<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-28018
YAHOO! INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0398689
--------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3420 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 731-3300
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: Yes[X] No[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1998
-------------------------------- -------------------------------
Common Stock, $0.00033 par value 98,690,788
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YAHOO! INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
at September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the three and nine months ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Changes in Securities 37
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 39
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
YAHOO! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 161,867,000 $ 62,538,000
Short-term investments in marketable securities 226,710,000 27,772,000
Accounts receivable, net 19,840,000 10,986,000
Prepaid expenses 3,674,000 5,893,000
-------------- -------------
Total current assets 412,091,000 107,189,000
Long-term investments in marketable debt securities 43,515,000 16,702,000
Long-term investments in marketable equity securities 18,359,000 -
Property and equipment, net 10,766,000 7,035,000
Other assets 12,650,000 10,958,000
-------------- -------------
$ 497,381,000 $ 141,884,000
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,840,000 $ 4,711,000
Accrued expenses and other current liabilities 22,567,000 12,481,000
Deferred revenue 28,614,000 4,852,000
Due to related parties 1,127,000 1,412,000
-------------- -------------
Total current liabilities 58,148,000 23,456,000
-------------- -------------
Minority interests in consolidated subsidiaries 951,000 716,000
Shareholders' equity:
Common Stock 23,000 20,000
Additional paid-in capital 470,774,000 146,106,000
Accumulated deficit (44,090,000) (27,971,000)
Unrealized gains on available-for-sale securities, net of tax 11,905,000 -
Cumulative translation adjustment (330,000) (443,000)
-------------- -------------
Total shareholders' equity 438,282,000 117,712,000
-------------- -------------
$ 497,381,000 $ 141,884,000
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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YAHOO! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenues $53,620,000 $18,134,000 $125,036,000 $ 42,306,000
Cost of revenues 5,597,000 2,388,000 14,234,000 6,143,000
-------------- -------------- --------------- --------------
Gross profit 48,023,000 15,746,000 110,802,000 36,163,000
-------------- -------------- --------------- --------------
Operating expenses:
Sales and marketing 22,887,000 11,938,000 59,027,000 28,801,000
Product development 5,709,000 2,920,000 15,253,000 7,613,000
General and administrative 2,441,000 1,591,000 6,660,000 4,501,000
Other - nonrecurring costs - - 44,100,000 21,245,000
-------------- -------------- --------------- --------------
Total operating expenses 31,037,000 16,449,000 125,040,000 62,160,000
-------------- -------------- --------------- --------------
Income (loss) from operations 16,986,000 (703,000) (14,238,000) (25,997,000)
Investment income, net 5,209,000 1,137,000 8,503,000 3,755,000
Minority interests in operations
of consolidated subsidiaries 10,000 247,000 365,000 631,000
-------------- -------------- --------------- --------------
Income (loss) before income taxes 22,205,000 681,000 (5,370,000) (21,611,000)
Provision for income taxes 5,551,000 - 9,682,000 -
-------------- -------------- --------------- --------------
Net income (loss) $16,654,000 $ 681,000 $(15,052,000) $(21,611,000)
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Net income (loss) per share:
Basic $ 0.18 $ 0.01 $ (0.17) $ (0.25)
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Diluted $ 0.15 $ 0.01 $ (0.17) $ (0.25)
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Weighted average common shares and
equivalents used in per share calculation:
Basic 94,764,000 88,456,000 89,959,000 86,403,000
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Diluted 114,456,000 103,446,000 89,959,000 86,403,000
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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YAHOO! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
September 30, September 30,
1998 1997
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,052,000) $ (21,611,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,932,000 1,596,000
Tax benefits from stock option plans 8,675,000 -
Compensation expense on stock option grants 471,000 333,000
Minority interests in operations of consolidated subsidiaries (365,000) (631,000)
Nonrecurring costs 44,100,000 21,245,000
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable, net (8,802,000) (3,910,000)
Prepaid expenses and other assets 3,075,000 (7,951,000)
Accounts payable 917,000 962,000
Accrued expenses and other current liabilities 8,176,000 4,249,000
Deferred revenue 23,756,000 3,192,000
Due to related parties (285,000) (322,000)
---------------- ------------------
Net cash provided by (used in) operating activities 68,598,000 (2,848,000)
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (6,389,000) (4,044,000)
Cash acquired in acquisitions 233,000 -
Purchases of investments in marketable securities (324,233,000) (32,493,000)
Sales and maturities of investments in marketable securities 98,478,000 56,179,000
Other investments (5,445,000) (299,000)
---------------- ------------------
Net cash provided by (used in) investing activities (237,356,000) 19,343,000
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 267,374,000 4,176,000
Proceeds from minority investors 600,000 996,000
Proceeds from lease obligations - 1,297,000
---------------- ------------------
Net cash provided by financing activities 267,974,000 6,469,000
---------------- ------------------
Effect of exchange rate changes on cash and cash equivalents 113,000 (63,000)
---------------- ------------------
Net change in cash and cash equivalents 99,329,000 22,901,000
Cash and cash equivalents at beginning of period 62,538,000 33,547,000
---------------- ------------------
Cash and cash equivalents at end of period $ 161,867,000 $ 56,448,000
---------------- ------------------
---------------- ------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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YAHOO! INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Yahoo! Inc., including its subsidiaries ("Yahoo!" or the "Company"), is
a global Internet media company that offers a branded network of
comprehensive information, communication and shopping services to millions of
users daily. The Company was incorporated in California on March 5, 1995 and
commenced operations on that date. The Company conducts its business within
one industry segment.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments that, in the opinion of management, are necessary for
a fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for a full year or for any future period.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes incorporated by reference
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997. Certain prior period balances have been reclassified to conform to
current period presentation.
NOTE 2 - COMMITMENTS
During March 1997, the Company entered into the Co-Marketing and
Trademark License agreements with Netscape Communications Corporation
("Netscape") under which the Company co-developed and operated an Internet
information navigation service called "Netscape Guide by Yahoo!" (the
"Guide"). The Co-Marketing agreement provided that revenue from advertising
on the Guide, which was managed by the Company, was to be shared between the
Company and Netscape. Under the terms of the Trademark License agreement,
the Company made a one-time, non-refundable trademark license fee payment of
$5,000,000 in March 1997 which was being amortized over the initial two-year
term. On May 21, 1998, the Company and Netscape terminated these agreements
effective July 1, 1998. Pursuant to the termination of these agreements,
Netscape agreed to forego revenue sharing on the Guide for the three months
prior to the termination date. The Company entered into a new agreement with
Netscape to include the Yahoo! brand in the Netscape Distinguished Provider
Program (a promotional program on the Netscape website), which began on June
1, 1998, for which the Company was provided a $1,584,000 credit as part of
the termination agreement. Unamortized trademark license costs in excess of
the advertising credit were charged to operations in the quarter ended June
30, 1998. As users are delivered to Yahoo! from the Netscape website, the
advertising credit is amortized and charged to operations.
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NOTE 3 - INVESTMENTS
The Company principally invests its excess cash in debt instruments of
the U.S. Government and its agencies, and in high-quality corporate issuers.
All highly liquid instruments with an original maturity of three months or
less are considered cash equivalents, those with original maturities greater
than three months and current maturities less than twelve months from the
balance sheet date are considered short-term investments, and those with
maturities greater than twelve months from the balance sheet date are
considered long-term investments.
The Company accounts for investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's marketable investments are classified as available-for-sale as of
the balance sheet date and are reported at fair value, with unrealized gains
and losses, net of tax, recorded in shareholders' equity. Realized gains or
losses and permanent declines in value, if any, on available-for-sale
securities will be reported in other income or expense, as incurred.
The Company invests in equity instruments of privately-held, information
technology companies for business and strategic purposes. These investments
are included in other long-term assets and are accounted for under the cost
method. For these non-quoted investments, the Company's policy is to
regularly review the assumptions underlying the operating performance and
cash flow forecasts in assessing the carrying values. The Company identifies
and records impairment losses on long-lived assets when events and
circumstances indicate that such assets might be impaired. To date, no such
impairment has been recorded. During 1998, certain of these investments in
privately-held companies became marketable equity securities when the
investees completed initial public offerings. Such investments are recorded
as long-term investments in marketable equity securities.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which was adopted by the Company in the first quarter
of fiscal 1998. SFAS 130 establishes standards for reporting comprehensive
income and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustment and unrealized gains and losses on available-for-sale securities.
The components of comprehensive income, net of tax, are as follows (in
thousands):
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------- ------ --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $16,654 $681 ($15,052) ($21,611)
Unrealized gains on available-
for-sale securities 11,905 - 11,905 -
Foreign currency translation
gains (losses) 16 (39) 113 (63)
------- ------- -------- ---------
Comprehensive income (loss) $28,575 $642 ($3,034) ($21,674)
------- ------- -------- ---------
------- ------- -------- ---------
</TABLE>
Accumulated other comprehensive income consists of the unrealized gains on
available-for-sale securities, net of tax and the cumulative translation
adjustment, as presented on the accompanying condensed consolidated balance
sheets.
NOTE 5 - ACQUISITION OF VIAWEB INC.
On June 10, 1998, the Company completed the acquisition of all
outstanding shares of Viaweb Inc. ("Viaweb"), a provider of software and
services for hosting online stores, through the issuance of 787,182 shares of
Yahoo! Common Stock. All outstanding options to purchase Viaweb common stock
were converted into options to purchase 122,252 shares of Yahoo! Common
Stock. The acquisition was accounted for as a purchase in accordance with
APB Opinion No. 16. Under the purchase method of accounting, the purchase
price is allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of the acquisition. Results of
operations for Viaweb have been included with those of the Company for
periods subsequent to the date of acquisition. Pro forma net revenues, net
loss, and net loss per share for the three and nine months ended September
30, 1998 and 1997, giving effect to Viaweb's historical results of operations
prior to the acquisition, were not materially different from the Company's
results, as reported.
The total purchase price of the acquisition was $48,559,000 including
acquisition expenses of $1,750,000. The purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair values
as follows:
<TABLE>
<S> <C>
In-process research and development $44,100,000
Technology and other intangible assets 4,232,000
Tangible assets acquired 571,000
Liabilities assumed (344,000)
------------
$48,559,000
------------
</TABLE>
Based on a third-party appraisal, management determined that $44,100,000
of the purchase price represented acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. This amount was expensed during the quarter ended
June 30, 1998 as a nonrecurring charge upon consummation of the acquisition.
Beginning in June 1998, the Company is amortizing the
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purchased technology and other intangible assets over an estimated useful
life of three years. Amortization expense of purchased technology and other
intangible assets was $353,000 during the quarter ended September 30, 1998
and $470,000 year-to-date.
NOTE 6 - ACQUISITION OF WEBCAL CORPORATION
On July 17, 1998, the Company completed the acquisition of WebCal
Corporation (WebCal), a privately-held developer and marketer of Web-based
calendaring and scheduling products, and publisher of EventCal, a
comprehensive database of world-wide public events. Under the terms of the
acquisition, which was accounted for as a pooling of interests, the Company
exchanged 270,954 shares of Yahoo! Common Stock for all of WebCal's
outstanding shares. The historical operations of WebCal are not material to
the Company's financial position or results of operations, therefore, prior
period financial statements have not been restated for this acquisition.
WebCal's accumulated deficit on July 17, 1998 was $1,067,000.
NOTE 7 - YAHOO! MARKETPLACE
On August 26, 1996, the Company entered into agreements with Visa
International Service Association ("VISA") and another party (together, the
"Visa Group") to establish a limited liability company, Yahoo! Marketplace
L.L.C., to develop and operate a navigational service focused on information
and resources for the purchase of consumer products and services over the
Internet. During July 1997, prior to the completion of significant business
activities and public launch of the property, the Company and VISA entered
into an agreement under which the Visa Group released the Company from
certain obligations and claims. In connection with this agreement, the
Company issued 1,398,962 shares of Yahoo! Common Stock to the Visa Group, for
which the Company recorded a one-time, non-cash, pre-tax charge of
$21,245,000 in the second quarter ended June 30, 1997.
NOTE 8 - STOCK SPLIT
During July 1998, the Company's Board of Directors approved a
two-for-one Common Stock split. Shareholders of record on July 17, 1998 (the
record date) received one additional share for every share held on that date.
All share numbers in the financial statements and notes thereto for all
periods presented have been adjusted to reflect the two-for-one split.
NOTE 9 - PRIVATE PLACEMENT
During July 1998, the Company entered into an agreement for a private
placement of Common Stock to SOFTBANK Holdings, Inc., a 29% shareholder of
the Company at June 30, 1998. On July 14, 1998, the Company received
proceeds of $250,000,000 in
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exchange for 2,726,880 newly issued shares of Yahoo! Common Stock.
SOFTBANK's total ownership at September 30, 1998 is approximately 30%. In
connection with the transaction, the Company also agreed to provide
registration rights comparable to the registration rights provided on the
shares acquired by SOFTBANK prior to the Company's April 1996 initial public
offering. The shares purchased by SOFTBANK are subject to a pre-existing
agreement, entered into in 1996, that prohibits SOFTBANK from purchasing
additional shares of the Company's capital stock if such purchase would
result in SOFTBANK owning more than 35% of the Company's capital stock
(assuming the exercise of all outstanding options and warrants to purchase
capital stock).
NOTE 10 - SUBSEQUENT EVENT
On October 20, 1998, the Company acquired Yoyodyne Entertainment, Inc.
("Yoyodyne"), a privately-held, direct marketing services company. Under the
terms of the acquisition, which will be accounted for as a pooling of
interests, the Company exchanged 280,664 shares of Yahoo! Common Stock and
options and warrants to purchase Yahoo! Common Stock for all of Yoyodyne's
outstanding shares, options, and warrants.
Presented below is unaudited selected pro forma financial information,
reflecting the combination, for the nine month periods ended September 30,
1998 and 1997 (in thousands except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------- ---------
<S> <C> <C>
Total revenues $126,860 $43,866
Net loss ($19,680) ($23,579)
Net loss per share - basic and diluted ($0.22) ($0.27)
Weighted average common shares and equivalents
used in per share calculation - basic and diluted 90,144 86,569
</TABLE>
The Company expects to record a one-time charge of approximately
$2,000,000 in the fourth quarter of 1998 relating to expenses incurred with
the transaction. The unaudited pro forma results above for the nine months
ended September 30, 1998 do not include this charge, which consists of broker
fees, legal and accounting fees, and certain other expenses directly related
to the acquisition.
The unaudited pro forma information is not necessarily indicative of the
actual results of operations had the acquisition occurred at the beginning of
the periods indicated, nor should it be used to project the Company's results
of operations for any future date or period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR
SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT
ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. IN EVALUATING THE COMPANY'S BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH
BELOW UNDER THE CAPTION "RISK FACTORS" IN ADDITION TO THE OTHER INFORMATION
SET FORTH HEREIN. THE COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND
FINANCIAL PERFORMANCE ARE SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES.
OVERVIEW
Yahoo! Inc. is a global Internet media company that offers a branded
network of comprehensive information, communication and shopping services to
millions of users daily. As the first online navigational guide to the Web,
www.yahoo.com is the single largest guide in terms of traffic, advertising,
household and business user reach, and is one of the most recognized brands
associated with the Internet. The Company was incorporated in California on
March 5, 1995 and commenced operations on that date. In August 1995, the
Company commenced selling advertisements on its Web pages and recognized its
initial revenues, and, in April 1996, the Company completed its initial
public offering. In October 1997, the Company acquired Four11 Corporation, a
privately-held online communications and Internet directory company. The
acquisition was accounted for as a pooling of interests. In June 1998, the
Company acquired Viaweb Inc., a provider of software and services for hosting
online stores. The acquisition was accounted for as a purchase. In July
1998, the Company acquired WebCal Corporation a developer and marketer of
Web-based calendaring and scheduling products, and publisher of EventCal, a
comprehensive database of world-wide public events. The acquisition was
accounted for as a pooling of interests. The historical operations of WebCal
are not material to the Company's financial position or results of
operations, therefore, prior period financial statements have not been
restated for this acquisition. On October 20, 1998, the Company acquired
Yoyodyne Entertainment, Inc., a privately-held, direct marketing services
company. The acquisition will be accounted for as a pooling of interests and
the consolidated financial statements will be restated to reflect the
acquisition.
The Company's revenues are derived principally from the sale of banner
and sponsorship advertisements. The Company's standard rates for banner
advertising currently range from approximately $6.00 per thousand impressions
for run of network to approximately $90.00 per thousand impressions for
highly targeted audiences and properties. To date, the duration of the
Company's banner advertising commitments has ranged from one week to two
years. Sponsorship advertising contracts have longer terms
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(ranging from three months to two years) than standard banner advertising
contracts and also involve more integration with Yahoo! services, such as the
placement of buttons that provide users with direct links to the advertiser's
website. Advertising revenues on both banner and sponsorship contracts are
recognized ratably over the period in which the advertisement is displayed,
provided that no significant Company obligations remain at the end of a
period and collection of the resulting receivable is probable. Company
obligations typically include guarantees of minimum number of "impressions,"
or times that an advertisement appears in pages viewed by users of the
Company's online properties. To the extent minimum guaranteed impressions
are not met, the Company defers recognition of the corresponding revenues
until the remaining guaranteed impression levels are achieved. The Company
also earns additional revenue on sponsorship contracts for fees relating to
the design, coordination, and integration of the customer's content and links
into Yahoo! online media properties. These development fees are recognized
as revenue once the related activities have been performed and the customer's
Web links are available on Yahoo! online media properties. A number of the
Company's agreements provide that Yahoo! receive revenues from electronic
commerce transactions. Currently, these revenues are recognized by the
Company upon notification from the advertiser of revenues earned by Yahoo!
and, to date, have not been material.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $53,620,000 and $125,036,000 for the three and nine
month periods ended September 30, 1998, respectively, which represent
increases of 196% when compared with the corresponding periods in 1997. The
increases are due primarily to the increasing number of advertisers
purchasing space on Yahoo! online media properties as well as larger and
longer term purchases by certain advertisers. Approximately 1,950 customers
advertised on Yahoo! online media properties during the quarter ended
September 30, 1998 as compared to approximately 1,200 during the third
quarter of 1997. No one customer accounted for 10% or more of revenues
during the three or nine month periods ended September 30, 1998 and 1997.
International revenues have accounted for less than 10% of net revenues
during the three and nine month periods ended September 30, 1998 and 1997.
Barter revenues also represented less than 10% of net revenues during those
periods. Advertising purchases by SOFTBANK, a 30% shareholder of the Company
at September 30, 1998, and its related companies accounted for approximately
8% and 4% of net revenues in the three and nine month periods ended September
30, 1998 as compared to 4% and 5% in the corresponding periods in fiscal
1997. Contracted prices on these orders are comparable to those given to
other major customers of the Company. There can be no assurance that
customers will continue to purchase advertising on the Compnay's
Web pages, that advertisers will not make smaller and shorter term purchases,
or that market prices for Web-based advertising will not decrease due to
competitive or other factors. Additionally, while the Company had
experienced strong revenue growth during the first three quarters of 1998,
management does not believe that this level of revenue growth will be
sustained in future periods.
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COST OF REVENUES
Cost of revenues consist of the expenses associated with the production
and usage of Yahoo! online media properties. These costs primarily consist
of fees paid to third parties for content included on the Company's online
media properties, Internet connection charges, equipment depreciation, and
compensation. Cost of revenues were $5,597,000 and $14,234,000 for the three
and nine month periods ended September 30, 1998, respectively, or 10% and 11%
of net revenues, as compared to $2,388,000 and $6,143,000, or 13% and 15% of
net revenues, in the corresponding periods in fiscal 1997. The absolute
dollar increase in cost of revenues is primarily attributable to an increase
in the quantity of content available on Yahoo! online media properties, and
the increased usage of these properties. The Company anticipates that its
content and Internet connection expenses will increase with the quantity and
quality of content available on the Yahoo! online media properties, and
increased usage of these properties. As measured in page views (defined as
electronic page displays), the Company delivered an average of 144 million
page views per day in September 1998 compared with an average of 50 million
page views per day in September 1997. Yahoo! Japan, an unconsolidated joint
venture of the Company which began operations in April 1996, is included in
these page views figures and accounted for an average of approximately 11
million page views per day in September 1998 and an average of over 4 million
page views per day in September 1997. The Company anticipates that its
content and Internet connection expenses will continue to increase in
absolute dollars for the foreseeable future. The Company currently
anticipates cost of revenues will be in the range of 10% to 13% of net
revenues for the fourth quarter of 1998.
SALES AND MARKETING
Sales and marketing expenses were $22,887,000 for the quarter ended
September 30, 1998, or 43% of net revenues as compared to $11,938,000, or 66%
of net revenues for the quarter ended September 30, 1997. For the nine
months ended September 30, 1998, sales and marketing expenses were
$59,027,000, or 47% of net revenues as compared to $28,801,000, or 68% of net
revenues for the nine months ended September 30, 1997. Sales and marketing
expenses consist primarily of advertising and other marketing related
expenses (which include Netscape Premier Provider/Distinguished Provider and
other distribution costs), compensation and employee-related expenses, and
sales commissions. The increase in absolute dollars from the year ago
periods is primarily attributable to an increase in advertising and
distribution costs associated with the Company's aggressive brand-building
strategy, increases in compensation expense associated with growth in sales
and marketing personnel, and expansion in the international subsidiaries with
the addition of subsidiaries during or subsequent to the quarter ended
September 30, 1997 in Australia, Denmark, Italy, Korea, Norway, Singapore,
and Sweden. The Company also added Yahoo! guides in Spanish and Mandarin
Chinese languages during the quarter ended June 30, 1998. The Company
anticipates that sales and marketing expenses in absolute dollars will
increase in future periods as it continues to pursue an aggressive
brand-building strategy through advertising and distribution and continues to
build its direct sales organization. As a percentage of net revenues, the
Company currently
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anticipates that sales and marketing expenses may increase slightly from the
third quarter to the fourth quarter of 1998.
PRODUCT DEVELOPMENT
Product development expenses were $5,709,000 for the quarter ended
September 30, 1998, or 11% of net revenues as compared to $2,920,000, or 16%
of net revenues for the quarter ended September 30, 1997. For the nine
months ended September 30, 1998, product development expenses were
$15,253,000, or 12% of net revenues as compared to $7,613,000, or 18% of net
revenues for the nine months ended September 30, 1997. Product development
expenses consist primarily of employee compensation relating to developing
and enhancing the features and functionality of Yahoo! online media
properties. The increase in absolute dollars is primarily attributable to
increases in the number of engineers that develop and enhance Yahoo! online
media properties. To date, all internal product development costs have been
expensed as incurred. The Company believes that significant investments in
product development are required to remain competitive. Consequently, the
Company expects to incur increased product development expenditures in
absolute dollars in future periods. As a percentage of net revenues, the
Company currently anticipates that product development expenses will
approximate current levels during the fourth quarter of 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,441,000 for the quarter
ended September 30, 1998, or 5% of net revenues as compared to $1,591,000, or
9% of net revenues for the quarter ended September 30, 1997. For the nine
months ended September 30, 1998, general and administrative expenses were
$6,660,000, or 5% of net revenues as compared to $4,501,000, or 11% of net
revenues for the nine months ended September 30, 1997. General and
administrative expenses consist primarily of compensation and fees for
professional services, and the increase in absolute dollars is primarily
attributable to increases in these areas. The Company believes that the
absolute dollar level of general and administrative expenses will increase in
future periods, as a result of an increase in personnel and increased fees
for professional services. As a percentage of net revenues, the Company
currently anticipates that general and administrative expenses will
approximate current levels during the fourth quarter of 1998.
OTHER - NONRECURRING COSTS
During June 1998, the Company completed the acquisition of all
outstanding shares of Viaweb through the issuance of 787,182 shares of Yahoo!
Common Stock. All outstanding options to purchase Viaweb common stock were
converted into options to purchase 122,252 shares of Yahoo! Common Stock.
During the quarter ended June 30, 1998, the Company recorded a nonrecurring
charge of $44,100,000 for in-process research and development that had not
yet reached technological feasibility and had no alternative future use.
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During July 1997, prior to the completion of significant business
activities and public launch of the Yahoo! Marketplace, the Company and VISA
entered into an agreement under which the Visa Group released the Company
from certain obligations and claims. In connection with this agreement, the
Company issued 1,398,962 shares of Yahoo! Common Stock to the Visa Group, for
which the Company recorded a one-time, non-cash, pre-tax charge of
$21,245,000 in the second quarter ended June 30, 1997.
In conjunction with the October 1998 acquisition of Yoyodyne
Entertainment, Inc., the Company expects to record a one-time charge of
approximately $2,000,000 in the fourth quarter of 1998 relating to expenses
incurred with the transaction.
INVESTMENT INCOME, NET
Investment income, net of investment expense, was $5,209,000 for the
quarter ended September 30, 1998. For the quarter ended September 30, 1997,
investment income was $1,137,000. Investment income for the nine months
ended September 30, 1998 was $8,503,000 as compared to $3,755,000 for the
nine months ended September 30, 1997. The increase in investment income from
the year ago periods was attributable to a higher average investment balance,
principally due to proceeds of $250,000,000 received by the Company on July
14, 1998 from a private placement of shares to SOFTBANK. Investment income
for the fourth quarter of 1998 is expected to increase slightly over third
quarter investment income as a higher average investment balance will be
offset by lower interest rates.
MINORITY INTERESTS IN OPERATIONS OF CONSOLIDATED SUBSIDIARIES
Minority interests in losses from operations of consolidated
subsidiaries were $10,000 for the quarter ended September 30, 1998 as
compared to $247,000 for the same period in 1997. Minority interests for the
nine months ended September 30, 1998 were $365,000 as compared to $631,000
for the nine months ended September 30, 1997. The 1998 minority interest is
attributable to operations in the European and Korean joint ventures.
Minority interest from the year ago periods is attributable to losses in the
European and other joint ventures. The Company expects that minority
interests in operations of consolidated subsidiaries in the aggregate will
continue to fluctuate in future periods as a function of the results from
consolidated subsidiaries. When, and if, the consolidated subsidiaries
become profitable, the minority interests adjustment on the statement of
operations will reduce the Company's net income by the minority partners'
share of the subsidiaries' net income.
INCOME TAXES
Based on the current estimate of operating results and certain other
factors, the Company expects its effective tax rate, before the effect of the
non-deductible charge of $44,100,000 for acquired in-process research and
development, will approximate 25% for fiscal year 1998. Before the effect of
this charge, the tax rate was approximately 25% for the quarter and nine
months ended September 30, 1998. This rate is lower than the statutory U.S.
federal rate due primarily to the utilization of net operating loss
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carryforwards, the utilization of research and development credits, and the
change in the valuation allowance on deferred tax assets. The Company
continues to provide a valuation allowance on certain deferred assets which
relate principally to foreign and acquired domestic net operating loss
carryforwards. When realized, the tax benefit of the deferred tax assets
attributable to the exercise of employee stock options will be accounted for
as a credit to additional paid-in capital rather than a reduction of the
income tax provision. Deferred tax assets related to employee stock option
exercises are currently expected to increase through fiscal year 1998.
NET INCOME (LOSS)
The Company recorded net income of $16,654,000 or $0.15 per share
diluted for the quarter ended September 30, 1998 compared to net income of
$681,000 or $0.01 per share diluted for the quarter ended September 30, 1997.
For the nine months ended September 30, 1998, the Company recorded a net loss
of $15,052,000 or $0.17 per share diluted. Excluding the effect of the
nonrecurring charge of $44,100,000 incurred in connection with the
acquisition of Viaweb, the Company earned $29,048,000 or $0.26 per share
diluted. For the nine months ended September 30, 1997, the Company recorded
a net loss of $21,611,000 or $0.25 per share diluted. Excluding the effect
of the nonrecurring charge of $21,245,000 incurred in connection with the
Visa agreement, the Company lost $366,000 or $0.00 per share diluted.
LIQUIDITY AND CAPITAL RESOURCES
Yahoo! invests predominantly in debt instruments that are highly liquid,
of high-quality investment grade, and predominantly have maturities of less
than one year with the intent to make such funds readily available for
operating purposes. At September 30, 1998, the Company had cash and cash
equivalents and investments in marketable debt securities totaling
$432,092,000 compared to $107,012,000 at December 31, 1997.
For the nine months ended September 30, 1998, cash provided by operating
activities of $68,598,000 was primarily due to earnings, before the
nonrecurring charge of $44,100,000, increases in deferred revenue (due to
invoicing and cash receipts in excess of revenue) and accrued liabilities,
and tax benefits from stock option plans. For the nine months ended
September 30, 1997, cash used in operating activities of $2,848,000 was
primarily due to increases in prepaid expenses and other assets, which
resulted primarily from a $5,000,000 one-time non-refundable license payment
to Netscape under the Netscape Guide by Yahoo! agreement and a $2,900,000
payment to Netscape under the international Netscape Net Search program
agreement, and an increase in accounts receivable, partially offset by
increases in accrued liabilities and deferred revenue.
Cash used in investing activities was $237,356,000 for the nine months
ended September 30, 1998. Purchases (net of sales and maturities) of
investments in marketable securities and other assets during the period were
$231,200,000 and capital expenditures totaled $6,389,000. Capital
expenditures have generally been comprised of purchases of computer hardware
and software as well as leasehold improvements related to leased facilities,
and are expected to increase in future periods. Cash provided by investing
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activities was $19,343,000 for the nine months ended September 30, 1997.
Sales and maturities (net of purchases) of investments in marketable
securities during the period were $23,686,000 and capital expenditures
totaled $4,044,000.
For the nine months ended September 30, 1998, cash provided by financing
activities of $267,374,000 was due primarily to the issuance of Common Stock
to SOFTBANK in the amount of $250,000,000 during July 1998 and the issuance
of Common Stock pursuant to the exercise of stock options. For the nine
months ended September 30, 1997, cash provided by financing activities of
$6,469,000 was due to the issuance of Common Stock pursuant to the exercise
of stock options, proceeds received under lease obligations, and proceeds
received from minority investors.
The Company currently has no material commitments other than those under
operating lease agreements. The Co-Marketing agreement with Netscape was
terminated in May 1998 and the Premier Provider agreements have expired. The
Company has experienced a substantial increase in its capital expenditures
and operating lease arrangements since its inception, which is consistent
with increased staffing, and anticipates that this will continue in the
future. Additionally, the Company will continue to evaluate possible
acquisitions of, or investments in businesses, products, and technologies
that are complementary to those of the Company, which may require the use of
cash. Management believes existing cash and investments will be sufficient
to meet the Company's operating requirements for at least the next twelve
months; however, the Company may sell additional equity or debt securities or
obtain credit facilities. The sale of additional securities could result in
additional dilution to the Company's shareholders.
RISK FACTORS
LIMITED OPERATING HISTORY; RISKS OF IMPLEMENTING GROWTH STRATEGY
Yahoo! was incorporated in March 1995 and did not begin generating
advertising revenues until August 1995. Therefore, we have a limited
operating history. Our prospects are subject to the risks, expenses and
uncertainties frequently encountered by young companies that operate
exclusively in the new and rapidly evolving markets for Internet products and
services. Successfully achieving our growth plan depends on, among other
things:
- our ability to continue to develop and extend the Yahoo! brand;
- our ability to develop new media properties;
- our ability to maintain and increase the levels of traffic on Yahoo!
properties;
- our development or acquisition of services or products equal or
superior to those of our competitors;
- the adoption by the market of the Web as an advertising medium;
- the successful sale of Web-based advertising by our internal sales
force;
- relative price stability for Web-based advertising, despite
competition and other factors that could reduce market prices for
advertising;
- our ability to effectively generate revenues through sponsored
services and placements in Yahoo! properties;
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- our ability to effectively integrate the technology and operations of
businesses or technologies we have acquired;
- our ability to successfully develop and offer personalized Web-based
services, such as e-mail services, to consumers without errors or
interruptions in service; and
- our ability to continue to identify, attract, retain and motivate
qualified personnel.
We may not be successful in implementing our growth plan.
ANTICIPATED INCREASES IN OPERATING EXPENSES; ANTICIPATED LOSSES
As of September 30, 1998, we had an accumulated deficit of $44,090,000.
Because of our limited operating history and the uncertain nature of the
rapidly-changing markets we serve, we believe the prediction of future
results of operations is difficult or impossible. In addition, we believe
that period-to-period comparisons of our operating results are not
meaningful. You should not rely on the results for any period as an
indication of future performance. In particular, although we experienced
strong revenue growth during the first nine months of 1998, we do not believe
that this level of revenue growth will be sustained in future periods. We
currently expect that our operating expenses will continue to increase
significantly as we expand our sales and marketing operations, continue to
develop and extend the Yahoo! brand, fund greater levels of product
development, develop and commercialize additional media properties, and
acquire complementary businesses and technologies. As a result, we may
experience significant losses on a quarterly and annual basis.
In June 1998, we completed the acquisition of Viaweb Inc., a provider of
software and services for hosting online stores, in exchange for shares and
options to purchase shares of our Common Stock. We incurred a one-time
charge of $44,100,000 in the quarter ended June 30, 1998 for acquired
in-process technology and expenses associated with the transaction. The
remaining purchase price of approximately $4,232,000 has been allocated to
acquired technology and other intangible assets and is being amortized over
an estimated useful life of three years. As a result of the expense incurred
in the quarter ended June 30, 1998, we may report a net loss for the year
ending December 31, 1998.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY OF ADVERTISING
REVENUE; RELIANCE ON SHORT-TERM ADVERTISING CONTRACTS
We derive the majority of our revenues from the sale of advertisements
under short-term contracts, which are difficult to forecast accurately. Our
expense levels are based in part on our expectations concerning future
revenue and, to a large extent, are fixed. We may be unable to adjust
spending quickly enough to compensate for any unexpected revenue shortfall.
Accordingly, the cancellation or deferral of advertising or sponsorship
contracts could have a material adverse effect on our financial results. As
noted above, we expect our operating expenses to increase significantly over
the near term. To the extent our expenses increase but our revenues do not,
our business, operating results, and financial condition will be materially
and adversely affected.
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Our operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside our control. These
factors include:
- the level of usage of the Internet;
- demand for Internet advertising;
- the addition or loss of advertisers;
- the level of user traffic on Yahoo! online media properties;
- the advertising budgeting cycles of individual advertisers;
- the mix of types of advertising we sell (targeted advertising
generally has higher rates);
- the amount and timing of capital expenditures and other costs relating
to the expansion of our operations;
- the introduction of new products or services by us or our competitors;
- pricing changes for Web-based advertising;
- the timing of initial set-up, engineering or development fees that may
be paid in connection with larger advertising and distribution
arrangements;
- technical difficulties with respect to the use of Yahoo! or other
online media properties we develop;
- costs incurred with respect to acquisitions;
- negative general economic conditions and resulting effects on media
spending; and
- economic conditions specific to the Internet and online media.
As a strategic response to changes in the competitive environment, we may
from time to time make certain pricing, service or marketing decisions that
may adversely affect our profitability in a given quarterly or annual period.
Our advertising revenue is subject to seasonal fluctuations.
Historically, advertisers have spent less in the first and third calendar
quarters. The level of use of our online properties is also seasonal. User
traffic on Yahoo! online media properties has historically been lower during
the summer and during year-end vacation and holiday periods.
A key element of our strategy is to generate advertising revenues through
sponsored services and placements by third parties in our online media
properties in addition to banner advertising. In connection with these
arrangements, we may receive sponsorship fees as well as a portion of
transaction revenues received by the sponsor from users originated through the
Yahoo! placement, in return for minimum levels of user impressions to be
provided by the Company. These arrangements expose us to potentially
significant financial risks, including:
- the risk that we fail to deliver required minimum levels of user
impressions or "click throughs" (in which case, these agreements
typically provide for adjustments to the fees payable thereunder or
"make good" periods);
- the risk that sponsors do not renew the agreements at the end of their
term or that they renew at lower rates; and
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- the risk that the arrangements do not generate anticipated levels of
shared transaction revenue, or that sponsors default on the payment
commitments in such agreements (as has occurred in the past).
As a result of these financial risks, we cannot guarantee that we will achieve
significant revenue from these sponsorship arrangements. In addition, because
we have limited experience with these arrangements, we are unable to determine
what effect they will have on gross margins and results of operations. Although
transaction-based fees have not to date represented a material portion of our
net revenues, if and to the extent such revenues become significant, there could
be greater variations in our quarterly operating results.
Due to these factors, in some future quarter, our operating results may
fall below the expectations of securities analysts and investors. In such an
event, the trading price of our Common Stock would likely be materially and
adversely affected.
COMPETITION
The market for Internet products and services is highly competitive. There
are no substantial barriers to entry in these markets, and we expect that
competition will continue to intensify. Negative competitive developments could
have a material adverse effect on our business and on the trading price of our
stock.
MULTIPLE PROVIDERS OF COMPETITIVE SERVICES. We compete with many other
providers of online navigation, information and community services. As we
expand the scope of our Internet services, we will compete directly with a
greater number of Internet sites and other media companies across a wide range
of different online services. We also compete in vertical markets where
competitors may have advantages in expertise, brand recognition, and other
factors. Many companies offer competitive products or services addressing Web
navigation services, including, among others:
- America Online, Inc. (NetFind);
- CNET, Inc. (Snap);
- Compaq/Digital Equipment Corporation (AltaVista);
- Excite, Inc. (including WebCrawler);
- Infoseek Corporation;
- Inktomi Corporation;
- Lycos, Inc. (including HotBot and Tripod);
- Microsoft Corporation (msn.com); and
- Netscape Communications Corporation (Netcenter).
In addition, we compete with metasearch services and software
applications, such as CNET's search.com service, that allow a user to search
the databases of several directories and catalogs simultaneously. We also
compete indirectly with database vendors that offer information search and
retrieval capabilities with their core database products. Several large
media companies, including both Time-Warner Inc. and CBS, have announced that
they are contemplating Internet navigation services and are attempting to
become "gateway" sites for Web users. Also, Infoseek and The Walt Disney
Company ("Disney") recently entered an agreement whereby Disney gains a
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controlling interest in Infoseek. The parties announced plans for a portal
and navigation service entitled go.com, which would be supported by Disney's
substantial promotional and media resources. These and other competitors are
expected to continue to make substantial marketing expenditures to promote
their online properties. We may be required to increase our sales and
marketing expenditures in response to these efforts, which would impair our
operating results.
A large number of websites and online services, such as the Microsoft
Network, AOL, and Netscape (Netcenter); other Web navigation companies such
as Excite, Lycos, and Infoseek; and high-traffic e-commerce merchants such as
Amazon.com, Inc. also offer or are expected to offer informational and
community features, (such as news, stock quotes, sports coverage, Yellow
Pages and email listings, weather news, chat services, message boards, email,
personal calendaring and online store hosting services) that may be
competitive with the services we offer. For example, Netscape recently
significantly enhanced its Netcenter service as a "gateway" website through
commercial relationships with certain of our competitors, including Excite.
A number of companies, including Hotmail (acquired by Microsoft) and
WhoWhere? Inc. (recently acquired by Lycos), offer Web-based email service
similar to those we offer. These companies are expected to continue to
provide such services in tandem with larger navigational sites and online
services. AOL recently acquired Mirabilis, a provider of "ICQ" instant
Internet messaging software and services that compete with our Yahoo! Pager
offering. The ICQ user base will provide AOL with an additional platform for
distribution of AOL's other navigation, information and communications
services that compete with ours. Several companies, including Microsoft and
AOL, also are developing or currently offer online information services for
local markets, which compete with our regional Yahoo! online properties. As
a result of our recent acquisition of Viaweb Inc., we face competition in the
market for hosting online merchant stores, including companies such as iCat
Corporation. We also face intense competition in international markets,
including U.S. companies, media and online companies, and Internet service
providers that are already well established in those foreign markets.
CONSOLIDATION OF PRODUCTS OFFERED BY WEB BROWSERS AND OTHER INTERNET
POINTS OF ENTRY. We face competition from providers of software and other
Internet products and services that incorporate search and retrieval features
into their offerings. For example, Web browsers offered by Netscape and
Microsoft increasingly incorporate prominent search buttons that direct
search traffic to competing services. These features could make it more
difficult for Internet users to find and use our products and services.
Netscape recently announced an agreement with Excite under which Excite will
be the most prominent navigational service within the Netcenter website. In
the future, Netscape, Microsoft and other browser suppliers may also more
tightly integrate products and services similar to ours into their browsers
or their browsers' pre-set home pages. In addition, entities that sponsor or
maintain high-traffic websites or that provide an initial point of entry for
Internet users, such as the Regional Bell Operating Companies, long-distance
providers, cable companies, or Internet Service Providers ("ISPs") such as
Microsoft and AOL, currently offer and could further develop, acquire or
license Internet search and navigation functions and community and
communications services that compete with those we offer. Any of these
companies could take actions that would make it more difficult for consumers
to find and use Yahoo! services. For example,
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Microsoft recently announced that it will feature and promote Internet search
engine services provided by Inktomi in the Microsoft Network and other
Microsoft online properties. We expect that such search services may be
tightly integrated into future versions of the Microsoft operating system,
the Internet Explorer browser, and other software applications, and that
Microsoft will promote such services within the Microsoft Network or through
other Microsoft affiliated end-user services such as MSNBC or WebTV Networks,
Inc. Microsoft may have a competitive advantage because its Internet
navigational offerings are more conveniently accessed by users than ours.
COMPETITION FOR ADVERTISING EXPENDITURES. We compete with online services,
other website operators and advertising networks, as well as traditional offline
media such as television, radio and print for a share of advertisers' total
advertising budgets. We believe that the number of companies selling Web-based
advertising and the available inventory of advertising space has recently
increased substantially. Accordingly, we may face increased pricing pressure
for the sale of advertisements, which could reduce our advertising revenues. In
addition, our sales may be adversely affected to the extent that our competitors
offer superior advertising services that better target users or provide better
reporting of advertising results.
PRINCIPAL COMPETITIVE FACTORS. We believe that the principal competitive
factors in our markets are:
- brand recognition;
- ease of use;
- comprehensiveness;
- independence;
- quality and responsiveness of search results and other services;
- the availability of high-quality, targeted content and focused
value-added products and services;
- access to end users; and
- with respect to advertisers and sponsors, the number of users,
duration and frequency of visits, and user demographics.
Competition among current and future suppliers of Internet navigational and
informational services, high-traffic websites and ISPs, as well as competition
with other media for advertising placements, could result in significantly lower
prices for advertising and reductions in advertising revenues. We also face
competition with respect to the acquisition of strategic businesses and
technologies.
Many of our existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical, marketing and
distribution resources than we do. In addition, providers of Internet tools
and services may be acquired by, receive investments from, or enter into
other commercial relationships with larger, well-established and
well-financed companies, such as Microsoft and AOL. For example, AOL is a
significant shareholder of Excite, and a version of the Excite service (AOL
NetFind) has been designated as the exclusive Internet search service for use
by AOL's subscribers. In addition, well-established traditional media
companies may acquire, invest or otherwise establish commercial relationships
with our competitors,
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such as NBC's recent investment in CNET's Snap service or Disney's investment
in Infoseek. These larger companies may use their substantial media
resources to promote and enhance their own services. Greater competition
resulting from such relationships could have a material adverse effect on our
business, operating results, and financial condition.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET; TECHNOLOGICAL CHANGE
Our future success is dependent upon continued growth in the use of the
Internet and the Web in order to support the sale of advertising on our online
media properties. Web-based advertising is relatively new, and it is difficult
to predict the extent of further growth, if any, in Web advertising
expenditures. The Internet may not prove to be a viable commercial marketplace
for a number of reasons, including lack of acceptable security technologies,
potentially inadequate development of the necessary infrastructure, or timely
development and commercialization of performance improvements. To the extent
that the Internet continues to experience significant growth in the number of
users and level of use, the Internet infrastructure may not be able to support
the demands placed upon it by such growth and the performance or reliability of
the Web may be adversely affected.
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards and customer demands,
and frequent new product introductions and enhancements. To the extent that
higher bandwidth Internet access becomes more widely available through cable
modems or other technologies, we may be required to make significant changes to
the design and content of our online properties in order to compete effectively.
Failure to effectively adapt to these or any other technological developments
could adversely affect our business, operating results, and financial condition.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF OUR PRODUCTS AND MEDIA PROPERTIES
The markets for our products and media properties have only recently begun
to develop, are rapidly evolving, and are increasingly competitive. Demand and
market acceptance for recently introduced products and services are subject to a
high level of uncertainty and risk. It is difficult for us to predict whether,
or how fast, these markets will grow. We cannot guarantee either that the
market for our products and media properties will continue to develop or that
demand for our products or media properties will be sustainable. If the market
develops more slowly than expected or becomes saturated with competitors, or if
our products and media properties do not sustain market acceptance, our
business, operating results, and financial condition will be materially and
adversely affected.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
We believe that establishing and maintaining the Yahoo! brand is a
critical aspect of our efforts to attract and expand our user and advertiser
base. We also believe that the importance of brand recognition will increase
due to the growing number of Internet sites and the relatively low barriers
to entry. Promotion and enhancement of the Yahoo! brand
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will depend largely on our success in providing high-quality products and
services. In order to attract and retain Internet users and to promote and
maintain the Yahoo! brand, we may find it necessary to increase expenditures
devoted to creating and maintaining brand loyalty. In the event of any
breach or alleged breach of security or privacy involving our services, or if
any third party undertakes illegal or harmful actions utilizing our
community, communications or commerce services, we could suffer substantial
adverse publicity and impairment of our brand and reputation. If we are
unable to provide high-quality products and services or otherwise fail to
promote and maintain our brand, or if we incur excessive expenses in an
attempt to improve our products and services or promote and maintain our
brand, our business, operating results, and financial condition will be
materially and adversely affected.
RELIANCE ON ADVERTISING REVENUES AND UNCERTAIN ADOPTION OF THE WEB AS AN
ADVERTISING MEDIUM
We derive a majority of our revenues from the sale of advertisements on our
Web pages under short-term contracts. Most of our advertising customers have
limited experience with the Web as an advertising medium. Our ability to
generate significant advertising revenues will depend upon, among other things:
- advertisers' acceptance of the Web as an effective and sustainable
advertising medium;
- the development of a large base of users of our services possessing
demographic characteristics attractive to advertisers; and
- our ability to continue to develop and update effective advertising
delivery and measurement systems.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising. We cannot guarantee that such standards
will develop sufficiently to support Web-based advertising as a significant
advertising medium. Nor can we guarantee that the advertisers will determine
that banner advertising, which comprises the majority of our revenues, is an
effective advertising medium. We may not be able to effectively transition to
any other forms of Web-based advertising, should such other forms prove more
popular. Certain advertising filter software programs are available that limit
or remove advertising from an Internet user's desktop. Such software, if
generally adopted by users, may have a materially adverse effect upon the
viability of advertising on the Internet. Our advertising customers may not
accept the internal and third-party measurements of impressions received by
advertisements on Yahoo! online media properties; such measurements may contain
errors. We rely primarily on our internal advertising sales force for domestic
advertising sales, which involves additional risks and uncertainties, including
risks associated with the recruitment, retention, management, training, and
motivation of sales personnel. As a result of these factors, we may not be able
to sustain or increase current advertising sales levels. Failure to do so will
have a material adverse effect on our business, operating results, and financial
position.
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SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES
We depend substantially upon third parties for several critical elements of
our business including, among others, technology and infrastructure, content
development, and distribution activities.
TECHNOLOGY AND INFRASTRUCTURE. In May 1998, we entered into an agreement
with Inktomi under which Inktomi will provide text-based Web search results to
complement our directory and navigational guide. We will depend substantially
upon ongoing maintenance and technical support from Inktomi to ensure accurate
and rapid presentation of such search results to our customers. If Inktomi were
to prematurely terminate their agreement with us or fail to renew it, we would
have to make substantial expenditures to develop or license replacement
technology. This also could result in lower levels of use of our navigational
services. We rely on a private third-party provider, Frontier GlobalCenter,
Inc., for our principal Internet connections. Email and other service Internet
connections are provided by GTE. Any disruption in the Internet access provided
by these third-party providers or any failure of these third-party providers to
handle current or higher volumes of use could have a material adverse effect on
our business, operating results, and financial condition. We license technology
and related databases from third parties for certain elements of Yahoo!
properties, including, among others, technology underlying the delivery of news,
stock quotes and current financial information, chat services, street mapping,
telephone listings, and similar services. We have experienced and expect to
continue to experience interruptions and delays in service and availability for
such elements, including recent interruptions in our stock quote services.
Furthermore, we are dependent on hardware suppliers for prompt delivery,
installation, and service of servers and other equipment to deliver our products
and services. Any errors, failures, or delays experienced in connection with
these third-party technologies and information services could negatively impact
our relationship with users and adversely affect our brand and our business, and
could expose us to liabilities to third parties.
CONTENT DEVELOPMENT. A key element of our strategy involves the
implementation of Yahoo!-branded media properties targeted for interest
areas, demographic groups, and geographic areas. In these efforts, we rely
on content development and localization efforts of third parties. For
example, we have entered into an agreement with Ziff-Davis under which
Ziff-Davis publishes an online publication and a print magazine under the
Yahoo! brand. We also expect to rely on third-party affiliates, including
SOFTBANK in Japan and Korea, and Rogers Communications in Canada, to
localize, maintain, and promote these services and to sell advertising in
local markets. We cannot guarantee that our current or future third-party
affiliates will effectively implement these properties, or that their efforts
will result in significant revenue to us. Any failure of these parties to
develop and maintain high-quality and successful media properties also could
hurt the Yahoo! brand. Certain of these arrangements also require us to
integrate third parties' content with our services, which can require
significant programming and design efforts. In addition, we have granted
exclusivity provisions to certain third parties, and may in the future grant
additional exclusivity provisions. Such exclusivity provisions may have the
effect of preventing us, while they are in force, from accepting advertising
or sponsorship
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arrangements within a particular subject matter with respect to portions of
our network of media properties.
DISTRIBUTION RELATIONSHIPS. In order to create traffic for our online
properties and make them more attractive to advertisers and consumers, we have
certain distribution agreements and informal relationships with leading Web
browser providers (Microsoft and Netscape), operators of online networks and
leading websites, and computer manufacturers, such as Compaq Computer and
Gateway 2000. We believe these arrangements are important to the promotion of
our online media properties, particularly among new Web users who may first
access the Web through these browsers, services, websites, or computers. Our
business relationships with these companies are intended to increase the use and
visibility of Yahoo!. These distribution arrangements typically are not
exclusive, and may be terminated upon little or no notice. Success of our
online properties in international markets may require us to establish
relationships with ISPs in various countries and regional markets, many of which
have a dominant market share in their territories. Even if sufficient
distribution opportunities are available to us in the U.S. or abroad, third
parties that provide distribution may assess fees or otherwise impose additional
conditions on the listing of Yahoo! or our other online properties. Any failure
to cost-effectively obtain distribution could have a material adverse effect on
our business, results of operations, and financial condition.
We recently announced a co-branding and distribution arrangement with AT&T
(which superseded Yahoo!'s previous agreement with MCI Internet) under which we
will provide a Web-based online service in conjunction with dial-up Internet
access provided by AT&T WorldNet Service. In this arrangement, we will depend
on AT&T for, among other things, effective marketing and promotion efforts and
the provision of competitive Internet access service to customers. Any failure
by AT&T in these respects could materially impair the benefits we expect to
receive from this arrangement, and could negatively affect the Yahoo! brand.
VOLATILITY OF STOCK PRICE
The trading price of our stock has been and may continue to be subject to
wide fluctuations. During the ten months ended October 31, 1998, the closing
sale prices of the Company's Common Stock on the Nasdaq Stock Market ranged from
$29.03 to $131.50. The stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, and the market
prices for Internet-related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of such
companies. These broad market and industry fluctuations may adversely affect
the price of the stock, regardless of our operating performance.
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ENHANCEMENT OF YAHOO! PROPERTIES AND DEVELOPMENT OF NEW PROPERTIES
To remain competitive, we must continue to enhance and improve the
functionality, features, and content of the Yahoo! main site, as well as our
other branded media properties. We may not be able to successfully maintain
competitive user response times or implement new features and functions,
which will involve the development of increasingly complex technologies.
Personalized information services, such as our Web-based email services,
message boards, stock portfolios and Yahoo! Clubs community features, require
significantly greater expenses than our general services. We cannot
guarantee that these additional expenses will be offset by additional
revenues from personalized services.
Our future success also depends in part upon the timely processing of
website listings submitted by users and Web content providers, which have
increased substantially in recent periods. We have, from time to time,
experienced significant delays in the processing of submissions. Further
delays could have a material adverse effect on our goodwill among Web users
and content providers, and on our business.
A key element of our business strategy is the development and
introduction of new Yahoo!-branded online properties targeted for specific
interest areas, user groups with particular demographic characteristics, and
geographic areas. We may not be successful in developing, introducing, and
marketing such products or media properties and such properties may not
achieve market acceptance, enhance our brand name recognition, or increase
user traffic. Furthermore, enhancements of or improvements to Yahoo! or new
media properties may contain undetected errors that require significant
design modifications, resulting in a loss of customer confidence and user
support and a decrease in the value of our brand name. Our ability to
successfully develop additional targeted media properties depends on use of
Yahoo! to promote such properties. If use of Yahoo! does not continue to
grow, our ability to establish other targeted properties would be adversely
affected. If we fail to effectively develop and introduce such new
properties, or such properties fail to achieve market acceptance, our
business, results of operations, and financial condition could be adversely
affected.
RISKS OF EQUITY INVESTMENTS IN OTHER COMPANIES
We have made equity investments in affiliated companies that are
involved in the commercialization of Yahoo!-branded online properties, such
as versions of Yahoo! localized for foreign markets. These affiliated
companies typically are in an early stage of development and may be expected
to incur substantial losses. Any investments in such companies may not
result in any return, nor can there be any assurance as to the timing of any
such return, or that we may lose our entire investment. As a result, we have
recorded and expect to continue to record a share of the losses in such
affiliates attributable to our ownership. We also have made equity
investments in non-affiliated companies involved in the development of
technologies or services that are complementary or related to the Company's
business, such as our recent investments in GeoCities, broadcast.com inc.
(formerly known as AudioNet), Impulse Buy Network, CDnow, Inc., and E-Loan
Inc. We intend to continue to make significant additional investments in
such companies in
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the future. Losses resulting from such investment could have a material
adverse effect on our operating results.
MANAGEMENT OF POTENTIAL GROWTH AND INTEGRATION OF ACQUISITIONS
Our recent growth has placed a significant strain on our managerial,
operational, and financial resources. To manage our growth, we must continue
to implement and improve our operational and financial systems and to expand,
train, and manage our employee base. The process of managing advertising
within large, high traffic websites such as those in the Yahoo! network is an
increasingly important and complex task. We rely on both internal and
licensed third-party advertising inventory management and analysis systems.
To the extent that any extended failure of our advertising management system
results in incorrect advertising insertions, we may be exposed to "make good"
obligations with our advertising customers, which, by displacing advertising
inventory, could defer advertising revenues. Failure of our advertising
management systems to effectively scale to higher levels of use or to
effectively track and provide accurate and timely reports on advertising
results also could negatively affect our relationships with advertisers. Our
systems, procedures, or controls may not be adequate to support our
operations. Our management may not be able to achieve the rapid execution
necessary to fully exploit our market opportunity. Any inability to
effectively manage growth could have a material adverse effect on our
business, operating results, and financial condition.
As part of our business strategy, we have completed several acquisitions
and expect to enter into additional business combinations and acquisitions.
Acquisition transactions are accompanied by a number of risks, including:
- the difficulty of assimilating the operations and personnel of the
acquired companies;
- the potential disruption of our ongoing business and distraction of
management;
- the difficulty of incorporating acquired technology or content and
rights into our products and media properties;
- unanticipated expenses related to technology integration;
- the maintenance of uniform standards, controls, procedures and
policies;
- the impairment of relationships with employees and customers as a
result of any integration of new management personnel; and
- the potential unknown liabilities associated with acquired businesses.
We may not be successful in addressing these risks or any other problems
encountered in connection with such acquisitions.
RISK OF CAPACITY CONSTRAINTS AND SYSTEMS FAILURES
We are dependent on our ability to effectively serve a high volume of
use of our online media properties. Accordingly, the performance of our
online media properties is critical to our reputation, our ability to attract
advertisers to our websites, and to achieve market acceptance of our products
and media properties. Any system failure that causes an interruption or an
increase in response time of our products and media properties could
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result in less traffic to our websites and, if sustained or repeated, could
reduce the attractiveness of our products and media properties to advertisers
and licensees. An increase in the volume of queries conducted through our
products and media properties could strain the capacity of the software or
hardware we have deployed, which could lead to slower response time or system
failures. In addition, as the number of Web pages and users increase, our
products and media properties and infrastructure may not be able to scale
accordingly. Personalized information services, such as Web-based email and
calendaring services, involve increasingly complex technical and operational
challenges that may strain our development and operational resources. We may
not be able to successfully implement and scale such services to the extent
required by any growth in the number of users of such services. Failure to
do so may affect the goodwill of users of these services, or negatively
affect our brand and reputation.
We are dependent on third parties for much of our technology and
infrastructure. See "Substantial Dependence on Third Parties" above.
Our operations are susceptible to outages due to fire, floods, power
loss, telecommunications failures, break-ins, and similar events. In
addition, substantially all of our network infrastructure is located in
Northern California, an area susceptible to earthquakes. We do not have
multiple site capacity in the event of any such occurrence. Despite our
implementation of network security measures, our servers are vulnerable to
computer viruses, break-ins, and similar disruptions from unauthorized
tampering with our computer systems. We do not carry sufficient business
interruption insurance to compensate us for losses that may occur as a result
of any of these events. Such events could have a material adverse effect on
our business, operating results, and financial condition.
TRADEMARKS AND PROPRIETARY RIGHTS
We regard our copyrights, trademarks, trade dress, trade secrets, and
similar intellectual property as critical to our success. We rely upon
trademark and copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and others to
protect our proprietary rights. We have obtained the registration for
certain of our trademarks, including "Yahoo!" and "Yahooligans!". Effective
trademark, copyright, and trade secret protection may not be available in
every country in which our products and media properties are distributed or
made available through the Internet. We have licensed in the past, and may
license in the future, elements of our distinctive trademarks, trade dress,
and similar proprietary rights to third parties. While we attempt to ensure
that the quality of our brand is maintained by our licensees, our licensees
may take actions that could materially and adversely affect the value of our
proprietary rights or the reputation of our products and media properties.
We are aware that third parties have, from time to time, copied significant
portions of Yahoo! directory listings for use in competitive Internet
navigational tools and services. The distinctive elements of Yahoo! may not
be protectible under copyright law. We cannot guarantee that the steps we
have taken to protect our proprietary rights will be adequate.
Many parties are actively developing search, indexing, and related Web
technologies. We believe that such parties will continue to take steps to
protect these
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technologies, including seeking patent protection. As a result, we believe
that disputes regarding the ownership of such technologies are likely to
arise in the future. For example, we are aware that a number of patents have
been issued in the areas of electronic commerce, Web-based information
indexing and retrieval (including patents recently issued to one of our
direct competitors) and online direct marketing. We anticipate that
additional third-party patents will be issued in the future. Third parties
may assert infringement claims against us. We cannot guarantee that we would
be able to license such patents on reasonable terms. The Company may incur
substantial expenses in defending against third-party patent claims
regardless of the merit of such claims. Infringement may result in
substantial monetary liability.
DEPENDENCE ON KEY PERSONNEL
We are substantially dependent on the continued services of our key
personnel. We expect that we will need to hire additional personnel in all
areas. The competition for such personnel in our industry is intense,
particularly in the San Francisco Bay Area, where our corporate headquarters
are located. At times, we have experienced difficulties in hiring personnel
with the right training or experience, particularly in technical areas. We
do not maintain key person life insurance for any of our personnel. If we do
not succeed in attracting new personnel, or retaining and motivating existing
personnel, our business will be adversely affected.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
There are currently few laws or regulations directly applicable to
access to or commerce on the Internet. Due to the increasing popularity and
use of the Internet, it is possible that laws and regulations may be adopted,
covering issues such as user privacy, defamation, pricing, taxation, content
regulation, quality of products and services, and intellectual property
ownership and infringement. Such legislation could expose us to substantial
liability. Such legislation could also dampen the growth in use of the Web,
decrease the acceptance of the Web as a communications and commercial medium,
or require us to incur significant expense in complying with any new
regulations. Other nations, including Germany, have taken actions to
restrict the free flow of material deemed to be objectionable on the Web.
The European Union has recently adopted privacy and copyright directives that
may impose additional burdens and costs on our international operations. In
addition, several telecommunications carriers, including America's Carriers'
Telecommunications Association, are seeking to have telecommunications over
the Web regulated by the FCC in the same manner as other telecommunications
services. Because the growing popularity and use of the Web has burdened the
existing telecommunications infrastructure and many areas with high Web use
have begun to experience interruptions in phone service, local telephone
carriers, such as Pacific Bell, have petitioned the FCC to regulate ISPs and
OSPs and to impose access fees. Increased regulation or the imposition of
access fees could substantially increase the costs of communicating on the
Web, potentially decreasing the demand for our products and media properties.
A number of proposals have been made at the federal, state and local level
that would impose additional taxes on the sale of goods and services through
the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce, and could adversely affect the Company's
opportunity to derive
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financial benefit from such activities. Also, Congress recently passed (and
the President has signed into law) the Digital Millenium Copyright Act, which
is intended to reduce the liability of online service providers for listing
or linking to third-party websites that include materials that infringe
copyrights or other rights of others. Congress also recently passed (and the
President has signed into law) the Children's Online Protection Act and the
Children's Online Privacy Act, which will restrict the distribution of
certain materials deemed harmful to children and impose additional
restrictions on the ability of online services to collect user information
from minors. We are currently reviewing this legislation, and cannot
currently predict the effect, if any, that it would have on our business if
passed into law. There can be no assurance that such legislation will not
impose significant additional costs on our business or subject us to
additional liabilities. In addition, a number of other countries have
announced or are considering additional regulation. For example, the
European Commission is expected in the near future to propose a directive
concerning the liability of online service providers for activities that take
place using their services. Such laws and regulations could fundamentally
impair our ability to provide Internet navigation or other services, or
substantially increase the cost of doing so. Moreover, the applicability to
the Internet of existing laws governing issues such as property ownership,
copyright, defamation, obscenity, and personal privacy is uncertain. We may
be subject to claims that our services violate such laws. Any such new
legislation or regulation in the United States or abroad or the application
of existing laws and regulations to the Internet could have a material
adverse effect on our business, operating results, and financial condition.
Due to the global nature of the Web, it is possible that the governments
of other states and foreign countries might attempt to regulate our
transmissions or prosecute us for violations of their laws. We might
unintentionally violate such laws. Such laws may be modified, or new laws
enacted, in the future. Any such developments could have a material adverse
effect on our business, results of operations, and financial condition.
LIABILITY FOR THE COMPANY'S SERVICES
We host a wide variety of information, community, communications and
commerce services that enable individuals to exchange information, conduct
business and engage in various online activities. The law relating to the
liability of providers of these online services for activities of their users
is currently unsettled. Claims could be made against us for defamation,
negligence, copyright or trademark infringement, personal injury or other
theories based on the nature and content of information that may be posted
online by our users. Such claims have been brought, and sometimes
successfully pressed, against online service providers in the past. In
addition, we could be exposed to liability with respect to the selection of
listings that may be accessible through our Yahoo!-branded products and media
properties, or through content and materials that may be posted by users in
classifieds, message board, clubs, chat room, or other interactive
community-building services. Such claims might include, among others, that
by providing hypertext links to websites operated by third parties, we are
liable for copyright or trademark infringement or other wrongful actions by
such third parties through such websites, or that we are responsible for
legal injury caused by statements made to, or actions taken by, participants
in our message board services, Yahoo! Clubs, or other community building
services. It is also possible that if any information provided
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through our services, such as stock quotes, analyst estimates or other
trading information, contains errors, third parties could make claims against
us for losses incurred in reliance on such information. We offer Web-based
email services, which expose us to potential risks, such as liabilities or
claims resulting from unsolicited email (spamming), lost or misdirected
messages, illegal or fraudulent use of email, or interruptions or delays in
email service. Investigating and defending such claims is expensive, even to
the extent such claims do not result in liability.
We also periodically enter into arrangements to offer third-party
products and services under the Yahoo! brand or via distribution on Yahoo!
properties. For example, we recently announced an agreement with GeoCities
under which GeoCities will offer free home page services and certain related
products to Yahoo! users. We also recently announced an arrangement with
broadcast.com, an Internet-based broadcast network, whereby links to
broadcast.com's site and content will be distributed via Yahoo! properties.
These business arrangements involve additional legal risks, such as potential
liabilities for content posted by free home page users or made available by
other third-party providers. We may be subject to claims concerning such
services or content by virtue of our involvement in marketing, branding or
providing access to such services, even if we do not ourselves host, operate,
or provide such services. While our agreements with these parties often
provide that we will be indemnified against such liabilities, such
indemnification may not be adequate.
In October 1998, we acquired Yoyodyne, a direct marketing firm.
Yoyodyne's business involves substantial use of sweepstakes, contests and
similar promotional events in order to solicit user registration and
involvement in direct marketing relationships. Sweepstakes and contests are
subject to extensive government regulation throughout the world, including
different regulatory schemes under states and territories in the United
States, and may be subject to laws governing lotteries and gambling.
Although we intend to operate these events to fall within exemptions from
such laws, such exemptions may not be available. In addition, we anticipate
that in the near future substantial additional federal, state and
international regulations may be adopted relating to user privacy and the
collection and utilization of user information. To the extent that we do not
effectively comply with such regulations, or if such regulations materially
impair our ability to effectively utilize direct marketing, our business,
results of operations, and financial condition could be materially and
adversely affected.
POTENTIAL COMMERCE-RELATED LIABILITIES AND EXPENSES
As part of our business, we enter into agreements with sponsors, content
providers, service providers, and merchants under which we are entitled to
receive a share of revenue from the purchase of goods and services by users
of our online properties. Such arrangements may expose us to additional
legal risks and uncertainties, including potential liabilities to consumers
of such products and services. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or may
not be adequate to indemnify the Company for all liability that may be
imposed.
We recently began offering a Yahoo!-branded VISA credit card, which
includes a "rewards" program entitling card users to receive points that may
be redeemed for
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merchandise, such as books or music. This arrangement exposes us to certain
additional risks and expenses, including those relating to compliance with
consumer protection laws, loss of customer data, disputes over redemption
procedures and rules, products liability, sales taxation and liabilities
associated with any failure in performance by participating merchants.
In June 1998, we completed the acquisition of Viaweb, a provider of
software and reporting tools for the operation of online commerce websites.
We intend to use the Viaweb technology to host and promote online stores on
behalf of third-party merchants, the operation and maintenance of which will
be largely under the independent control of such merchants. These activities
expose us to a number of additional risks and uncertainties, including:
- potential liabilities for illegal activities that may be conducted by
participating merchants;
- products liability or other tort claims relating to goods or services
sold through hosted commerce sites;
- consumer fraud and false or deceptive advertising or sales practices;
- breach of contract claims relating to merchant transactions;
- claims that materials included in merchant sites or sold by merchants
through these sites infringe third-party patents, copyrights,
trademarks or other intellectual property rights, or are libelous,
defamatory or in breach of third-party confidentiality or privacy
rights;
- claims relating to any failure of merchants to appropriately collect
and remit sales or other taxes arising from e-commerce transactions;
and
- claims that may be brought by merchants as a result of their exclusion
from our commerce services or losses resulting from any downtime or
other performance failures in our hosting services.
Although we maintain liability insurance, insurance may not cover these
claims or may not be adequate. Even to the extent such claims do not result
in material liability, investigating and defending such claims is expensive.
In September 1998, we launched Yahoo! Auctions, a free service that
hosts online auctions for a wide variety of goods and services. Auction
services expose the Company to a number of significant additional risks. For
example, while we do not pre-screen the types of goods offered on Yahoo!
Auctions, we are aware that certain goods, such as alcohol, tobacco,
firearms, adult material and other goods that may be subject to regulation by
local, state or federal authorities may be traded on Yahoo! Auctions. We
might not be able to prevent the unlawful exchange of goods on our service,
and may be subject to civil or criminal liability for unlawful activities
carried out by users through our service. In addition, while we take no
responsibility for delivery of payment or goods to any user of Yahoo!
Auctions, we anticipate that users who did not receive the purchase price or
the goods that were to have been exchanged may register complaints with us or
seek to hold us liable. We also anticipate that we will receive complaints
from buyers as to the quality of the goods purchased through Yahoo! Auctions,
as well as complaints alleging that comments posted by participants of the
service concerning other participants are unfair or defamatory. Any claims
or litigation arising from Yahoo! Auctions could be
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costly. Any negative publicity generated as a result of fraudulent or
deceptive conduct by users of Yahoo! Auctions could damage our reputation and
diminish the value of our brand name. We have also received in the past, and
anticipate that we will receive in the future, communications alleging that
certain items sold through Yahoo! Auctions, or text and images posted by
users in auction listings, infringe third-party copyrights, trademarks or
other intellectual property rights. While our user policies prohibit the
sale of goods and posting of materials which may infringe third-party
intellectual property rights, an allegation of infringement may result in
costly litigation.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates
and, as a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with such "Year 2000"
requirements. We are in the process of assessing the Year 2000 issue and
expect to complete the program by the spring of 1999. We have not incurred
material costs to date in this process, and currently do not believe that the
cost of additional actions will have a material effect on our results of
operations or financial condition. Although we currently believe that our
systems are Year 2000 compliant in all material respects, our current systems
and products may contain undetected errors or defects with Year 2000 date
functions that may result in material costs. Although we are not aware of any
material operational issues or costs associated with preparing our internal
systems for the Year 2000, we may experience serious unanticipated negative
consequences (such as significant downtime for one or more Yahoo! media
properties) or material costs caused by undetected errors or defects in the
technology used in our internal systems. In addition, we utilize third-party
equipment, software and content, including non-information technology systems
("non-IT systems"), such as our security system, building equipment and
non-IT systems embedded microcontrollers that may not be Year 2000 compliant.
We are in the process of developing a plan to assess whether these third
parties are adequately addressing the Year 2000 issue and whether any of our
non-IT systems have material Year 2000 compliance problems. Failure of such
third-party equipment, software or content to operate properly with regard to
the year 2000 and thereafter could require us to incur unanticipated expenses
to remedy any problems, which could have a material adverse effect on our
business, results of operations, and financial condition. We have not yet
fully developed a comprehensive contingency plan to address situations that
may result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing such a plan may itself
be material. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
Furthermore, the purchasing patterns of advertisers may be affected by Year
2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. We do not currently have any
information about the Year 2000 status of our advertising customers.
However, these expenditures may result in reduced funds available for Web
advertising or sponsorship of Web services, which could have a material
adverse effect on our business, results of operations, and financial
condition.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
A key part of our strategy is to develop Yahoo!-branded online
properties in international markets. We have developed and operate, through
joint ventures with SOFTBANK and related entities, versions of Yahoo!
localized for Japan, Germany, France, the United Kingdom, and Korea. We
offer a version of Yahoo! localized for Canada under an agreement with Rogers
Communications, and we operate localized or mirror versions of Yahoo! through
wholly-owned subsidiaries in Australia, Denmark, Italy, Norway, Sweden, and
Singapore. We also offer Yahoo! guides in Spanish and Mandarin Chinese.
To date, we have only limited experience in developing localized
versions of our products and marketing and operating our products and
services internationally. We rely on the efforts and abilities of our
foreign business partners in such activities. We also believe that in light
of substantial anticipated competition, we will need to move quickly into
international markets in order to effectively obtain market share. We may
not be able to do so. We expect to continue to experience higher costs as a
percentage of revenues in connection with international online properties.
International markets we have selected may not develop at a rate that
supports our level of investment. In particular, international markets may
be slower in adoption of the Internet as an advertising and commerce medium.
We may experience difficulty in managing international operations as a result
of distance as well as language and cultural differences. We or our partners
may not be able to successfully market and operate our products and services
in foreign markets. In addition, in a number of international markets we
face substantial competition from ISPs, some of which have a dominant market
share in their territories, that offer or may offer their own navigational
service.
In addition to uncertainty about our ability to continue to generate
revenues from our foreign operations and expand our international presence,
there are certain risks inherent in doing business on an international level,
including:
- unexpected changes in regulatory requirements;
- trade barriers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- problems in collecting accounts receivable;
- political instability;
- export restrictions;
- export controls relating to encryption technology;
- seasonal reductions in business activity in certain other parts of the
world; and
- potentially adverse tax consequences.
One or more of these factors could have a material adverse effect on our future
international operations and, consequently, on our business, operating results,
and financial condition.
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CONCENTRATION OF STOCK OWNERSHIP
As of September 30, 1998, our directors and executive officers, and their
affiliates beneficially owned approximately 58% of the outstanding stock. As of
September 30, 1998, SOFTBANK owned approximately 30% of the outstanding stock.
As a result of their ownership, the directors, executive officers, and
significant shareholders (including SOFTBANK) collectively are able to control
all matters requiring shareholder approval, including the election of directors
and approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in control
of the Company.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors has the authority to issue up to 10,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the shareholders. The rights of the holders of
Common Stock may be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company without further action by the
shareholders and may adversely affect the voting and other rights of the
holders of Common Stock. We have no present plans to issue shares of
Preferred Stock. Further, certain provisions of our charter documents,
including provisions eliminating the ability of shareholders to take action
by written consent and limiting the ability of shareholders to raise matters
at a meeting of shareholders without giving advance notice, may have the
effect of delaying or preventing changes in control or management of the
Company, which could have an adverse effect on the market price of the stock.
In addition, our charter documents do not permit cumulative voting and
provide that, at such time as the Company has at least six directors, the
Board of Directors will be divided into two classes, each of which serves for
a staggered two-year term, which may make it more difficult for a third-party
to gain control of the Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1998, we had outstanding 97,858,392 shares of Common
Stock, and options to purchase a total of 24,492,540 shares of Common Stock
under our stock option plans, including shares issued and options assumed in the
recent acquisitions of Viaweb and WebCal. Of these shares, an estimated number
of 6,643,218 shares recently issued in connection with acquisitions and
investments have been available for resale pursuant to registration statements
filed by the Company with the SEC. Sales of substantial amounts of such shares
in the public market or the prospect of such sales could adversely affect the
market price of the stock.
36
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks, copyrights and other intellectual property rights,
and a variety of claims arising in connection with the Company's email, message
boards, and other communications and community features, such as claims alleging
defamation and invasion of privacy. The Company is not currently aware of any
legal proceedings or claims that the Company believes will have, individually or
in the aggregate, a material adverse effect on the Company's financial position
or results of operations.
ITEM 2. CHANGES IN SECURITIES
Yahoo! Inc. made the following unregistered sales of the Company's Common
Stock in the quarter ended September 30, 1998:
<TABLE>
<CAPTION>
PERSONS OR CLASS
TRANSACTION AMOUNT OF NAME OF UNDERWRITER CONSIDERATION OF PERSONS TO WHOM THE EXEMPTION FROM
DATE SECURITIES SOLD OR PLACEMENT AGENT RECEIVED SECURITIES WERE SOLD REGISTRATION CLAIMED
- ----------- --------------- ------------------- ------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
7/14/98 2,726,880 Shares (1) None (1) SOFTBANK Holdings, Inc. Section 4(2) of the
Securities Act of 1933,
as amended
7/17/98 270,954 Shares (2) None (2) Stockholders of WebCal Section 4(2) of the
Corporation Securities Act of 1933,
as amended
</TABLE>
(1) Pursuant to a Stock Purchase Agreement dated July 7, 1998, between Yahoo!
and SOFTBANK Holdings, Inc., on July 14, 1998 the Company received
$250,000,000 in exchange for 2,726,880 shares of Yahoo! Common Stock.
(2) Pursuant to an Agreement and Plan of Merger dated July 8, 1998, by and
among Yahoo!, WC Acquisition Corporation, a wholly-owned subsidiary of
Yahoo!, and WebCal Corporation ("WebCal"), on July 17, 1998 (the effective
date of the acquisition), all outstanding shares of WebCal capital stock
were converted into 270,954 shares of Yahoo! Common Stock. The resale of
these shares has been registered on a Registration Statement on Form S-3
filed with the Securities and Exchange Commission on September 4, 1998.
37
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The exhibits listed in the accompanying Index to Exhibits are filed as
part of this Report on Form 10-Q.
a. Reports on Form 8-K:
1) On July 9, 1998, the Company filed a report on Form 8-K
announcing its financial results for the quarter ended
June 30, 1998, a 2-for-1 stock split, and a $250,000,000
private placement of Common Stock to SOFTBANK Holdings, Inc.
2) On September 4, 1998, the Company filed a report on Form 8-K/A
(as an amended to Form 8-K filed on July 9, 1998) to announce
that the number of shares of Common Stock registered for sale
under previous Registration Statements on Forms S-3 and S-8
have been deemed to be increased to include the shares of
Common Stock issued in connection with the two-for-one stock
split effected on July 17, 1998.
38
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
YAHOO! INC.
Dated: November 13, 1998 By: /s/ GARY VALENZUELA
--------------------
Gary Valenzuela
Senior Vice President, Finance
and Administration, and Chief
Financial Officer
(Principal Financial Officer)
Dated: November 13, 1998 By: /s/ JAMES J. NELSON
--------------------
James J. Nelson
Vice President, Finance
(Principal Accounting Officer)
39
<PAGE>
YAHOO! INC.
INDEX TO EXHIBITS
EXHIBIT
TITLE NO.
- ----- -------
Financial Data Schedule............................................ 27
40
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE YAHOO!
INC. FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN TIS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 161,867,000
<SECURITIES> 226,710,000
<RECEIVABLES> 23,867,000
<ALLOWANCES> 4,027,000
<INVENTORY> 0
<CURRENT-ASSETS> 412,091,000
<PP&E> 16,862,000
<DEPRECIATION> 6,096,000
<TOTAL-ASSETS> 497,381,000
<CURRENT-LIABILITIES> 58,148,000
<BONDS> 0
0
0
<COMMON> 23,000
<OTHER-SE> 438,259,000
<TOTAL-LIABILITY-AND-EQUITY> 497,381,000
<SALES> 0
<TOTAL-REVENUES> 125,036,000
<CGS> 0
<TOTAL-COSTS> 14,234,000
<OTHER-EXPENSES> 125,040,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,370,000)
<INCOME-TAX> 9,682,000
<INCOME-CONTINUING> (15,052,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,052,000)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
