|
|
$
|
(656,890)
|
|
Net loss attributable to Yahoo! Inc.
|
|
$
|
(21,554
|
)
|
|
$
|
(439,913
|
)
|
|
$
|
(356
|
)
|
|
$
|
(539,145)
|
|
Adjusted EBITDA
|
|
$
|
261,703
|
|
|
$
|
172,369
|
|
|
$
|
492,816
|
|
|
$
|
319,441
|
|
Net cash provided by (used in) operating activities
|
|
$
|
307,952
|
|
|
$
|
409,930
|
|
|
$
|
(2,652,987
|
)
|
|
$
|
775,698
|
|
Free cash flow
(2)(3)
|
|
$
|
(24,780
|
)
|
|
$
|
425,646
|
|
|
$
|
(3,059,702
|
)
|
|
$
|
722,841
|
|
|
|
(1) Includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
125,130
|
|
|
$
|
131,964
|
|
|
$
|
240,826
|
|
|
$
|
240,371
|
|
Restructuring charges, net
|
|
$
|
19,688
|
|
|
$
|
19,384
|
|
|
$
|
70,920
|
|
|
$
|
76,614
|
|
Goodwill impairment charge
|
|
$
|
-
|
|
|
$
|
394,901
|
|
|
$
|
-
|
|
|
$
|
394,901
|
|
Intangible assets impairment charge
|
|
$
|
-
|
|
|
$
|
87,335
|
|
|
$
|
-
|
|
|
$
|
87,335
|
|
|
|
(2)
|
During the six months ended June 30, 2015, we satisfied the $3.3 billion income tax liability related to the sale of
Alibaba Group Holding Limited (Alibaba Group) American Depositary Shares (ADSs) in September 2014.
|
(3)
|
During the three and six months ended June 30, 2016, we received net cash proceeds from the sale of land of $246 million
and during the six months ended June 30, 2016, we received 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 of revenue or as cost of revenue.
Adjusted EBITDA
.
Adjusted EBITDA is a non-GAAP financial measure defined as net loss attributable to Yahoo! Inc.
before taxes, depreciation, amortization of intangible assets, stock-based compensation expense, other (expense) income, 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 (used in) provided by 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.
39
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.
In this Managements Discussion and Analysis, we also present adjusted GAAP revenue and cost of revenue TAC amounts that exclude the effect
of the change in revenue presentation related to implementation of the Eleventh Amendment to the Microsoft Search Agreement during the second quarter of 2016. 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 June 30,
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
% Change
|
|
|
2015
|
|
|
2016
|
|
|
% Change
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,243,265
|
|
|
$
|
1,307,637
|
|
|
|
5%
|
|
|
$
|
2,469,235
|
|
|
$
|
2,394,789
|
|
|
|
(3)%
|
|
Less: TAC
|
|
|
200,230
|
|
|
|
466,486
|
|
|
|
133%
|
|
|
|
383,369
|
|
|
|
694,249
|
|
|
|
81%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ex-TAC
|
|
$
|
1,043,035
|
|
|
$
|
841,151
|
|
|
|
(19)%
|
|
|
$
|
2,085,866
|
|
|
$
|
1,700,540
|
|
|
|
(18)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2016, revenue and TAC increased $64 million and $266 million, respectively, compared
to the same period of 2015. For the three months ended June 30, 2016, revenue ex-TAC decreased $202 million compared to the same period of 2015. The increase in revenue for the three months ended June 30, 2016 was primarily attributable to an
increase in search revenue of $183 million, partially offset by a decline in display and other revenue of $34 million and $85 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 $252 million for the three months ended
June 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 $69 million, or 13 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 due to a decline in revenue from Affiliate sites and, to a lesser extent, a decline in revenue from Yahoo Properties. The decline in revenue from Affiliate sites was primarily driven by a decline in video and audience
advertising partially offset by an increase in native advertising. The decline in revenue from Yahoo Properties was primarily driven by a decline in premium advertising, partially offset by an increase from audience 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 in which we recognized $69 million in the three
months ended June 30, 2015.
For the six months ended June 30, 2016, revenue decreased $74 million and TAC increased $311 million compared to the
same period of 2015. For the six months ended June 30, 2016, revenue ex-TAC decreased $385 million, compared to the same period of 2015. The decrease in revenue for the six months ended June 30, 2016 was primarily attributable to a decline in
display and other revenue of $38 million and $170 million, respectively, partially offset by an increase in search revenue of $133 million. The decline in display revenue was primarily due to a decline in revenue on Yahoo Properties from premium
advertising and, to a lesser extent, native advertising, partially offset by an increase from audience advertising. The decline in display revenue from Yahoo Properties was offset slightly by an increase in revenue from Affiliate sites primarily
related to native advertising partially offset by declines in video and 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 $139 million in the six months ended June 30, 2015. 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 $252 million for the six months ended June 30, 2016. Excluding the impact of the change in revenue presentation, search revenue declined $119 million, or 11
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.
Total revenue noted above included declines of $18 million and $35 million in revenue for the three and six months ended June 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. TAC associated with the Mozilla Agreement for both the three and six months ended June 30, 2016 was flat compared to the same periods of 2015.
See Results of Operations for a more detailed discussion of the factors that contributed to the changes in revenue and TAC during this
period.
40
We expect 2016 revenue to be similar to 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 June 30, 2016 increased to $504 million, compared to $401 million for the three months ended
June 30, 2015. Mavens revenue for the six months ended June 30, 2016 increased to $894 million, compared to $767 million for the six months ended June 30, 2015. The change in revenue presentation associated with the Eleventh Amendment
to the Microsoft Search Agreement contributed $119 million to Mavens revenue in the three and six months ended June 30, 2016. Excluding the impact of the revenue presentation noted above, Mavens revenue would have been $385 million and $775
million, respectively, for the three and six months ended June 30, 2016. For the three and six months ended June 30, 2016, excluding the change in revenue presentation, Mavens revenue declined $16 million, or 4 percent, and increased $8
million, or 1 percent, respectively, compared to the same periods of 2015. The decline in Mavens revenue for the three months ended June 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 video advertising on Yahoo Properties due to an increase in supply. The increase in Mavens revenue for the six months ended June 30, 2016 was primarily related to growth in native
advertising on mobile devices, partially offset by a decline in video advertising on Affiliate sites associated with pricing and demand.
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 during the first six months 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 second quarter of 2016, we continued to refresh the user experience on mobile with the launch of new Yahoo Sports and Finance apps that provide a more personalized experience. As of June 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 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 June 30, 2016 increased to $378 million, compared to $252 million for the three months ended June 30,
2015. Mobile revenue for the six months ended June 30, 2016 increased to $638 million, compared to $485 million for the six months ended June 30, 2015. The change in revenue presentation associated with the Eleventh Amendment to the
Microsoft Search Agreement contributed $119 million to mobile revenue in the three and six months ended June 30, 2016. Excluding the impact of the revenue presentation, noted above, mobile revenue would have been $259 million and $519 million,
respectively, for the three and six months ended June 30, 2016. For the three and six months ended June 30, 2016, excluding the change in revenue presentation, mobile revenue increased $7 million, or 3 percent and $34 million, or 7
percent, respectively, compared to the same periods of 2015. The increase in mobile revenue for the three and six months ended June 30, 2016 was primarily attributable to growth in native advertising associated with an increase in volume from
Affiliate sites and video from the BrightRoll platform.
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 decline from the amount reported in 2015.
TAC rates that we pay to Affiliates for Mavens and mobile are substantially consistent with our TAC rates for our other revenue streams.
41
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(dollars in thousands)
|
|
Total revenue
|
|
$
|
1,243,265
|
|
|
$
|
1,307,637
|
|
|
$
|
2,469,235
|
|
|
$
|
2,394,789
|
|
Total operating expenses
(1)
|
|
|
1,288,059
|
|
|
|
1,797,313
|
|
|
|
2,601,383
|
|
|
|
3,051,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(44,794)
|
|
|
$
|
(489,676)
|
|
|
$
|
(132,148)
|
|
|
$
|
(656,890)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
125,130
|
|
|
$
|
131,964
|
|
|
$
|
240,826
|
|
|
$
|
240,371
|
|
Restructuring charges, net
|
|
$
|
19,688
|
|
|
$
|
19,384
|
|
|
$
|
70,920
|
|
|
$
|
76,614
|
|
Goodwill impairment charge
|
|
$
|
-
|
|
|
$
|
394,901
|
|
|
$
|
-
|
|
|
$
|
394,901
|
|
Intangible assets impairment charge
|
|
$
|
-
|
|
|
$
|
87,335
|
|
|
$
|
-
|
|
|
$
|
87,335
|
|
Items as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
Total operating expenses
|
|
|
104%
|
|
|
|
137%
|
|
|
|
105%
|
|
|
|
127%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4)%
|
|
|
|
(37)%
|
|
|
|
(5)%
|
|
|
|
(27)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
10%
|
|
|
|
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 $7.1 million and $3.0 million to search and display revenue, respectively, previously included in other revenue for the three months ended June 30, 2015, and we
reclassified $17.5 million and $6.2 million to search and display revenue, respectively, previously included in other revenue for the six months ended June 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Search
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo Properties
|
|
$
|
470,062
|
|
|
$
|
488,290
|
|
|
$
|
955,982
|
|
|
$
|
887,597
|
|
Affiliate sites
|
|
|
58,153
|
|
|
|
223,206
|
|
|
|
114,325
|
|
|
|
315,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total search revenue
|
|
$
|
528,215
|
|
|
$
|
711,496
|
|
|
$
|
1,070,307
|
|
|
$
|
1,203,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Search as a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo Properties
|
|
|
38%
|
|
|
|
37%
|
|
|
|
39%
|
|
|
|
37%
|
|
Affiliate sites
|
|
|
5%
|
|
|
|
17%
|
|
|
|
4%
|
|
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total search revenue
|
|
|
43%
|
|
|
|
54%
|
|
|
|
43%
|
|
|
|
50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Search revenue for the three and six months ended June 30, 2016 increased $183 million and $133
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 $252 million for both the three and six months ended June 30, 2016. 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 six months ended June 30, 2016 declined $69 million, or 13 percent, and $119 million, or 11 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 six months ended June 30, 2016, despite the decline in Paid Clicks on Affiliate
sites, advertising revenue on Affiliate sites grew by $25 million and $61 million, respectively (excluding the impact of the change in revenue presentation) due to improved Price-per-Click in the Americas segment associated with 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Display
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo Properties
|
|
$
|
363,078
|
|
|
$
|
352,761
|
|
|
$
|
719,624
|
|
|
$
|
679,901
|
|
Affiliate sites
|
|
|
140,250
|
|
|
|
116,776
|
|
|
|
250,642
|
|
|
|
252,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total display revenue
|
|
$
|
503,328
|
|
|
$
|
469,537
|
|
|
$
|
970,266
|
|
|
$
|
932,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display as a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo Properties
|
|
|
29%
|
|
|
|
27%
|
|
|
|
29%
|
|
|
|
28%
|
|
Affiliate sites
|
|
|
11%
|
|
|
|
9%
|
|
|
|
10%
|
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total display revenue
|
|
|
40%
|
|
|
|
36%
|
|
|
|
39%
|
|
|
|
39%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and six months ended June 30, 2016 decreased $34 million, or 7 percent, and $38 million,
or 4 percent, respectively, compared to the same periods of 2015. The decline in display revenue for the three months ended June 30, 2016 was due to a decline on Yahoo Properties and Affiliate sites of $10 million and $24 million, respectively. The
decline in display revenue for the six months ended June 30, 2016 was due to a decline on Yahoo Properties of $40 million which was slightly offset by an increase in advertising revenue from Affiliate sites driven primarily by native advertising.
The decline in revenue from Yahoo Properties for the three and six months ended June 30, 2016 was primarily attributable to a decline in premium advertising, partially offset by an increase in audience advertising. Display revenue from Yahoo
Properties for the six months ended June 30, 2016 was also impacted by a decline in native advertising. The decline in revenue from Affiliate sites for the three months ended June 30, 2016 was primarily due to a decline in video and audience
advertising, partially offset by an increase from native advertising. The increase in revenue from Affiliate sites for the six months ended June 30, 2016 was partially offset by declines in video and audience advertising.
The total decrease in display revenue for the three and six months ended June 30, 2016 described above included the impact of unfavorable foreign
exchange fluctuations of $4 million and $14 million, respectively, for the three and six months ended June 30, 2016, using the foreign currency exchange rates from the three and six months ended June 30, 2015.
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Other revenue
|
|
$
|
211,722
|
|
|
$
|
126,604
|
|
|
$
|
428,662
|
|
|
$
|
258,856
|
|
Other revenue as a percentage of total revenue
|
|
|
17%
|
|
|
|
10%
|
|
|
|
18%
|
|
|
|
11%
|
|
|
|
43
Other revenue for the three and six months ended June 30, 2016 decreased $85 million, or 40 percent,
and $170 million, or 40 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 $77 million and $8 million, respectively, for the three months
ended June 30, 2016, and a decline in fees and listings-based revenue of $152 million and $18 million, respectively, for the six months ended June 30, 2016. The decline in fees revenue was primarily due to the completion of recognition of
deferred revenue under the TIPLA with Alibaba Group in which we recognized $69 million and $139 million, respectively, in the three and six months ended June 30, 2015. The decline in listings-based revenue for the three and six months ended
June 30, 2016 was 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 the three and six months ended
June 30, 2016, Paid Clicks decreased 24 percent and 23 percent, respectively, 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 six months ended June 30, 2016, Price-per-Click increased 8 percent and 7 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 18 percent and 17 percent for the three and six months ended June 30, 2016, respectively, as compared to the
same periods of 2015, driven by the decline in traffic on Yahoo Properties.
Display Metrics
For both the three and six months ended June 30, 2016, the number of Ads Sold increased 9 percent, compared to the same periods of 2015, primarily
attributable to an increase in audience and native ad units sold, partially offset by a continued decline in premium ad units sold. Native Ads Sold grew primarily due to our syndication (third-party, affiliate) business and an increase in native Ads
Sold internationally. Native ad units represented approximately 43 percent and 45 percent of total Ads Sold for the three and six months ended June 30, 2016, compared to 41 percent of total Ads Sold for both the three and six months ended
June 30, 2015.
For the three and six months ended June 30, 2016, the Price-per-Ad decreased 15 percent and 11 percent, respectively,
compared to the same periods of 2015, due to continued pricing pressure on premium advertising, a decline in pricing of native and video advertising, partially offset by an increase in pricing of audience advertising.
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.
44
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Cost of revenue TAC
|
|
$
|
200,230
|
|
|
$
|
466,486
|
|
|
$
|
383,369
|
|
|
$
|
694,249
|
|
Cost of revenue TAC as a percentage of revenue
|
|
|
16%
|
|
|
|
36%
|
|
|
|
15%
|
|
|
|
29%
|
|
|
|
Cost of revenue TAC for the three and six months ended June 30, 2016 increased $266 million and
$311 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 $252 million for the three and six months ended June 30, 2016. See Significant TransactionsMicrosoft Search Agreement, above, for
further detail. For the three and six months ended June 30, 2016, excluding the impact of the change in revenue presentation, TAC increased $14 million, or 7 percent, and $59 million, or 15 percent, respectively. The remaining increase in
cost of revenue TAC was attributable to an increase in other search TAC, partially offset by a decrease in display TAC primarily associated with BrightRoll.
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Cost of revenue other
|
|
$
|
295,932
|
|
|
$
|
268,483
|
|
|
$
|
581,195
|
|
|
$
|
551,070
|
|
Cost of revenue other as a percentage of revenue
|
|
|
24%
|
|
|
|
21%
|
|
|
|
24%
|
|
|
|
23%
|
|
|
|
Cost of revenue other for the three months ended June 30, 2016 decreased $27 million, or 9 percent, compared
to the same period of 2015, primarily due to a decline in content expense of $11 million, lower cost of revenue of $4 million related to a decline in algorithmic serving costs and rich media serving costs, partially offset by an increase in costs
associated with specialized ad campaigns, lower compensation costs of $7 million and lower credit card costs of $5 million. These declines were also partially offset by an increase in depreciation and amortization expense of $3 million. The decline
in content expense was associated with original content production costs in 2015 for which we have no similar costs in 2016.
Cost of revenue
other for the six months ended June 30, 2016 decreased $30 million, or 5 percent, compared to the same period of 2015. The decrease for the six months ended June 30, 2016, compared to 2015, was primarily due to declines in content expense
of $18 million, compensation costs of $14 million, credit card costs of $11 million and facilities expense of $3 million, partially offset by increases in depreciation and amortization expense of $11 million and other cost of revenue of $8 million
related to an increase in costs associated with specialized ad campaigns, fraud prevention and ad verification fees and our ecommerce business in the Asia Pacific segment. The decline in content expense was associated with original content
production costs in 2015 for which we have no similar costs in 2016.
45
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Sales and marketing expenses
|
|
$
|
274,304
|
|
|
$
|
226,024
|
|
|
$
|
549,661
|
|
|
$
|
462,057
|
|
Sales and marketing expenses as a percentage of revenue
|
|
|
22%
|
|
|
|
17%
|
|
|
|
22%
|
|
|
|
19%
|
|
|
|
Sales and marketing expenses for the three months ended June 30, 2016 decreased $48 million, or 18 percent, compared
to the same period of 2015, primarily due to declines in compensation costs of $22 million, marketing and public relations expense of $17 million, outside service provider expense of $4 million, and travel and entertainment expense of $3 million.
The decline in compensation costs was primarily attributable to a 23 percent decrease in headcount year-over-year. 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.
Sales and marketing expenses for the six months ended June 30, 2016 decreased $88 million, or 16 percent,
compared to the same period of 2015, primarily due to declines in compensation costs of $47 million, marketing and public relations expense of $20 million, outside service provider expense of $3 million, travel and entertainment expense of $6
million, and stock-based compensation expense of $6 million. The decline in compensation costs was primarily attributable to a 23 percent decrease in headcount year-over-year. 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.
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Product development expenses
|
|
$
|
306,428
|
|
|
$
|
280,035
|
|
|
$
|
633,175
|
|
|
$
|
558,064
|
|
Product development expenses as a percentage of revenue
|
|
|
25%
|
|
|
|
21%
|
|
|
|
26%
|
|
|
|
23%
|
|
|
|
Product development expenses for the three months ended June 30, 2016 decreased $26 million, or 9 percent, compared
to the same period of 2015, primarily attributable to a decline in compensation costs of $21 million, depreciation and amortization expense of $18 million, and facilities and equipment expense of $5 million. These declines were partially offset by
an increase in stock-based compensation expense of $8 million and an increase of $7 million related to product initiatives to drive search volume. The decline in compensation costs is primarily attributable to a 17 percent decline in headcount
year-over-year.
Product development expenses for the six months ended June 30, 2016 decreased $75 million, or 12 percent, compared to the same
period of 2015, primarily attributable to a decline in compensation costs of $54 million, depreciation and amortization expense of $33 million, and facilities and equipment expense of $11 million. These declines were partially offset by an increase
in stock-based compensation expense of $7 million, and an increase of $10 million related to product initiatives to drive search volume. The decline in compensation costs is primarily attributable to a 17 percent decline in headcount year-over-year.
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.
46
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
General and administrative expenses
|
|
$
|
180,595
|
|
|
$
|
158,355
|
|
|
$
|
354,108
|
|
|
$
|
313,806
|
|
General and administrative expenses as a percentage of revenue
|
|
|
15%
|
|
|
|
12%
|
|
|
|
14%
|
|
|
|
13%
|
|
|
|
General and administrative expenses for the three months ended June 30, 2016 decreased $22 million, or 12 percent,
compared to the same period of 2015, primarily attributable to declines in compensation costs of $11 million and facilities and equipment expense of $7 million. The decline in compensation costs was primarily attributable to a 14 percent decline in
headcount year-over-year.
General and administrative expenses for the six months ended June 30, 2016 decreased $40 million, or 11 percent,
compared to the same period of 2015, primarily attributable to declines in compensation costs of $21 million, facilities and equipment expense of $12 million, travel and entertainment expense of $5 million, and stock-based compensation expense of $5
million, partially offset by an increase in outside service provider expense of $6 million. The decline in compensation costs was primarily attributable to a 14 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 revenueother 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Amortization of intangibles
|
|
$
|
19,982
|
|
|
$
|
16,369
|
|
|
$
|
40,055
|
|
|
$
|
35,142
|
|
Amortization of intangibles as a percentage of revenue
|
|
|
1%
|
|
|
|
1%
|
|
|
|
2%
|
|
|
|
1%
|
|
|
|
Amortization of intangibles for the three and six months ended June 30, 2016 decreased $4 million, or 18 percent,
and $5 million, or 12 percent, respectively, compared to the same periods of 2015, driven by a decline in expense for fully amortized assets.
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Gain on sale of patents and land
|
|
$
|
(9,100
|
)
|
|
$
|
(120,059
|
)
|
|
$
|
(11,100
|
)
|
|
$
|
(121,559
|
)
|
Gain on sale of patents and land as a percentage of revenue
|
|
|
(1)%
|
|
|
|
(9)%
|
|
|
|
(1)%
|
|
|
|
(5)%
|
|
|
|
During the three and six months ended June 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 six months ended June 30,
2016, we sold certain patents and recorded gain on sale of patents of approximately $2 million.
During the three and six months ended June 30,
2015, we sold certain patents and recorded gain on sale of patents of approximately $9 million and $11 million, respectively.
47
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Goodwill impairment charge
|
|
$
|
|
|
|
$
|
394,901
|
|
|
$
|
|
|
|
$
|
394,901
|
|
Goodwill impairment charge as a percentage of revenue
|
|
|
0%
|
|
|
|
30%
|
|
|
|
0%
|
|
|
|
16%
|
|
|
|
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.
During the three and six months
ended June 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Intangible assets impairment charge
|
|
$
|
|
|
|
$
|
87,335
|
|
|
$
|
|
|
|
$
|
87,335
|
|
Intangible assets impairment charge as a percentage of revenue
|
|
|
0%
|
|
|
|
7%
|
|
|
|
0%
|
|
|
|
4%
|
|
|
|
During the three months ended June 30, 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.
Restructuring
Charges, Net
Restructuring charges, net was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Employee severance pay and related costs
|
|
$
|
7,149
|
|
|
$
|
5,052
|
|
|
$
|
51,149
|
|
|
$
|
49,848
|
|
Non-cancelable lease, contract termination, and other charges
|
|
|
13,403
|
|
|
|
14,030
|
|
|
|
22,020
|
|
|
|
19,934
|
|
Reversals of previous charges
|
|
|
(790)
|
|
|
|
(712)
|
|
|
|
(4,021)
|
|
|
|
(1,918)
|
|
Non-cash accelerations of stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,705
|
|
|
|
7,374
|
|
Other non-cash (credits) charges, net
|
|
|
(74)
|
|
|
|
1,014
|
|
|
|
(933)
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
$
|
19,688
|
|
|
$
|
19,384
|
|
|
$
|
70,920
|
|
|
$
|
76,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2016, we recorded expense of $12 million, $5 million, and $2
million related to the Americas, EMEA, and Asia Pacific segments, respectively. For the three months ended June 30, 2015, we recorded expense of $12 million, $7 million, and $1 million related to the Americas, EMEA, and Asia Pacific segments,
respectively. For the six months ended June 30, 2016, we recorded expense of $60 million, $13 million, and $4 million related to the Americas, EMEA, and Asia Pacific segments, respectively. For the six months ended June 30, 2015, we
recorded expense of $53 million, $14 million, and $4 million related to the Americas, EMEA, and Asia Pacific segments, respectively.
48
The amounts recorded during the three and six months ended June 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 June 30, 2016, in connection with this action, we incurred pre-tax cash charges of $2 million for severance pay expenses and related
cash expenditures and pre-tax cash charges of $13 million related to the consolidation and exit of facilities related to non-cancelable lease costs and other related costs. During the six months ended June 30, 2016, in connection with this
action, we incurred pre-tax cash charges of $46 million for severance pay expenses and related cash expenditures, pre-tax cash charges of $16 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 six months ended June 30, 2015 were primarily
related to severance, facility and other related costs pursuant to a restructuring plan that we initiated in 2015.
The $62 million restructuring
liability as of June 30, 2016 consisted of $11 million for employee severance pay expenses, which we expect to pay out by the end of the second quarter of 2017, and $51 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) Income, Net
Other (expense) income, net was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Interest, dividend, and investment income
|
|
$
|
8,034
|
|
|
$
|
14,039
|
|
|
$
|
16,879
|
|
|
$
|
25,521
|
|
Interest expense
|
|
|
(17,558)
|
|
|
|
(18,332)
|
|
|
|
(35,128)
|
|
|
|
(36,725)
|
|
Gain (loss) on Hortonworks warrants
|
|
|
5,449
|
|
|
|
(2,287)
|
|
|
|
(6,460)
|
|
|
|
(41,437)
|
|
Foreign exchange gain (loss)
|
|
|
(8,186)
|
|
|
|
20,964
|
|
|
|
(19,527)
|
|
|
|
18,826
|
|
Other
|
|
|
520
|
|
|
|
678
|
|
|
|
1,432
|
|
|
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income, net
|
|
$
|
(11,741)
|
|
|
$
|
15,062
|
|
|
$
|
(42,804)
|
|
|
$
|
(32,354)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, dividend and investment income increased $6 million and $9 million for the three and six months ended
June 30, 2016, respectively, compared to the same periods of 2015, primarily due to an increase in interest income.
Interest expense increased
$1 million and $2 million for the three and six months ended June 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 six months ended June 30, 2016, we recorded losses of $2 million and $41 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 increase in foreign exchange
gains is attributable to the write off of CTA 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.
49
We recorded income tax expense of $58 million and $16 million for the three months ended June 30, 2015
and 2016, respectively. We recorded income tax expense of $18 million and income tax benefit of $19 million for the six months ended June 30, 2015 and 2016, respectively. For the three and six months ended June 30, 2015, despite the
pre-tax loss, we recorded income tax expense, based on forecasted tax expense for fiscal year 2015 as a result of tax expense in profitable jurisdictions being higher than tax benefits anticipated in loss jurisdictions. The income tax
provision/benefit for the three and six months ended June 30, 2016 included tax expenses associated with gain from sale of our real estate property in Santa Clara, California, offset by tax benefits from our loss before income taxes and
earnings in equity interests and the Tumblr intangible assets impairment charge.
As of June 30, 2016, we do not anticipate repatriating our
undistributed foreign earnings of approximately $3.3 billion. Those earnings are principally 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 June 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 June 30, 2016 increased by $6 million from the recorded balance as of December 31, 2015. The increase mainly related to transfer prices in different tax
jurisdictions, offset by audit settlements for previous taxable 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 June 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
audits 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 $10 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 June 30, 2016, we accrued deferred tax liabilities of $12.3 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.
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
June 30, 2016, totals approximately $110 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
Earnings in equity interests
|
|
$
|
95,841
|
|
|
$
|
51,777
|
|
|
$
|
195,531
|
|
|
$
|
133,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings in equity interests for the three and six months ended June 30, 2016 decreased $44 million and $62 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 six months ended June 30, 2015 and
2016 were related to the Yahoo!7 venture in Australia and New Zealand.
50
Net Loss Attributable to Yahoo! Inc.
Net loss attributable to Yahoo! Inc. for the three months ended June 30, 2016 increased $418 million to $440 million, primarily attributable to
goodwill and intangible assets impairment charges, a decrease in revenue (excluding the impact of the change in revenue presentation associated with the Eleventh Amendment), and, to a lesser extent, a decline in earnings in equity interests. This
was partially offset by a gain on sale of land, and, to a lesser extent, an increase in other income, net and declines in sales and marketing expense, provision for income taxes, cost of revenue other, product development expense, and general
and administrative expense.
Net loss attributable to Yahoo! Inc. for the six months ended June 30, 2016 increased to $539 million, primarily
attributable to goodwill and intangible assets impairment charges, a decrease in revenue (excluding the impact of the change in revenue presentation associated with the Eleventh Amendment), 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 and
product development expense, and, to a lesser extent, declines in general and administrative expense, cost of revenue other, and other expense, net, and an increase in benefit from income taxes.
The declines in revenue noted above were partially attributable to the completion of recognition of deferred revenue under the TIPLA with Alibaba Group
in which we recognized $69 million and $139 million, respectively, in the three and six months ended June 30, 2015, for which there was no similar revenue in 2016.
Adjusted EBITDA (a Non-GAAP Financial Measure)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
(dollars in thousands)
|
|
|
|
Net loss attributable to Yahoo! Inc.
|
|
$
|
(21,554)
|
|
|
$
|
(439,913)
|
|
|
$
|
(356)
|
|
|
$
|
(539,145)
|
|
Advisory fees
|
|
|
8,000
|
|
|
|
15,293
|
|
|
|
8,000
|
|
|
|
24,277
|
|
Gain on sale of land
|
|
|
|
|
|
|
(120,059)
|
|
|
|
|
|
|
|
(120,059)
|
|
Depreciation and amortization
|
|
|
153,679
|
|
|
|
133,227
|
|
|
|
305,218
|
|
|
|
272,892
|
|
Stock-based compensation expense
|
|
|
125,130
|
|
|
|
131,964
|
|
|
|
240,826
|
|
|
|
240,371
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
394,901
|
|
|
|
|
|
|
|
394,901
|
|
Intangible assets impairment charge
|
|
|
|
|
|
|
87,335
|
|
|
|
|
|
|
|
87,335
|
|
Restructuring charges, net
|
|
|
19,688
|
|
|
|
19,384
|
|
|
|
70,920
|
|
|
|
76,614
|
|
Other (expense) income, net
|
|
|
11,741
|
|
|
|
(15,062)
|
|
|
|
42,804
|
|
|
|
32,354
|
|
(Provision) benefit for income taxes
|
|
|
58,495
|
|
|
|
15,543
|
|
|
|
17,595
|
|
|
|
(19,223)
|
|
Earnings in equity interests, net of tax
|
|
|
(95,841)
|
|
|
|
(51,777)
|
|
|
|
(195,531)
|
|
|
|
(133,351)
|
|
Net income attributable to noncontrolling interests
|
|
|
2,365
|
|
|
|
1,533
|
|
|
|
3,340
|
|
|
|
2,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
261,703
|
|
|
$
|
172,369
|
|
|
$
|
492,816
|
|
|
$
|
319,441
|
|
Net loss attributable to Yahoo! Inc. as a percentage of revenue
|
|
|
(2)%
|
|
|
|
(34)%
|
|
|
|
0%
|
|
|
|
(23)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA as a percentage of revenue ex-TAC
(1)
|
|
|
25%
|
|
|
|
(20)%
|
|
|
|
24%
|
|
|
|
(19)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Revenue ex-TAC is calculated as GAAP revenue less cost of revenue TAC.
|
For the three months ended June 30, 2016, adjusted EBITDA decreased $89 million, or 34 percent, compared to the same period of 2015, mainly due to
an increase in TAC payments due to the change in revenue presentation described above and a lower benefit from patent sales. This was partially offset by an increase in revenue and a decline in global operating costs and Americas direct costs, as
described in Segment Reporting below.
For the six months ended June 30, 2016, adjusted EBITDA decreased $173 million or 35 percent,
compared to the same period of 2015, mainly due to a decrease in revenue, the increase in TAC (described above) and a lower benefit from patent sales, which were partially offset by a decline in global operating costs.
Adjusted EBITDA for the three and six months ended June 30, 2016 was impacted by a decline in revenue attributable to the completion of recognition of
deferred revenue under the TIPLA with Alibaba Group in which we recognized $69 million and $139 million, respectively, in the three and six months ended June 30, 2015, for which there was no similar revenue in 2016.
51
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 June 30,
|
|
|
Percent
|
|
|
Six Months Ended June 30,
|
|
|
Percent
|
|
|
|
2015
|
|
|
2016
|
|
|
Change
|
|
|
2015
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
(dollars in thousands)
|
|
Revenue by segment
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
992,210
|
|
|
$
|
1,055,068
|
|
|
|
6%
|
|
|
$
|
1,976,931
|
|
|
$
|
1,916,607
|
|
|
|
(3)%
|
|
EMEA
|
|
|
85,830
|
|
|
|
103,134
|
|
|
|
20%
|
|
|
|
166,916
|
|
|
|
180,057
|
|
|
|
8%
|
|
Asia Pacific
|
|
|
165,225
|
|
|
|
149,435
|
|
|
|
(10)%
|
|
|
|
325,388
|
|
|
|
298,125
|
|
|
|
(8)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,243,265
|
|
|
$
|
1,307,637
|
|
|
|
5%
|
|
|
$
|
2,469,235
|
|
|
$
|
2,394,789
|
|
|
|
(3)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAC by segment
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
180,822
|
|
|
$
|
413,194
|
|
|
|
129%
|
|
|
$
|
347,477
|
|
|
$
|
618,065
|
|
|
|
78%
|
|
EMEA
|
|
|
12,950
|
|
|
|
42,330
|
|
|
|
227%
|
|
|
|
24,654
|
|
|
|
54,839
|
|
|
|
122%
|
|
Asia Pacific
|
|
|
6,458
|
|
|
|
10,962
|
|
|
|
70%
|
|
|
|
11,238
|
|
|
|
21,345
|
|
|
|
90%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TAC
|
|
$
|
200,230
|
|
|
$
|
466,486
|
|
|
|
133%
|
|
|
$
|
383,369
|
|
|
$
|
694,249
|
|
|
|
81%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ex-TAC by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
811,388
|
|
|
$
|
641,874
|
|
|
|
(21)%
|
|
|
$
|
1,629,454
|
|
|
$
|
1,298,542
|
|
|
|
(20)%
|
|
EMEA
|
|
|
72,880
|
|
|
|
60,804
|
|
|
|
(17)%
|
|
|
|
142,262
|
|
|
|
125,218
|
|
|
|
(12)%
|
|
Asia Pacific
|
|
|
158,767
|
|
|
|
138,473
|
|
|
|
(13)%
|
|
|
|
314,150
|
|
|
|
276,780
|
|
|
|
(12)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue ex-TAC
|
|
|
1,043,035
|
|
|
|
841,151
|
|
|
|
(19)%
|
|
|
|
2,085,866
|
|
|
|
1,700,540
|
|
|
|
(18)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs by segment
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
78,705
|
|
|
|
65,766
|
|
|
|
(16)%
|
|
|
|
139,584
|
|
|
|
138,274
|
|
|
|
(1)%
|
|
EMEA
|
|
|
20,567
|
|
|
|
18,894
|
|
|
|
(8)%
|
|
|
|
40,751
|
|
|
|
39,503
|
|
|
|
(3)%
|
|
Asia Pacific
|
|
|
51,820
|
|
|
|
47,144
|
|
|
|
(9)%
|
|
|
|
102,552
|
|
|
|
91,792
|
|
|
|
(10)%
|
|
Global operating costs
(2)
|
|
|
647,340
|
|
|
|
552,271
|
|
|
|
(15)%
|
|
|
|
1,329,263
|
|
|
|
1,137,307
|
|
|
|
(14)%
|
|
Gain on sale of patents and land
|
|
|
(9,100)
|
|
|
|
(120,059)
|
|
|
|
1219%
|
|
|
|
(11,100)
|
|
|
|
(121,559)
|
|
|
|
995%
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
394,901
|
|
|
|
100%
|
|
|
|
|
|
|
|
394,901
|
|
|
|
100%
|
|
Intangible assets impairment charge
|
|
|
|
|
|
|
87,335
|
|
|
|
100%
|
|
|
|
|
|
|
|
87,335
|
|
|
|
100%
|
|
Depreciation and amortization
|
|
|
153,679
|
|
|
|
133,227
|
|
|
|
(13)%
|
|
|
|
305,218
|
|
|
|
272,892
|
|
|
|
(11)%
|
|
Stock-based compensation expense
|
|
|
125,130
|
|
|
|
131,964
|
|
|
|
5%
|
|
|
|
240,826
|
|
|
|
240,371
|
|
|
|
0%
|
|
Restructuring charges, net
|
|
|
19,688
|
|
|
|
19,384
|
|
|
|
(2)%
|
|
|
|
70,920
|
|
|
|
76,614
|
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(44,794)
|
|
|
$
|
(489,676)
|
|
|
|
993%
|
|
|
$
|
(132,148)
|
|
|
$
|
(656,890)
|
|
|
|
397%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
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.
|
(2)
|
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.
|
(3)
|
Commencing in the second quarter of 2016, TAC payments related to the Microsoft Search Agreement, which previously would
have been recorded as a reduction of 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 for additional information.
|
52
Revenue and Revenue ex-TAC by Segment
Americas
Americas revenue for the three and six months ended
June 30, 2016 increased $63 million, or 6 percent, and decreased $60 million, or 3 percent, respectively, compared to the same periods of 2015. The increase in Americas revenue for the three months ended June 30, 2016 was primarily
attributable to an increase in search revenue of $162 million, partially offset by declines in other revenue and display revenue of $79 million and $20 million, respectively. The decrease in Americas revenue for the six months ended June 30,
2016 was primarily attributable to declines in other revenue and display revenue of $158 million and $21 million, respectively, partially offset by an increase in search revenue of $119 million. 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 $218 million for the three and six
months ended June 30, 2016. See Significant TransactionsMicrosoft Search Agreement for further detail. Excluding the impact of the change in revenue presentation, noted above, search revenue declined $56 million, or 13
percent, and $99 million, or 11 percent, for the three and six months ended June 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 the completion of recognition of deferred revenue pursuant to the TIPLA with Alibaba Group in which we recognized $69 million and
$139 million in the three and six months ended June 30, 2015. The decline in Americas display revenue for the three and six months ended June 30, 2016 was attributable to a decline in revenue on Affiliate sites driven primarily by video
and audience advertising, partially offset by an increase from native advertising. For the three months ended June 30, 2016, the decline was partially offset by an increase in advertising revenue on Yahoo Properties.
Revenue in the Americas accounted for approximately 81 percent and 80 percent of total revenue for the three and six months ended June 30, 2016,
respectively, compared to 80 percent of total revenue for both the three and six months ended June 30, 2015.
Americas revenue ex-TAC for
the three and six months ended June 30, 2016 decreased $170 million, or 21 percent, and $331 million, or 20 percent, compared to the same periods of 2015, primarily due to the revenue declines noted above as well as increases in TAC. Excluding
the impact of the implementation of the Eleventh Amendment to the Microsoft Search Agreement, TAC increased $14 million, or 8 percent, and $52 million, or 15 percent, for the three and six months ended June 30, 2016, respectively, due to an
increase in other search TAC, partially offset by a decline in display TAC related to BrightRoll.
Revenue ex-TAC in the Americas accounted for
approximately 76 percent of total revenue ex-TAC for both the three and six months ended June 30, 2016, compared to 78 percent of total revenue ex-TAC for both the three and six months ended June 30, 2015.
EMEA
EMEA revenue for the three and six months ended
June 30, 2016 increased $17 million, or 20 percent, and $13 million, or 8 percent, respectively, compared to the same periods of 2015. The increase in EMEA revenue for the three months ended June 30, 2016 was attributable to an increase in
search revenue of $25 million, partially offset by a decline in display revenue of $6 million. The increase in EMEA revenue for the six months ended June 30, 2016 was attributable to an increase in search revenue of $21 million, partially
offset by a decline in display revenue of $5 million and other revenue of $3 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 $33 million for the three and six months ended June 30, 2016. Excluding the impact of the change in revenue presentation, noted above, search
revenue declined $9 million, or 29 percent, and $12 million, or 21 percent, for the three and six months ended June 30, 2016, respectively, primarily due to a decline in Paid Clicks.
Revenue in EMEA accounted for approximately 8 percent of total revenue for both the three and six months ended June 30, 2016, compared to
7 percent of total revenue for both the three and six months ended June 30, 2015.
EMEA revenue ex-TAC for the three and six months ended
June 30, 2016 decreased $12 million, or 17 percent, and $17 million, or 12 percent, respectively, compared to the same periods of 2015, primarily due to TAC growing at a faster rate than revenue.
Revenue ex-TAC in EMEA accounted for approximately 7 percent of total revenue ex-TAC for both the three and six months ended June 30, 2016 and
2015.
Asia Pacific
Asia Pacific revenue for the three
and six months ended June 30, 2016 decreased $16 million, or 10 percent, and $27 million, or 8 percent, respectively, compared to the same periods of 2015, primarily due to declines in display revenue of $7 million and $12 million respectively,
other revenue of $5 million and $8 million, respectively, and search revenue of $4 million and $7 million, respectively.
Revenue in Asia Pacific
accounted for approximately 11 percent and 12 percent of total revenue for the three and six months ended June 30, 2016, respectively, compared to 13 percent of total revenue for both the three and six months ended June 30, 2015.
53
Asia Pacific revenue ex-TAC for the three and six months ended June 30, 2016 decreased $20 million, or
13 percent, and $37 million, or 12 percent, respectively, compared to the same periods of 2015, primarily due to an increase in display TAC of $4 million and $10 million for the three and six months ended June 30, 2016, respectively, and a
decrease in revenue as discussed above.
Revenue ex-TAC in Asia Pacific accounted for approximately 17 percent of total revenue ex-TAC for both the
three and six months ended June 30, 2016, compared to 15 percent of total revenue ex-TAC for both the three and six months ended June 30, 2015.
Direct Costs by Segment
Americas
For the three and six months ended June 30,
2016, direct costs attributable to the Americas segment decreased $13 million, or 16 percent, and $1 million, or 1 percent, respectively, compared to the same periods of 2015. The decline in direct costs attributable to the Americas segment for the
three months ended June 30, 2016 was primarily related to a decline in compensation costs. The decline in direct costs attributable to the Americas segment for the six months ended June 30, 2016 was primarily attributable to declines in
compensation costs, travel and entertainment expense, bad debt expense and other cost of revenue, partially offset by an increase in marketing and public relations expense and content costs.
Direct costs attributable to the Americas segment represented approximately 10 percent and 11 percent of Americas revenue ex-TAC for the three and six
months ended June 30, 2016, respectively, compared to 10 percent and 9 percent for the three and six months ended June 30, 2015, respectively.
EMEA
For the three and six months ended June 30, 2016, direct costs attributable to the EMEA segment decreased $2 million, or 8 percent, and $1
million, or 3 percent, respectively, compared to the same periods of 2015, primarily due to a decline in compensation costs and other cost of revenue, partially offset by a slight increase in marketing and public relations expense. The decline in
direct costs attributable to the EMEA segment for the six months ended June 30, 2016 was also slightly offset by an increase in bad debt expense.
Direct costs attributable to the EMEA segment represented approximately 31 percent and 32 percent of EMEA revenue ex-TAC for the three and six months
ended June 30, 2016, respectively, compared to 28 percent and 29 percent for the three and six months ended June 30, 2015, respectively.
Asia Pacific
For the three and six months ended June 30, 2016, direct costs attributable to the Asia Pacific segment decreased $5 million, or 9 percent,
and $11 million, or 10 percent, respectively, compared to the same periods of 2015, primarily attributable to a decline in compensation costs and marketing and public relation expense. Direct costs attributable to the APAC segment for the three
months ended June 30, 2016 were also impacted by a decline in other cost of revenue.
Direct costs attributable to the Asia Pacific segment
represented approximately 34 percent and 33 percent of Asia Pacific revenue ex-TAC for the three and six months ended June 30, 2016, respectively, compared to 33 percent for both the three and six months ended June 30, 2015.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
|
|
|
June 30,
2016
|
|
|
|
|
|
(dollars in thousands)
|
|
Cash and cash equivalents
|
|
$
|
1,631,911
|
|
|
|
|
|
|
$
|
1,325,404
|
|
Short-term marketable securities
|
|
|
4,225,112
|
|
|
|
|
|
|
|
5,055,683
|
|
Long-term marketable securities
|
|
|
975,961
|
|
|
|
|
|
|
|
1,284,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities
|
|
$
|
6,832,984
|
|
|
|
|
|
|
$
|
7,665,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total assets
|
|
|
15%
|
|
|
|
|
|
|
|
17%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
Cash Flow Highlights
|
|
2015
|
|
|
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(2,652,987)
|
|
|
|
|
|
|
$
|
775,698
|
|
Net cash provided by (used in) investing activities
|
|
$
|
1,519,420
|
|
|
|
|
|
|
$
|
(1,020,739)
|
|
Net cash used in financing activities
|
|
$
|
(329,966)
|
|
|
|
|
|
|
$
|
(83,456)
|
|
|
|
For the six months ended June 30, 2016, our operating activities generated adequate cash to meet our operating
needs. Our operating activities for the six months ended June 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 June 30, 2016, we had cash, cash equivalents, and marketable securities (excluding Alibaba Group and Hortonworks equity securities) totaling
$7.7 billion compared to $6.8 billion at December 31, 2015. During the six months ended June 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 $402 million of our total $7.7 billion of cash and cash equivalents and marketable securities (excluding Alibaba Group and Hortonworks equity securities) as of June 30, 2016. The cumulative earnings remaining in our
consolidated foreign subsidiaries, if repatriated to the United States, under current law, would be subject to U.S. income taxes with an adjustment for foreign tax credits. As of June 30, 2016, we do not anticipate repatriating our
undistributed foreign earnings of approximately $3.3 billion. Those earnings are principally related to our equity method investment in Yahoo Japan. It is not practicable to determine the income tax liability that might be incurred if these earnings
were to be repatriated.
On May 18, 2016, we delivered notice to Citibank to terminate our 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.
We currently hedge a portion of our net investment in Yahoo Japan with forward and option contracts to reduce the risk that our investment in Yahoo Japan
will be adversely affected by foreign currency translation exchange rate fluctuations. The forward contracts are required to be settled in cash and the amount of cash payment we receive or could be required to pay upon settlement could be material.
The amount of cash paid or received on the option contracts would only be required if the exchange rate at maturity is outside a predetermined range.
We expect to continue to evaluate possible acquisitions of, or strategic investments in, businesses, products, and technologies that are complementary to
our business, which acquisitions and investments may require the use of cash.
We 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 provided by (used in) operating activities
.
Cash flows from operating activities for the six months ended June 30,
2016 were driven by a net source of cash from working capital of $454 million (which included a $190 million cash tax refund), dividends received from equity investees of $157 million and non-cash adjustments of $835 million, reduced by a net loss
of $537 million and earnings in equity interests of $133 million.
For the six months ended June 30, 2015, cash flows from operating activities
were reduced by changes in working capital of $3,203 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 $196 million offset by net
income of $3 million, dividends received from equity investees of $142 million and non-cash adjustments of $601 million.
Net cash provided by
(used in) investing activities
.
In the six months ended June 30, 2016, the $1,021 million used in investing activities was due to purchases of marketable securities, net of proceeds from sales and maturities, of $1,146 million,
partially offset by net proceeds from disposition of property and equipment of $94 million and $33 million in net proceeds from settlement of derivative hedge contracts.
In the six months ended June 30, 2015, the $1,519 million provided by investing activities was due to proceeds from sales and maturities of
marketable securities, net of purchases, of $1,731 million, $20 million proceeds from the sale of patents, and $61 million in net proceeds from settlement of derivative hedge contracts, partially offset by $267 million used for capital expenditures,
$21 million used for acquisitions, and $5 million used for the purchase of intangibles and other activities.
55
Net cash used in financing activities
.
In the six months ended June 30, 2016, the
$83 million used in financing activities was due to $99 million used for tax withholding payments related to net share settlements of restricted stock units and other financing activities and $6 million used for distributions to non-controlling
interests. This use of cash was partially offset by $11 million in cash proceeds received from employee stock option exercises, and an excess tax benefit from stock-based awards of $11 million.
In the six months ended June 30, 2015, the $330 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 $159 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 $47 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 $2 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 six months ended June 30, 2016, we had a net benefit of $94 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 six months ended June 30, 2016 were $152
million. For the six months ended June 30, 2015, capital expenditures, net were $267 million. The $115 million decrease in capital expenditures was a result of the completion of certain Company initiatives, facilities expansions and improvements in
2015.
Excluding the net cash proceeds of $246 million received from the sale of land, we expect capital expenditures, net to be up to $350 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
(dollars in thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
307,952
|
|
|
$
|
409,930
|
|
|
$
|
(2,652,987)
|
|
|
$
|
775,698
|
|
Acquisition of property and equipment, net
|
|
|
(155,442)
|
|
|
|
169,650
|
|
|
|
(266,895)
|
|
|
|
93,551
|
|
Excess tax benefits from stock-based awards
|
|
|
(35,620)
|
|
|
|
3,034
|
|
|
|
1,850
|
|
|
|
10,560
|
|
Dividends received from equity investee
|
|
|
(141,670)
|
|
|
|
(156,968)
|
|
|
|
(141,670)
|
|
|
|
(156,968)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
(24,780)
|
|
|
$
|
425,646
|
|
|
$
|
(3,059,702)
|
|
|
$
|
722,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2016, free cash flow increased $450 million, primarily due to the net cash
proceeds from disposition of property and equipment which was a result of the sale of certain property in Santa Clara, California, including land, as well as an increase in cash inflow from working capital.
For the six months ended June 30, 2016, free cash flow increased $3.8 billion 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, as well as the net cash proceeds from disposition of property and equipment, as noted above.
Stock Repurchases
During the six months ended June 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
726
|
|
|
$
|
2,000
|
|
|
$
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Contractual Obligations and Commitments
The following table presents certain payments due under contractual obligations with minimum commitments as of June 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
|
|
|
54
|
|
|
|
2
|
|
|
|
10
|
|
|
|
10
|
|
|
|
32
|
|
Operating lease obligations
(2) (3) (4)
|
|
|
425
|
|
|
|
58
|
|
|
|
160
|
|
|
|
91
|
|
|
|
116
|
|
Capital lease obligations
|
|
|
34
|
|
|
|
6
|
|
|
|
20
|
|
|
|
5
|
|
|
|
3
|
|
Affiliate commitments
(5)
|
|
|
1,344
|
|
|
|
188
|
|
|
|
750
|
|
|
|
406
|
|
|
|
-
|
|
Non-cancelable obligations
(6)
|
|
|
139
|
|
|
|
54
|
|
|
|
69
|
|
|
|
7
|
|
|
|
9
|
|
Intellectual property rights
(7)
|
|
|
13
|
|
|
|
3
|
|
|
|
5
|
|
|
|
2
|
|
|
|
3
|
|
Uncertain tax positions, including interest and penalties
(8)
|
|
|
1,178
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
4,625
|
|
|
$
|
312
|
|
|
$
|
2,452
|
|
|
$
|
521
|
|
|
$
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
In December 2014, the Company entered into a 10-year lease agreement for three buildings in Los Angeles, California. As
of June 30, 2016, the total expected minimum operating lease commitment was $59 million for three buildings. The Company has the option to renew the lease for two consecutive renewal terms of either five years or seven years each.
|
(5)
|
We are obligated to make minimum payments under contracts to provide sponsored search and/or display advertising services
to our Affiliates which represent TAC.
|
(6)
|
We are obligated to make payments under various arrangements with vendors and other business partners, principally for
content, bandwidth, and marketing arrangements.
|
(7)
|
We are committed to make certain payments under various intellectual property arrangements.
|
(8)
|
As of June 30, 2016, unrecognized tax benefits and potential interest and penalties resulted in accrued liabilities
of $1,178 million, classified as other accrued expenses and current liabilities and deferred and other long-term tax liabilities, net on our condensed consolidated balance sheets. As of June 30, 2016, the settlement period for the $1,177
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 June 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.
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
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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 June 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 June 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.
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.
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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 June 30, 2016 was $124 million, which is
included in the Americas operating segment. There is 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:
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Expected cash flows underlying our business plans for the periods 2016 through 2027.
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Cash flows beyond 2026 are projected to grow at a perpetual growth rate.
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In order to risk adjust the cash flow projections in determining fair value, we utilized a discount rate of 15 percent.
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Given the impairment recorded in the Tumblr reporting unit during the second quarter of 2016, it is reasonably possible that
changes in judgments, assumptions and estimates we made in assessing the fair value of goodwill could cause us to consider some portion or all of the remaining goodwill of the Tumblr reporting unit to become impaired. 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 for
additional goodwill impairment information for the three and six months ended June 30, 2016 and also Note 5Goodwill in the Notes to our condensed consolidated financial statements.
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 for additional intangibles impairment information for the six months ended June 30, 2016 and also Note 5Goodwill in the Notes to our
condensed consolidated financial statements.
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.
Recent Accounting Pronouncements
See Note 1The Company and Summary of
Significant Accounting Policies in the Notes to our condensed consolidated financial statements.