<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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; reflects the two-for-one stock
split which was effective on August 3, 1998.
Class Outstanding at June 30, 1998
- -------------------------------- ----------------------------
Common Stock, $0.00033 par value 93,683,120
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AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
After discussions with the Staff at the Securities and Exchange Commission (the
"Staff"), Yahoo! has adjusted the allocation of the purchase price related to
the June 1998 acquisition of Viaweb Inc. Although Yahoo!, with the concurrence
of its independent accountants, believes that its original accounting treatment
was in accordance with generally accepted accounting principles, it has accepted
the Staff's view with respect to these matters. This amended filing contains
related financial information and disclosures as of and for the three and six
month periods ended June 30, 1998. See Note 1 to the Condensed Consolidated
Financial Statements.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(unaudited and restated):
Condensed Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes in Securities 40
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 42
</TABLE>
3
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YAHOO! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
(restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 89,278,000 $ 62,538,000
Short-term investments in marketable securities 53,852,000 27,772,000
Accounts receivable, net 16,795,000 10,986,000
Prepaid expenses 4,211,000 5,893,000
-------------- --------------
Total current assets 164,136,000 107,189,000
Long-term investments in marketable securities 4,106,000 16,702,000
Property and equipment, net 8,987,000 7,035,000
Investment in Yahoo! Japan 2,864,000 2,828,000
Other assets 46,036,000 8,130,000
-------------- --------------
$ 226,129,000 $ 141,884,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,483,000 $ 4,711,000
Accrued expenses and other current liabilities 19,490,000 12,481,000
Deferred revenue 18,533,000 4,852,000
Due to related parties 1,517,000 1,412,000
-------------- --------------
Total current liabilities 44,023,000 23,456,000
-------------- --------------
Deferred tax liability 6,000,000 -
Minority interests in consolidated subsidiaries 961,000 716,000
Shareholders' equity:
Common Stock 21,000 20,000
Additional paid-in capital 206,636,000 146,106,000
Accumulated deficit (31,166,000) (27,971,000)
Cumulative translation adjustment (346,000) (443,000)
-------------- --------------
Total shareholders' equity 175,145,000 117,712,000
-------------- --------------
$ 226,129,000 $ 141,884,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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YAHOO! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(restated) (restated)
<S> <C> <C> <C> <C>
Net revenues $ 41,210,000 $ 14,107,000 $ 71,416,000 $ 24,172,000
Cost of revenues 5,137,000 2,318,000 9,054,000 3,755,000
------------- ------------- ------------- -------------
Gross profit 36,073,000 11,789,000 62,362,000 20,417,000
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 20,044,000 9,448,000 36,140,000 16,863,000
Product development 4,892,000 2,444,000 9,426,000 4,693,000
General and administrative 2,227,000 1,613,000 4,219,000 2,910,000
Amortization of intangibles 290,000 - 290,000 -
Other - nonrecurring costs 15,000,000 21,245,000 15,000,000 21,245,000
------------- ------------- ------------- -------------
Total operating expenses 42,453,000 34,750,000 65,075,000 45,711,000
------------- ------------- ------------- -------------
Loss from operations (6,380,000) (22,961,000) (2,713,000) (25,294,000)
Investment income, net 1,848,000 1,227,000 3,294,000 2,618,000
Minority interests in operations
of consolidated subsidiaries 112,000 182,000 355,000 384,000
------------- ------------- ------------- -------------
Income (loss) before income taxes (4,420,000) (21,552,000) 936,000 (22,292,000)
Provision for income taxes 3,060,000 - 4,131,000 -
------------- ------------- ------------- -------------
Net loss $ (7,480,000) $(21,552,000) $ (3,195,000) $(22,292,000)
============= ============= ============= =============
Net loss per share - basic and diluted $ (0.08) $ (0.25) $ (0.04) $ (0.26)
============= ============= ============= =============
Weighted average common shares and equivalents
used in per share calculation - basic and diluted 89,008,000 86,292,000 87,556,000 85,378,000
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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YAHOO! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
June 30, June 30,
1998 1997
------------- -------------
(restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,195,000) $(22,292,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,829,000 862,000
Compensation expense on stock option grants 314,000 173,000
Minority interests in operations of consolidated subsidiaries (355,000) (384,000)
Nonrecurring costs 15,000,000 21,245,000
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable, net (5,757,000) (2,140,000)
Prepaid expenses and other assets 2,340,000 (5,826,000)
Accounts payable (440,000) (140,000)
Accrued expenses and other current liabilities 5,133,000 2,109,000
Deferred revenue 13,675,000 519,000
Due to related parties 105,000 (33,000)
------------- -------------
Net cash provided by (used in) operating activities 29,649,000 (5,907,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (3,556,000) (2,289,000)
Cash acquired in acquisition of Viaweb Inc. (Note 4) 26,000 -
Purchases of investments in marketable securities (60,726,000) (17,425,000)
Sales and maturities of investments in marketable securities 47,242,000 50,594,000
------------- -------------
Net cash provided by (used in) investing activities (17,014,000) 30,880,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 13,408,000 2,113,000
Proceeds from minority investors 600,000 600,000
Proceeds from lease obligations - 1,151,000
------------- -------------
Net cash provided by financing activities 14,008,000 3,864,000
------------- -------------
Effect of exchange rate changes on cash and cash equivalents 97,000 (24,000)
------------- -------------
Net change in cash and cash equivalents 26,740,000 28,813,000
Cash and cash equivalents at beginning of period 62,538,000 33,547,000
------------- -------------
Cash and cash equivalents at end of period $ 89,278,000 $ 62,360,000
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
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YAHOO! INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY, BASIS OF PRESENTATION, AND RESTATEMENT
Yahoo! Inc., including its subsidiaries ("Yahoo!" or the "Company"), is
a global Internet media company that offers a network of branded World Wide Web
(the "Web") programming serving 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. The condensed consolidated financial statements for the
periods ended June 30, 1997 have been restated to reflect the October 1997
acquisition of Four11 Corporation which was accounted for as a pooling of
interests. All share numbers in this Report reflect the two-for-one stock split
which was effective on August 3, 1998.
The accompanying condensed consolidated financial statements as of June
30, 1998 and for the three and six month periods ended June 30, 1998 have been
restated to reflect a change in the original accounting for the purchase price
allocation related to the June 1998 acquisition of Viaweb Inc. ("Viaweb", see
Note 4). After discussions with the Staff of the Securities and Exchange
Commission (the "Staff"), the Company has revised the original accounting for
the purchase price allocation and the related amortization of intangibles.
Although Yahoo!, with the concurrence of its independent accountants, believes
that its original accounting treatment was in accordance with generally accepted
accounting principles, it has accepted the Staff's view with respect to these
matters. This resulted in a reduction in the amount of the charge for in-process
research and development from $44,100,000 to $15,000,000 and an increase in the
amounts allocated to purchased technology, deferred tax liability, and goodwill
from $3,800,000, $0, and $432,000 to $15,000,000, $6,000,000, and $24,332,000,
respectively. The restatement does not affect previously reported net cash flows
for the periods. The effect of this reallocation on previously reported
condensed consolidated financial statements as of and for the three and six
month periods ended June 30, 1998 is as follows (in thousands except per share
amounts, unaudited):
7
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
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Statements of Operations: As Reported Restated As Reported Restated
----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Cost of revenues $4,720 $5,137 $8,637 $9,054
Product development 5,010 4,892 9,544 9,426
Amortization of intangibles - 290 - 290
Other - nonrecurring costs 44,100 15,000 44,100 15,000
Loss from operations (34,891) (6,380) (31,224) (2,713)
Net loss (35,991) (7,480) (31,706) (3,195)
Net loss per share -
basic and diluted ($0.40) ($0.08) ($0.36) ($0.04)
<CAPTION>
June 30, 1998
-------------
Balance Sheets: As Reported Restated
----------- ---------
<S> <C> <C>
Other assets $11,525 $46,036
Total assets 191,618 226,129
Deferred tax liability - 6,000
Accumulated deficit (59,677) (31,166)
Total shareholders' equity $146,634 $175,145
</TABLE>
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.
8
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NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." 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 gain/loss on available for sale securities. For the three and six
month periods ended June 30, 1998 and 1997, the difference between net loss, as
reported, and comprehensive income relates solely to the change in the
cumulative translation adjustment for the respective periods which was not
material to these financial statements.
NOTE 4 - ACQUISITION OF VIAWEB INC.
On June 10, 1998, the Company completed the acquisition of all
outstanding shares of 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.
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 $15,000,000
Purchased technology 15,000,000
Intangible assets 24,332,000
Deferred tax liability (6,000,000)
Tangible assets acquired 571,000
Liabilities assumed (344,000)
-----------
$48,559,000
===========
</TABLE>
As a result of discussions with the Staff, the Company has adjusted
the allocation of the purchase price originally reported. Among the factors
considered in discussions with the Staff in determining the amount of the
allocation of the purchase price to in-process research and development were
various factors such as estimating the stage of development of each
in-process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenues generated from
such projects, and discounting the net cash flows, in addition to other
assumptions. The remaining identified intangibles, including the value of
purchased
9
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technology and other intangibles will be amortized on a straight-line basis
over three and seven years, respectively. Amortization expense of purchased
technology and other intangible assets was $417,000 and $290,000,
respectively, during the quarter ended June 30, 1998. A deferred tax
liability has been recognized for the difference between the assigned values
for book purposes and the tax bases of assets in accordance with the
provisions of Statement of Financial Accounting Standard No. 109.
In addition, other factors were considered in discussions with the
Staff in determining the value assigned to purchased in-process technology
such as research projects in areas supporting the on-line store technology
(including significant enhancement to the ability of the product to support
multiple users and multiple servers), developing functionality to support the
ability to process credit card orders, and enhancing the product's user
interface developing functionality that would allow the product to be used
outside of the United States.
If none of these projects is successfully developed, the Company's
sales and profitability may be adversely affected in future periods.
Additionally, the failure of any particular individual project in-process could
impair the value of other intangible assets acquired. The Company expects to
begin to benefit from the purchased in-process technology in late 1998.
NOTE 5 - 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 6 - LEGAL PROCEEDINGS
As previously reported, in July and October 1997, GTE New Media
Services Incorporated ("GTE New Media") filed lawsuits in state court in Dallas,
Texas and in federal court in the District of Columbia, against Netscape and the
Company, which lawsuits relate to certain Yellow Pages services offered in the
Netscape Guide By Yahoo!. In June 1998, the Company entered into agreements with
GTE New Media that provide for the dismissal of, and mutual release with respect
to, both lawsuits without any payment or consideration by the Company, and, with
respect to the Texas case, subject only to certain conditions that the Company
anticipates will be fulfilled by October 1998.
10
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Satisfaction of these conditions is not expected to have a material effect on
the Company's financial position or results of operations.
NOTE 7 - SUBSEQUENT EVENTS
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) will be entitled to one additional share for every share held on
that date. All share numbers in this Report reflect the two-for-one stock split
which was effective on August 3, 1998.
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 exchange for 2,726,880 newly issued shares of Yahoo! Common
Stock, bringing SOFTBANK's total ownership to approximately 31%. 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). These restrictions terminate on the
earlier of March 12, 2001, or in the event that the Company's founders, David
Filo and Jerry Yang, own beneficially less than 7,500,000 shares of the
Company's Common Stock, in the aggregate. Also, SOFTBANK's maximum permitted
percentage ownership increases to 49.5% of the Company's capital stock
(excluding options and warrants to purchase capital stock) in the event that
Messrs. Filo and Yang beneficially own in the aggregate less than 12,000,000
shares of Common Stock. The agreements also prohibit SOFTBANK from disposing of
shares representing more than 5% of the Company's capital stock without approval
of the Company's Board of Directors (other than in public market sales under
Rule 144 or pursuant to a registration statement filed by the Company).
11
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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 network of
branded World Wide Web programming that serves 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. Yahoo! Inc.
provides targeted Internet resources and communications services for a broad
range of audiences, based on demographic, key-subject and geographic interests.
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. 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. The condensed consolidated financial statements for the period ended
June 30, 1997 have been restated to reflect the acquisition. 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.
On June 10, 1998, the Company completed the acquisition of all
outstanding shares of 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.
12
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The total purchase price of the acquisition was $48,559,000 including
acquisition expenses of $1,750,000. Of the purchase price, $15,000,000 was
assigned to in-process research and development and expensed upon the
consummation of the acquisition. The purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values.
As a result of discussions with the Staff, the Company has adjusted
the allocation of the purchase price originally reported. Among the factors
were considered in discussions with the Staff in determining the amount of the
allocation of the purchase price to in-process research and development were
various factors such as estimating the stage of development of each
in-process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenues generated from
such projects, and discounting the net cash flows, in addition to other
assumptions. The remaining identified intangibles, including the value of
purchased technology and other intangibles will be amortized on a
straight-line basis over three and seven years, respectively. Amortization
expense of purchased technology and other intangible assets was $417,000 and
$290,000, respectively, during the quarter ended June 30, 1998. A deferred tax
liability has been recognized for the difference between the assigned values
for book purposes and the tax bases of assets in accordance with the
provisions of Statement of Financial Accounting Standard No. 109.
In addition, other factors were considered in discussions with the
Staff in determining the value assigned to purchased in-process technology
such as research projects in areas supporting the on-line store technology
(including significant enhancement to the ability of the product to support
multiple users and multiple servers), developing functionality to support the
ability to process credit card orders, and enhancing the product's user
interface developing functionality that would allow the product to be used
outside of the United States.
If none of these projects is successfully developed, the Company's
sales and profitability may be adversely affected in future periods.
Additionally, the failure of any particular individual project in-process could
impair the value of other intangible assets acquired. The Company expects to
begin to benefit from the purchased in-process technology in late 1998.
The Company's revenues are derived principally from the sale of banner
advertisements on short-term contracts. The Company's standard rates for
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
advertising commitments has ranged from one week to two years. During 1997, the
Company also began selling a combination of sponsorship and banner advertising
contracts. In general, these sponsorship advertising contracts have longer terms
(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
Web site. 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
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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 significant.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $41,210,000 and $71,416,000 for the second quarter
and first half of 1998, respectively, which represent increases of 192% and 195%
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 and the trend towards larger purchases and for a longer
duration. Approximately 1,800 customers advertised on Yahoo! online media
properties during the quarter ended June 30, 1998 as compared to approximately
900 during the second quarter of 1997. No one customer accounted for 10% or more
of revenues during the three or six month periods ended June 30, 1998 and 1997.
International revenues have accounted for less than 10% of net revenues during
the three and six month periods ended June 30, 1998 and 1997. Barter revenues
also represented less than 10% of net revenues during those periods. Advertising
purchases by SOFTBANK, a 29% shareholder of the Company at June 30, 1998, and
its related companies accounted for approximately 1% of net revenues in the
second quarter and first half of fiscal 1998 as compared to 5% and 7% 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
Company's Web pages or that market prices for Web-based advertising will not
decrease due to competitive or other factors. Additionally, while the Company
has experienced strong revenue growth during the first half of 1998, management
does not believe that this level of revenue growth will be sustained in future
periods.
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, amortization of purchased technology,
equipment depreciation, and compensation. Cost of revenues, as restated, were
$5,137,000 and $9,054,000 for the second quarter and first half of 1998,
respectively, or 12% and 13% of net revenues, as
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compared to $2,318,000 and $3,755,000, or 16% 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, the increased usage of these
properties, and the amortization of the technology purchased in the Viaweb
acquisition. The Company anticipates that its content and Internet connection
expenses will increase with the quantity and quality of content available on
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 115 million page views per day in June 1998 compared
with an average of over 38 million page views per day in June 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 8 million page views per day in June 1998 and an
average of over 3 million page views per day in June 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 remainder of 1998.
SALES AND MARKETING
Sales and marketing expenses were $20,044,000 for the quarter ended
June 30, 1998, or 49% of net revenues as compared to $9,448,000, or 67% of net
revenues for the quarter ended June 30, 1997. For the six months ended June 30,
1998, sales and marketing expenses were $36,140,000, or 51% of net revenues as
compared to $16,863,000, or 70% of net revenues for the six months ended June
30, 1997. Sales and marketing expenses consist primarily of advertising and
other marketing related expenses (which include Netscape Premier
Provider/Distinguished Provider and Netscape Guide amortization 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 subsequent to June 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 and continues to build its direct
sales organization. As a percentage of net revenues, the Company currently
anticipates that sales and marketing expenses may trend somewhat lower over the
remainder of 1998.
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PRODUCT DEVELOPMENT
Product development expenses, as restated, were $4,892,000 for the
quarter ended June 30, 1998, or 12% of net revenues as compared to $2,444,000,
or 17% of net revenues for the quarter ended June 30, 1997. For the six months
ended June 30, 1998, product development expenses were $9,426,000, or 13% of net
revenues as compared to $4,693,000, or 19% of net revenues for the six months
ended June 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 remainder of 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,227,000 for the quarter
ended June 30, 1998, or 5% of net revenues as compared to $1,613,000, or 11% of
net revenues for the quarter ended June 30, 1997. For the six months ended June
30, 1998, general and administrative expenses were $4,219,000, or 6% of net
revenues as compared to $2,910,000, or 12% of net revenues for the six months
ended June 30, 1997. General and administrative expenses consist primarily of
fees for professional services and compensation. The increase in absolute
dollars is primarily attributable to increases in personnel and usage of
professional services. The Company believes that the absolute dollar level of
general and administrative expenses will increase in future periods, as a result
of increased fees for professional services and an increase in personnel. As a
percentage of net revenues, the Company currently anticipates that general and
administrative expenses will approximate current levels during the remainder of
1998.
AMORTIZATION OF INTANGIBLES
As part of the Viaweb acquisition, the Company recorded an intangible
asset related to goodwill in the amount of $24,332,000, as restated. This asset
is being amortized over a seven year period beginning in June 1998.
OTHER - NONRECURRING COSTS
On June 10, 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
$15,000,000, as restated, for in-
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process research and development that had not yet reached technological
feasibility and had no alternative future use.
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.
INVESTMENT INCOME, NET
Investment income, net of investment expense, was $1,848,000 for the
quarter ended June 30, 1998. For the quarter ended June 30, 1997, investment
income was $1,227,000. Investment income for the six months ended June 30, 1998
was $3,294,000 as compared to $2,618,000 for the six months ended June 30, 1997.
The increase in investment income from the year ago periods was primarily
attributable to a higher average investment balance. Investment income for the
remainder of 1998 is expected to increase significantly due to proceeds from a
private placement of $250,000,000 received by the Company on July 14, 1998.
MINORITY INTERESTS IN OPERATIONS OF CONSOLIDATED SUBSIDIARIES
Minority interests in losses from operations of consolidated
subsidiaries were $112,000 for the quarter ended June 30, 1998 as compared to
$182,000 for the same period in 1997. Minority interests for the six months
ended June 30, 1998 were $355,000 as compared to $384,000 for the six months
ended June 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 elimination
on the statement of operations will reduce the Company's net income by the
minority partner's 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 charges of $15,000,000 for acquired in-process research and
development and amortization of intangible assets, will approximate 25% for
fiscal year 1998. Before the effect of these charges, the tax rate was
approximately 27% for the quarter ended June 30, 1998 and 25% for the six months
ended June 30, 1998. These rates are lower than the statutory U.S. federal rate
due primarily to the utilization of net operating loss carryforwards, the
utilization of research and development credits, and the change in the valuation
allowance on temporary differences. The Company believes sufficient uncertainty
exists regarding the realizability of its remaining deferred tax assets such
that a full valuation allowance
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continues to be required. The portion of the deferred tax assets attributable
to the exercise of employee stock options is reflected in the U.S. net
operating loss carryforward, the tax benefit of which, when recognized, 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 LOSS
The Company recorded a net loss, as restated, of $7,480,000 or $0.08
per share for the quarter ended June 30, 1998. Excluding the effect of the
nonrecurring charge of $15,000,000 incurred in connection with the acquisition
of Viaweb and the amortization of $417,000 and $290,000 from the related
purchased technology and intangible assets, the Company earned $8,227,000 or
$0.08 per share diluted. The Company recorded a net loss of $21,552,000 or $0.25
per share for the quarter ended June 30, 1997. Excluding the effect of the
nonrecurring charge of $21,245,000 incurred in connection with the Visa
agreement, the Company recorded a net loss of $307,000 or $0.00 per share.
For the six month period ended June 30, 1998, the Company recorded a
net loss of $3,195,000 or $0.04 per share. Excluding the effect of the
nonrecurring charge of $15,000,000 incurred in connection with the acquisition
of Viaweb and the amortization of $417,000 and $290,000 from the related
purchased technology and intangible assets, the Company earned $12,512,000 or
$0.12 per share diluted. For the six month period ended June 30, 1997, the
Company recorded a net loss of $22,292,000 or $0.26 per share. Excluding the
effect of the nonrecurring charge of $21,245,000, the Company recorded a net
loss of $1,047,000 or $0.01 per share.
LIQUIDITY AND CAPITAL RESOURCES
Yahoo! invests predominantly in 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 June 30, 1998, the Company had cash and cash equivalents and
investments in marketable securities totaling $147,236,000 compared to
$107,012,000 at December 31, 1997.
For the six months ended June 30, 1998, cash provided by operating
activities of $29,649,000 was primarily due to earnings, before the nonrecurring
charge of $15,000,000, and increases in deferred revenue (due to invoicing and
cash receipts in excess of revenue) and accrued liabilities. For the six months
ended June 30, 1997, cash used in operating activities of $5,907,000 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 $1,000,000 payment to
Netscape under the Premier Provider agreement.
Cash used in investing activities was $17,014,000 for the six months
June 30, 1998. Purchases (net of sales and maturities) of investments in
marketable securities during the period were $13,484,000 and capital
expenditures totaled $3,556,000. Capital
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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
activities was $30,880,000 for the six months ended June 30, 1997. Sales and
maturities (net of purchases) of investments in marketable securities during
the period were $33,169,000 and capital expenditures totaled $2,289,000.
For the six months ended June 30, 1998, cash provided by financing
activities of $14,008,000 was due primarily to the issuance of Common Stock
pursuant to the exercise of stock options. For the six months ended June 30,
1997, cash provided by financing activities of $3,864,000 was due primarily to
the issuance of Common Stock pursuant to the exercise of stock options and
proceeds received under lease obligations.
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. During July 1998, the Company entered into an agreement for a
private placement of Common Stock to SOFTBANK Holdings, Inc. On July 14, 1998,
the Company received proceeds of $250,000,000 in exchange for 2,726,880 newly
issued shares of Yahoo! Common Stock.
RISK FACTORS
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES
The Company was incorporated in March 1995 and did not commence
generating advertising revenues until August 1995. Accordingly, the Company has
a limited operating history upon which an evaluation of the Company can be
based, and its prospects are subject to the risks, expenses and uncertainties
frequently encountered by companies in the new and rapidly evolving markets for
Internet products and services, including the Web-based advertising market.
Specifically, such risks include, without limitation, the failure to continue to
develop and extend the Yahoo! brand, the failure to develop new media
properties, the inability of the Company to maintain and increase the levels of
traffic on Yahoo! properties, the development or acquisition of equal or
superior services or products by competitors, the failure of the market to adopt
the Web as an advertising medium, the failure to successfully sell Web-based
advertising through the Company's recently developed internal sales force,
potential reductions in market prices for Web-based advertising as a result of
competition or other factors, the failure of the Company to
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effectively generate commerce-related revenues through sponsored services and
placements in Yahoo! properties, the inability of the Company to effectively
integrate the technology and operations of any other acquired businesses or
technologies with its operations, such as the recent acquisition of Viaweb
Inc., the failure of the Company to successfully develop and offer
personalized Web-based services, such as e-mail services, to consumers
without errors or interruptions in service, and the inability to continue to
identify, attract, retain and motivate qualified personnel. There can be no
assurance that the Company will be successful in addressing such risks.
As of June 30, 1998, the Company had an accumulated deficit of
$31,166,000. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible. The Company believes that
period-to-period comparisons of its operating results are not meaningful and
that the results for any period should not be relied upon as an indication of
future performance. In particular, although the Company has experienced strong
revenue growth during the first half of 1998, management does not believe that
this level of revenue growth will be sustained in future periods. In addition,
the Company currently expects to continue to significantly increase its
operating expenses to expand its sales and marketing operations, to continue to
develop and extend the Yahoo! brand, to fund greater levels of product
development, to develop and commercialize additional media properties, and to
acquire complementary businesses and technologies. As a result of these factors,
there can be no assurance that the Company will not incur significant losses on
a quarterly and annual basis.
On June 10, 1998, the Company completed the acquisition of Viaweb Inc.,
a provider of software and services for hosting online stores, in exchange for
787,182 shares of the Company's Common Stock and assumption of options to
purchase an aggregate of 122,252 shares of the Company's Common Stock. The
Company incurred a one-time charge of $15,000,000 in the quarter ended June 30,
1998 for acquired in-process technology and expenses associated with the
transaction. As a result of the expense incurred in the quarter ended June 30,
1998, the Company reported a net loss for such quarter and may report a net loss
for the year ending December 31, 1998.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
As a result of the Company's limited operating history, the Company
does not have historical financial data for a significant number of periods on
which to base planned operating expenses. The Company derives the majority of
its revenues from the sale of advertisements under short-term contracts, which
are difficult to forecast accurately. The Company's expense levels are based in
part on its expectations concerning future revenue and, to a large extent, are
fixed. Quarterly revenues and operating results depend substantially upon the
advertising revenues received within the quarter, which are difficult to
forecast accurately. Accordingly, the cancellation or deferral of a small number
of advertising or sponsorship contracts could have a material adverse effect on
the Company's business, results of operations, and financial condition. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall, and any significant shortfall in revenue in
relation to the Company's expectations would have an
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immediate adverse effect on the Company's business, operating results, and
financial condition. In addition, the Company plans to continue to
significantly increase its operating expenses to expand its sales and marketing
operations, to continue to develop and extend the Yahoo! brand, to fund greater
levels of product development, and to develop and commercialize additional
media properties. To the extent that such expenses precede or are not
subsequently followed by increased revenues, the Company's business, operating
results, and financial condition will be materially and adversely affected. As
a result of these factors, there can be no assurance that the Company will not
incur significant losses in the future.
The Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's 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 sold by the
Company (such as the amount of targeted advertising, which generally has higher
rates), the amount and timing of capital expenditures and other costs relating
to the expansion of the Company's operations, the introduction of new products
or services by the Company or its 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
media properties developed by the Company, incurrence of costs relating to
future acquisitions, negative general economic conditions (which may be
expected to adversely affect media spending), and economic conditions specific
to the Internet and online media. As a strategic response to changes in the
competitive environment, the Company may from time to time make certain
pricing, service or marketing decisions, or business combinations that could
have a material adverse effect on the Company's business, results of
operations, and financial condition.
Seasonality may affect the amount of customer advertising dollars
placed with the Company in the first and third calendar quarters as advertisers
historically spend less during these quarters. This seasonality may adversely
affect the Company's operating results for the quarter ending September 30,
1998. The Company also expects to experience seasonality in the level of use of
its online properties, with user traffic on Yahoo! online media properties being
lower during the summer and year-end vacation and holiday periods, when usage of
the Web and the Company's services to date have experienced slower growth or
decline.
A key element of the Company's strategy is to generate advertising
revenues through sponsored services and placements by third parties in the
Company's online media properties in addition to banner advertising. In
connection with these arrangements, the Company may receive sponsorship fees as
well as a portion of transaction revenues received by the third-party sponsor
from users originated through the Yahoo! placement, in return for minimum levels
of user impressions to be provided by the Company. To the extent implemented,
these arrangements expose the Company to potentially significant financial
risks, including the risk that the Company fails to deliver required minimum
levels of user impressions or "click throughs" (in which case, these agreements
typically provide
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for adjustments to the fees payable thereunder or "make good" periods), that
third-party sponsors do not renew the agreements at the end of their term or
that sponsors renew at lower rates, that the arrangements do not generate
anticipated levels of shared transaction revenue, or that sponsors default in
the payment commitments in such agreements, which could result in the Company
failing to achieve anticipated revenue from the sponsorship arrangements. In
addition, because the Company has limited experience with these arrangements,
the Company is unable to determine what effect such arrangements will have on
gross margins and results of operations. Although transaction-based fees have
not to date represented a material portion of the Company's net revenues, if
and to the extent such revenues become significant, the foregoing factors could
result in greater variations in the Company's quarterly operating results and
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
Due to all of the foregoing factors, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such an event, the trading price of the Company's
Common Stock would likely be materially and adversely affected.
COMPETITION
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. Negative competitive developments could
have a material adverse effect on the Company's business and on the trading
price of the Company's Common Stock.
MULTIPLE PROVIDERS OF COMPETITIVE SERVICES. The Company competes with
many other providers of online navigation, information and community services.
As the Company expands the scope of its Internet services, it will compete
directly with a greater number of Internet sites and other media companies
across a wide range of different online services, including 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),
C/NET, Inc. (Snap! Online), Digital Equipment Corporation (AltaVista), Excite,
Inc. (including WebCrawler), Infoseek Corporation, Inktomi, Lycos, Inc.
(including Tripod), Microsoft Corporation (Internet Start), Netscape
Communications Corporation (Netcenter), and Wired Ventures, Inc. (hotbot). In
addition, the Company competes with metasearch services and software
applications, such as C/NET's search.com service, that allow a user to search
the databases of several directories and catalogs simultaneously. The Company
also competes indirectly with database vendors that offer information search and
retrieval capabilities with their core database products. In addition, many
large media companies have announced that they are contemplating Internet
navigation services and are attempting to become "gateway" sites for Web users.
For example, both Time-Warner Inc. and CBS have announced initiatives to develop
Web services in order to have their Web sites become the starting point for
users navigating the Web and C/NET recently announced that NBC has purchased an
equity interest in C/NET's Snap! Online navigational service, and that C/NET and
NBC will operate the service as a joint venture. In June 1998 Infoseek
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and the Walt Disney Company ("Disney") entered into agreements providing that
Disney will purchase 43% of Infoseek's capital stock and warrants to purchase
sufficient shares to control Infoseek. The parties also announced that they
will be launching a new portal service that combines content for both
companies. The Company also anticipates that Disney will provide significant
promotional support to these online properties, including through Disney's
substantial media resources, which include the ABC television network. These
and other competitors have and are expected to continue to make substantial
marketing expenditures to promote their online properties. To the extent the
Company is required to increase its sales and marketing expenditures in
response these efforts, the Company's operating results could be materially and
adversely affected.
A large number of Web sites and online services (including, among
others, the Microsoft Network, AOL, Netscape (Netcenter), and other Web
navigation companies such as Excite, Lycos, and Infoseek) also offer
informational and community features, such as news, stock quotes, sports
coverage, Yellow Pages and email listings, weather news, chat services, bulletin
board listings and online store hosting services that are competitive with the
services offered by the Company. For example, Netscape, which experiences high
levels of traffic on its Web sites by virtue of default settings and buttons on
its popular Web browser products, recently significantly enhanced its Netcenter
service as a "gateway" Web site, through commercial relationships between
Netscape and certain of the Company's competitors. A number of companies,
including Hotmail (which was recently acquired by Microsoft) and WhoWhere? Inc.,
offer Web-based email service similar to those offered by the Company, and such
companies have and 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 the Company's Yahoo! Pager offering, and 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 those of
the Company. Several companies, including large companies such as Microsoft and
AOL and their affiliates, also are developing or currently offer online
information services for local markets, which compete with the Company's
regional Yahoo! online properties. As a result of the Company's recent
acquisition of Viaweb Inc., the Company also expects to face competition in the
market for hosting online merchant stores. The Company also faces intense
competition in international markets, including competition from several
U.S.-based competitors as well as 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. The Company also faces 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, which are the most widely used browsers, increasingly incorporate
prominent search buttons and similar features, such as features based on "push"
technologies, that direct search traffic to competing services, including those
that may be developed or licensed by such parties, that could make it more
difficult for Internet viewers to find and use the Company's 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 and
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Microsoft and other browser suppliers may also more tightly integrate products
and services similar to the Company's into their browsers or their browsers'
pre-set home pages. In addition, entities that sponsor or maintain high-traffic
Web sites 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 that compete with those offered by the Company and
could take actions that make it more difficult for consumers to find and use
Yahoo! services. For example, 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, and offers
personalized Web services through its Internet Start service. The Company
expects 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. Insofar as Microsoft's Internet
navigational offerings may be more conveniently accessed by users than those of
the Company, this may provide Microsoft with significant competitive advantages
that could have a material adverse effect on the Company's business.
COMPETITION FOR ADVERTISING EXPENDITURES. The Company also competes
with online services, other Web site operators and advertising networks, as well
as traditional offline media such as television, radio and print for a share of
advertisers' total advertising budgets. The Company believes that the number of
companies selling Web-based advertising and the available inventory of
advertising space have increased substantially during recent periods.
Accordingly, the Company may face increased pricing pressure for the sale of
advertisements and reductions in the Company's advertising revenues. In
addition, the Company's sales may be adversely affected to the extent that the
Company's competitors offer superior advertising services that better target
users or provide better reporting of advertising results.
PRINCIPAL COMPETITIVE FACTORS. The Company believes that the principal
competitive factors in its markets are brand recognition, ease of use,
comprehensiveness, independence, quality and responsiveness of search results,
the availability of high-quality, targeted content and focused value added
products and services, quality and brand appeal, 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 Web sites and
ISPs, as well as competition with other media for advertising placements, could
result in significant price competition and reductions in advertising revenues.
Additionally, the Company has faced and expects to continue to face competition
with respect to the acquisition of strategic businesses and technologies. There
can be no assurance that the Company will be able to compete successfully or
that the competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, operating results, and financial
condition.
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Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical,
marketing and distribution resources. 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 or 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 the
Company's competitors, such as NBC's recent investment in C/NET's Snap! Online
service or Disney's investment in Infoseek, and may use their substantial media
resources to promote and enhance such competitor's services. Greater competition
resulting from such relationships could have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET; TECHNOLOGICAL CHANGE
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the Web in order to support the sale of
advertising on the Company's online media properties. Web-based advertising is
relatively new, and predicting the extent of further growth, if any, in Web
advertising expenditures is difficult. There can be no assurance that
communication or commerce over the Internet will increase or that extensive
content will continue to be provided over the Internet. 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, such as a reliable network backbone, or timely
development and commercialization of performance improvements, including high
speed modems. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and level of use, there can
be no assurance that the Internet infrastructure will continue to be able to
support the demands placed upon it by such potential growth or that the
performance or reliability of the Web will not be adversely affected by this
continued growth. If use of the Internet does not continue to grow, or if the
Internet infrastructure does not effectively support growth that may occur, the
Company's business, operating results, and financial condition would be
materially and 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. For example, to the extent that higher bandwidth Internet access
becomes more widely available through cable modems or other technologies, the
Company may be required to make significant changes to the design and content of
its online properties in order to compete effectively. Failure of the Company to
effectively adapt to these or any other technological developments could
adversely affect the Company's business, operating results, and financial
condition.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS AND
MEDIA PROPERTIES
The markets for the Company's products and media properties have only
recently begun to develop, are rapidly evolving, and are characterized by an
increasing number of
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market entrants who have introduced or developed information navigation
products and services for use on the Internet and the Web. As is typical in the
case of a new and rapidly evolving industry, demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty and risk. Because the market for the Company's products and media
properties is new and evolving, it is difficult to predict the future growth
rate, if any, and size of this market. There can be no assurance either that
the market for the Company's products and media properties will continue to
develop or that demand for the Company's products or media properties will be
sustainable. If the market develops more slowly than expected or becomes
saturated with competitors, or if the Company's products and media properties
do not sustain market acceptance, the Company's business, operating results,
and financial condition will be materially and adversely affected.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
The Company believes that establishing and maintaining the Yahoo! brand
is a critical aspect of its efforts to attract and expand its user and
advertiser base and 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 will depend largely on the
Company's success in providing high-quality products and services, which success
cannot be assured. In order to attract and retain Internet users and to promote
and maintain the Yahoo! brand in response to competitive pressures, the Company
may find it necessary to increase substantially its financial commitment to
creating and maintaining a distinct brand loyalty among consumers. If the
Company is unable to provide high-quality products and services or otherwise
fails to promote and maintain its brand, or if the Company incurs excessive
expenses in an attempt to improve its products and services or promote and
maintain its brand, the Company's 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
The Company derives substantially all of its revenues from the sale of
advertisements on its Web pages under short-term contracts. Most of the
Company's advertising customers have limited experience with the Web as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Web-based advertising, and may not find such advertising to be
effective for promoting their products and services relative to traditional
print and broadcast media. The Company's 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 the Company's services possessing
demographic characteristics attractive to advertisers, and the ability of the
Company 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, and there can be no
assurance that such standards will develop sufficiently to support Web-based
advertising as a significant advertising medium. In addition, there can be no
assurance that the advertisers will determine that banner advertising, which
comprises the majority of the
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Company's revenues, is an effective advertising medium, and there can be no
assurance that the Company will effectively transition to any other forms of
Web-based advertising, should they develop. 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. There also
can be no assurance that the Company's advertising customers will accept the
internal and third-party measurements of impressions received by advertisements
on Yahoo! online media properties, or that such measurements will not contain
errors. The Company relies primarily on its internal advertising sales force
for domestic advertising sales, which involves additional risks and
uncertainties, including (among others) risks associated with the recruitment,
retention, management, training, and motivation of sales personnel. As a result
of these factors, there can be no assurance that the Company will sustain or
increase current advertising sales levels. Failure to do so will have a
material adverse effect on the Company's business, operating results, and
financial position.
SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES
The Company depends substantially upon third parties for several
critical elements of its business including, among others, technology and
infrastructure, content development, and distribution activities.
TECHNOLOGY AND INFRASTRUCTURE. In May 1998, the Company and Inktomi
entered into an agreement under which Inktomi will provide text-based Web search
results to complement the Company's directory and navigational guide. The
Inktomi service was integrated on July 1, 1998. The Company will depend
substantially upon ongoing maintenance and technical support from Inktomi to
ensure accurate and rapid presentation of such search results to the Company's
customers. Any termination of the agreement with Inktomi or Inktomi's failure to
renew such agreement upon expiration could result in substantial additional
costs to the Company in developing or licensing replacement technology, and
could result in a loss of levels of use of the Company's navigational services.
The Company also relies principally on a private third-party provider, Frontier
GlobalCenter, Inc. ("GlobalCenter"), for the Company's principal Internet
connections. Additionally, 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 the
Company's business, operating results, and financial condition. The Company also
licenses 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. The Company
has experienced and expects to continue to experience interruptions and delays
in service and availability for such elements, such as recent interruptions in
the Company's stock quote services. Any errors, failures, or delays experienced
in connection with these third-party technologies and information services could
negatively impact the Company's relationship with users and adversely affect the
Company's brand and its business, and could expose the Company to liabilities to
third parties.
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CONTENT DEVELOPMENT. A key element of the Company's strategy involves
the implementation of Yahoo!-branded media properties targeted for interest
areas, demographic groups, and geographic areas. In these efforts, the Company
has relied and will continue to rely substantially on content development and
localization efforts of third parties. For example, the Company has entered into
an agreement with Ziff-Davis pursuant to which Ziff-Davis publishes an online
publication and a print magazine under the Yahoo! brand. The Company also
expects to rely substantially on third-party affiliates, including SOFTBANK in
Japan and Korea, and Rogers Communications ("Rogers") in Canada, to localize,
maintain, and promote these services and to sell advertising in local markets.
There can be no assurance that the Company's current or future third-party
affiliates will effectively implement these properties, or that their efforts
will result in significant revenue to the Company. Any failure of these parties
to develop and maintain high-quality and successful media properties also could
result in unfavorable dilution to the Yahoo! brand. Certain of these
arrangements also require the Company to integrate third parties' content with
the Company's services, which can require the dedication of resources and
significant programming and design efforts to accomplish. In addition, the
Company has 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 the Company, for the duration of such
exclusivity arrangements, from accepting advertising or sponsorship arrangements
within a particular subject matter with respect to portions of the Company's
network of media properties, which could have an adverse effect on the Company.
DISTRIBUTION RELATIONSHIPS. In order to create traffic for the
Company's online properties and make them more attractive to advertisers and
consumers, the Company has entered into certain distribution agreements and
informal relationships with leading Web browser providers (Microsoft and
Netscape), operators of online networks and leading Web sites, and computer
manufacturers, such as Compaq Computer and Gateway 2000. The Company believes
these arrangements are important to the promotion of the Company's online media
properties, particularly among new Web users who may first access the Web
through these browsers, services, Web sites, or computers. The Company's
business relationships with these companies consist of arrangements for the
positioning of access to Yahoo! properties on Web browsers and cooperative
marketing programs and licenses to include Yahoo! in online networks or services
offered by these parties, which 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. Third parties that provide distribution
channels for the Company may also assess fees or otherwise impose additional
conditions on the listing of Yahoo! or other online properties of the Company.
Any such event could have a material adverse effect on the Company's business,
results of operations, and financial condition.
The Company recently announced a co-branding and distribution
arrangement with MCI under which the Company will provide a Web-based online
service in conjunction with dial-up Internet access provided by MCI. In this
arrangement, the Company will depend substantially upon MCI for, among other
things, effective marketing and promotion efforts and the provision of
competitive Internet access service to customers. Any failure by
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MCI in these respects could materially impair the benefits received by the
Company from this arrangement, and could negatively affect the Yahoo! brand.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been and may
continue to be subject to wide fluctuations. During the six months ended June
30, 1998, the highest and lowest reported closing sale prices (adjusted for
August 3, 1998 stock split) of the Company's Common Stock on the NASDAQ Stock
Market were $78.75 and $29.03, respectively. Trading prices of the Common Stock
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 the Company or its competitors, changes in
financial estimates and recommendations by securities analysts, the operating
and stock price performance of other companies that investors may deem
comparable to the Company, and news reports relating to trends in the Company's
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 trading
price of the Company's Common Stock, regardless of the Company's operating
performance.
ENHANCEMENT OF YAHOO! PROPERTIES AND DEVELOPMENT OF NEW PROPERTIES
To remain competitive, the Company must continue to enhance and improve
the functionality, features, and content of the Yahoo! main site, as well as the
Company's other branded media properties. There can be no assurance that the
Company will be able to successfully maintain competitive user response times or
implement new features and functions, such as new search capabilities, greater
levels of user personalization, simplified searching from the Web browser,
real-time chat and Internet paging, localized content filter and information
delivery through "push" or other methods, which will involve the development of
increasingly complex technologies. The Company also expects that personalized
information services, such as the Company's recently launched Web-based email
service, will require significantly greater expenses associated with, among
other things, increased server capacity and equipment and requirements for
additional customer support personnel and systems. To the extent such additional
expenses are not offset by additional revenues from such personalized services,
the Company's financial results will be adversely affected.
The Company's future success also depends in part upon the timely
processing of Web site listings submitted by users and Web content providers,
which have increased substantially in recent periods. The Company has from time
to time experienced significant delays in the processing of submissions, and
further delays could have a material adverse effect on the Company's goodwill
among Web users and content providers, and on the Company's business.
A key element of the Company's business strategy is the development and
introduction of new Yahoo!-branded online properties targeted for specific
interest areas,
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user groups with particular demographic characteristics, and geographic areas.
There can be no assurance that the Company will be successful in developing,
introducing, and marketing such products or media properties or that such
products and media properties will achieve market acceptance, enhance the
Company's brand name recognition, or increase traffic on Yahoo!'s online
properties. 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 the Company's brand name recognition. The Company's
ability to successfully develop additional targeted media properties depends
substantially on use of Yahoo! to promote such properties. If use of Yahoo!
fails to continue to grow, the Company's ability to establish other targeted
properties would be adversely affected. Any failure of the Company to
effectively develop and introduce these properties, or failure of such
properties to achieve market acceptance, could adversely affect the Company's
business, results of operations, and financial condition.
INVESTMENTS IN AFFILIATES
The Company has 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. The Company currently
intends to continue to make significant additional investments in such companies
from time to time in the future, as well as other companies involved in the
development of technologies or services that are complementary or related to the
Company's business, such as the December 1997 investments in GeoCities and
broadcast.com (formerly AudioNet). These affiliated companies typically are in
an early stage of development and may be expected to incur substantial losses.
As a result, the Company has recorded and expects to continue to record a share
of the losses in such affiliates attributable to the Company's ownership, which
losses have had and will continue to have an adverse effect on the Company's
results of operations. Furthermore, there can be no assurance that any
investments in such companies will result in any return, nor can there be any
assurance as to the timing of any such return, or that the Company will not lose
its entire investment. Any such investment losses could have a material adverse
effect on the Company's operating results.
MANAGEMENT OF POTENTIAL GROWTH AND INTEGRATION OF ACQUISITIONS
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational, and financial
resources. To manage its potential growth, the Company must continue to
implement and improve its operational and financial systems and to expand,
train, and manage its employee base. The process of managing advertising within
large, high traffic Web sites such as those in the Yahoo! network is an
increasingly important and complex task. The Company relies on both internal and
licensed third-party advertising inventory management and analysis systems. To
the extent that any extended failure of the Company's advertising management
system results in incorrect advertising insertions, the Company may be exposed
to "make good" obligations with its advertising customers, which, by displacing
advertising inventory, could defer advertising revenues and thereby have a
material adverse effect on the Company's business, operating results, and
financial condition. Failure of the Company's
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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 the Company's relationships with
advertisers and thereby have an adverse effect on the Company's business. There
can be no assurance that the Company's systems, procedures, or controls will be
adequate to support the Company's operations or that Company management will be
able to achieve the rapid execution necessary to fully exploit the Company's
market opportunity. Any inability to effectively manage growth, if any, could
have a material adverse effect on the Company's business, operating results,
and financial condition.
As part of its business strategy, the Company has completed and expects
to enter into additional business combinations and acquisitions, such as the
October 1997 acquisition of Four11 and the June 1998 acquisition of Viaweb.
Acquisition transactions are accompanied by a number of risks, including, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired technology or
content and rights into the Company's products and media properties, expenses
associated with the transactions, additional expenses associated with
amortization of acquired intangible assets, 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. There can be no assurance that the Company would be successful in
addressing these risks or any other problems encountered in connection with such
acquisitions.
RISK OF CAPACITY CONSTRAINTS AND SYSTEMS FAILURES
The Company is dependent on its ability to effectively serve a high
volume of use of its online media properties. Accordingly, the performance of
the Company's online media properties is critical to the Company's reputation,
its ability to attract advertisers to the Company's Web sites, and to achieve
market acceptance of these products and media properties. Any system failure
that causes an interruption or an increase in response time of the Company's
products and media properties could result in less traffic to the Company's Web
sites and, if sustained or repeated, could reduce the attractiveness of the
Company's products and media properties to advertisers and licensees. An
increase in the volume of queries conducted through the Company's products and
media properties could strain the capacity of the software or hardware deployed
by the Company, which could lead to slower response time or system failures, and
adversely affect the number of impressions received by advertisers and thus the
Company's advertising revenues. In addition, as the number of Web pages and
users increase, there can be no assurance that the Company's products and media
properties and infrastructure will be able to scale accordingly. The Company
also faces technical challenges associated with higher levels of personalization
and localization of content delivered to users of its services, which adds
strain to the Company's development and operational resources. For example,
personalized information services, such as Web-based email services, involve
increasingly complex technical and operational challenges, and there can be no
assurance that the Company will successfully implement
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and scale such services to the extent required by any growth in the number of
users of such services, or that the failure to do so will not materially and
adversely affect the goodwill of users of these services, or negatively affect
the Company's brand and reputation. The Company is also dependent upon Web
browsers and Internet and online service providers for access to its products
and media properties. In particular, a private third-party provider,
GlobalCenter, provides the Company's principal Internet connections. In the
past, users have occasionally experienced difficulties due to system failures,
including failures unrelated to the Company's systems. Additionally, Internet
connections for the Company's Web-based email services 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 higher volumes of user
traffic could have a material adverse effect on the Company's business,
operating results, and financial condition. Furthermore, the Company is
dependent on hardware suppliers for prompt delivery, installation, and service
of servers and other equipment used to deliver the Company's products and
services.
The Company's operations are susceptible to outages due to fire,
floods, power loss, telecommunications failures, break-ins, and similar events.
In addition, substantially all of the Company's network infrastructure is
located in Northern California, an area susceptible to earthquakes, which also
could cause system outages or failures. The Company does not presently have
multiple site capacity in the event of any such occurrence. Despite the
implementation of network security measures by the Company, its servers are
vulnerable to computer viruses, break-ins, and similar disruptions from
unauthorized tampering with the Company's computer systems. The Company does not
carry sufficient business interruption insurance to compensate the Company for
losses that may occur as a result of any of these events. Such events could have
a material adverse effect on the Company's business, operating results, and
financial condition.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade dress, trade
secrets, and similar intellectual property as critical to its success, and the
Company relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States and internationally, and has
applied for and obtained the registration for certain of its trademarks,
including "Yahoo!" and "Yahooligans!". Effective trademark, copyright, and trade
secret protection may not be available in every country in which the Company's
products and media properties are distributed or made available through the
Internet. The Company has licensed in the past, and it expects that it may
license in the future, elements of its distinctive trademarks, trade dress, and
similar proprietary rights to third parties, including in connection with
branded mirror sites of Yahoo!, and other media properties and merchandise that
may be controlled operationally by third parties. While the Company attempts to
ensure that the quality of its brand is maintained by such licensees, no
assurances can be given that such licensees will not take actions that could
materially and adversely affect the value of the Company's proprietary rights or
the reputation of its products and media properties, either of which could have
a material adverse effect on the Company's business. Also, the Company is aware
that third parties have from time to time
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copied significant portions of Yahoo! directory listings for use in
competitive Internet navigational tools and services, and there can be no
assurance that the distinctive elements of Yahoo! will be protectible under
copyright law. There can be no assurance that the steps taken by the Company
to protect its proprietary rights will be adequate or that third parties will
not infringe or misappropriate the Company's copyrights, trademarks, trade
dress, and similar proprietary rights. In addition, there can be no assurance
that other parties will not assert infringement claims against the Company.
Many parties are actively developing search, indexing, and related Web
technologies at the present time. The Company believes that such parties have
taken and will continue to take steps to protect these technologies, including
seeking patent protection. As a result, the Company believes that disputes
regarding the ownership of such technologies are likely to arise in the future.
For example, the Company is aware that a number of patents have been issued in
the areas of electronic commerce and Web-based information indexing and
retrieval (including patents recently issued to one of the Company's direct
competitors), and the Company anticipates that additional third-party patents
will be issued in the future. There can be no assurance that the technology
recently acquired through the Viaweb acquisition, or any other technology
relating to the Company's business that has been or may be developed by the
Company or licensed from third parties, will not be determined to infringe one
or more third-party patents. In the event of such infringement, there can be no
assurance that the Company will be able to license such patents on reasonable
terms, if any, or that such infringement will not result in substantial monetary
liability to the Company, including substantial expenses that may be incurred in
defending against third-party patent claims regardless of the merit of such
claims.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance
of its senior management and key technical personnel. In particular, the
Company's success depends substantially on the continued efforts of its senior
management team. The Company does not carry key person life insurance on any of
its senior management personnel. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on the business, operating results, and financial condition of the Company.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material and adverse
effect upon the Company's business, operating results, and financial condition.
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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 a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
defamation, pricing, taxation, content regulation, quality of products and
services, and intellectual property ownership and infringement. For example,
although the Communications Decency Act was held to be unconstitutional, there
can be no assurance that similar legislation will not be enacted in the future,
and it is possible that such legislation could expose the Company to substantial
liability. Such legislation could also dampen the growth in use of the Web
generally, decrease the acceptance of the Web as a communications and commercial
medium and require the Company to incur expense in complying with any new
regulations, and could, thereby, have a material adverse effect on the Company's
business, results of operations, and financial condition. Other nations,
including Germany, have taken actions to restrict the free flow of material
deemed to be objectionable on the Web, and the European Union has recently
adopted privacy and copyright directives that may impose additional burdens and
costs on the Company's international operations. In addition, several
telecommunications carriers are seeking to have telecommunications over the Web
regulated by the Federal Communications Commission (the "FCC") in the same
manner as other telecommunications services. For example, America's Carriers
Telecommunications Association ("ACTA") has filed a petition with the FCC for
this purpose. In addition, 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 in a manner similar to long distance telephone carriers and to impose
access fees on the ISPs and OSPs. If either of these petitions is granted, or
the relief sought therein is otherwise granted, the costs of communicating on
the Web could increase substantially, potentially slowing the growth in use of
the Web, which could in turn decrease the demand for the Company's 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 financial benefit from such activities. Also, legislation
is pending in Congress that would impose liability on online service providers
such as the Company for listing or linking to third-party Web sites or hosting
third-party Web sites that include materials that infringe copyrights or other
rights of others. In addition, a number of other countries have announced or are
considering additional regulation in many of the foregoing areas. Such laws and
regulations if enacted in the United States or abroad could fundamentally impair
the Company's ability to provide Internet navigation services, or substantially
increase the cost of doing so, which would have a material adverse effect on the
Company's business, operating results, and financial condition. Moreover, the
applicability to the Internet of the existing laws governing issues such as
property ownership, copyright, defamation, obscenity, and personal privacy is
uncertain, and the Company may be subject to claims that its services violate
such laws. Any such new legislation or regulation in the United States or abroad
or the application of
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existing laws and regulations to the Internet could have a material adverse
effect on the Company's business, operating results, and financial condition.
Due to the global nature of the Web, it is possible that, although
transmissions by the Company over the Internet originate primarily in the State
of California, the governments of other states and foreign countries might
attempt to regulate the Company's transmissions or prosecute the Company for
violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that the
Company might not unintentionally violate such law or that such laws will not be
modified, or new laws enacted, in the future. Any of the foregoing developments
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
LIABILITY FOR INFORMATION SERVICES
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company and may be subsequently distributed to
others, there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature and content of such materials. Such claims
have been brought, and sometimes successfully pressed, against online service
providers in the past. In addition, the Company could be exposed to liability
with respect to the selection of listings that may be accessible through the
Company's Yahoo!-branded products and media properties, or through content and
materials that may be posted by users in classifieds, message board and chat
room services offered by the Company. Such claims might include, among others,
that by providing hypertext links to Web sites operated by third parties, the
Company is liable for copyright or trademark infringement or other wrongful
actions by such third parties through such Web sites, or that the Company is
responsible for legal injury caused by statements made for or actions taken by
participants in the Company's message board services. It is also possible that
if any information provided through the Company's services, such as stock
quotes, analyst estimates or other trading information, contains errors, third
parties could make claims against the Company for losses incurred in reliance on
such information. The Company offers Web-based email services, which expose the
Company 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. Even to the
extent such claims do not result in liability to the Company, the Company
expects to incur significant costs in investigating and defending such claims.
The Company also from time to time enters into arrangements to offer
third-party products and services under the Yahoo! brand or via distribution on
Yahoo! properties. For example, the Company recently announced an agreement with
GeoCities under which GeoCities will offer free home page services and certain
related products to Yahoo! users. The Company 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. The Company may be subject to claims
concerning
35
<PAGE>
such services or content by virtue of the Company's involvement in marketing,
branding or providing access to such services, even if the Company does not
itself host, operate, or provide such services. While the Company's agreements
with these parties often provide that the Company will be indemnified against
such liabilities, there can be no assurance that such indemnification, if
available, will be adequate.
POTENTIAL COMMERCE-RELATED LIABILITIES AND EXPENSES
As part of its business, the Company enters into agreements with
sponsors, content providers, service providers, and merchants under which the
Company is entitled to receive a share of revenue from the purchase of goods and
services by users of the Company's online properties. Such arrangements may
expose the Company to additional legal risks and uncertainties, including
(without limitation) potential liabilities to consumers of such products and
services. Although the Company carries general liability insurance, the
Company's 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.
The Company 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 merchandise, such as books or music. This arrangement
exposes the Company to certain additional risks and expenses, including, without
limitation, 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, the Company completed the acquisition of Viaweb, a
provider of software and reporting tools for the operation of online commerce
Web sites. The Company intends 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 the Company to a number of additional risks and uncertainties,
including (without limitation) 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 the
Company's commerce services or losses resulting from any downtime or other
performance failures in the Company's hosting services. Although the Company
maintains liability insurance, there can be no assurance that insurance will
cover these claims or that such coverage, if available, will be adequate. Even
to the extent such claims do not result in material liability to the Company,
the Company expects to incur significant costs in investigating and defending
such claims.
36
<PAGE>
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. Although the
Company believes that its systems are Year 2000 compliant in all material
respects, there can be no assurances that the Company's current systems and
products do not contain undetected errors or defects with Year 2000 date
functions that may result in material costs to the Company. Although the Company
is not aware of any material operational issues or costs associated with
preparing its internal systems for the Year 2000, there can be no assurances
that the Company will not experience serious unanticipated negative consequences
(such as significant downtime for one or more Yahoo! media properties) and/or
material costs caused by undetected errors or defects in the technology used in
its internal systems. In addition, the Company utilizes third-party equipment,
software and content that may not be Year 2000 compliant. Failure of such
third-party equipment, software or content to operate properly with regard to
the year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, results of operations and financial condition.
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. These expenditures may result in reduced funds
available for Web advertising or sponsorship of Web services, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
A key part of the Company's strategy is to develop Yahoo!-branded
online properties in international markets. The Company has developed and
operates, through joint ventures with SOFTBANK and related entities, versions of
Yahoo! localized for Japan, Germany, France, the United Kingdom, and Korea. The
Company offers a version of Yahoo! localized for Canada under an agreement with
Rogers Communications, and the Company operates localized or mirror versions of
Yahoo! through wholly-owned subsidiaries in Australia, Denmark, Italy, Norway,
Sweden, and Singapore. The Company also offers Yahoo! guides in Spanish and
Mandarin Chinese languages.
To date, the Company has only limited experience in developing
localized versions of its products and marketing and operating its products and
services internationally, and the Company relies substantially on the efforts
and abilities of its foreign business partners in such activities. The Company
also believes that in light of substantial anticipated competition, it will be
necessary to move quickly into international markets in order to effectively
obtain market share, and there can be no assurance that the Company will be able
to do so. The Company has experienced and expects to continue to experience
higher costs as a percentage of revenues in connection with international online
properties than domestic online properties. There can be no assurance that the
international markets addressed by the Company will develop at a rate that
supports the Company's level of
37
<PAGE>
investment. If revenues from these markets are not adequate to offset
investments in such activities, the Company's business, operating results, and
financial condition could be materially adversely affected. The Company may
experience difficulty in managing international operations as a result of
distance as well as language and cultural differences, and there can be no
assurance that the Company or its partners will be able to successfully market
and operate its products and services in foreign markets. In addition, in a
number of international markets the Company faces 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 the uncertainty as to the Company's ability to continue
to generate revenues from its foreign operations and expand its international
presence, there are certain risks inherent in doing business on an international
level, such as 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. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's future
international operations and, consequently, on the Company's business, operating
results, and financial condition.
CONCENTRATION OF STOCK OWNERSHIP
As of July 15, 1998, the present directors, executive officers, and
their respective affiliates beneficially owned approximately 59% of the
outstanding Common Stock of the Company. As of July 15, 1998, SOFTBANK owned
approximately 31% of the outstanding Common Stock. As a result of their
ownership, the directors, executive officers, greater than 5% shareholders and
their respective affiliates (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.
ANTITAKEOVER 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. The Company has no present plans to issue shares of Preferred
Stock. Further, certain provisions of the Company's 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
38
<PAGE>
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
Company's Common Stock. In addition, the Company's charter documents do not
permit cumulative voting and provide that, at such time as the Company has at
least six directors, the Company's 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 Company's Board of
Directors.
SHARES ELIGIBLE FOR FUTURE SALE
As of June 30, 1998, the Company had outstanding 93,683,120 shares of
Common Stock, and options to purchase a total of 23,141,384 shares of the
Company's Common Stock under the Company's stock option plans, including shares
issued and options assumed in the recent acquisition of Viaweb. Of these shares,
an estimated number of 6,372,264 shares recently issued in connection with
acquisitions and investments have been or will be 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 Company's Common Stock.
39
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, in July and October 1997, GTE New Media
Services Incorporated ("GTE New Media") filed lawsuits in state court in Dallas,
Texas and in federal court in the District of Columbia, against Netscape and the
Company, which lawsuits relate to certain Yellow Pages services offered in the
Netscape Guide By Yahoo!. In June 1998, the Company entered into agreements with
GTE New Media that provide for the dismissal of, and mutual release with respect
to, both lawsuits without any payment or consideration by the Company, and, with
respect to the Texas case, subject only to certain conditions that the Company
anticipates will be fulfilled by October 1998.
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 June 30, 1998:
<TABLE>
<CAPTION>
- ------------------ ---------------------- ------------------ ------------------ ------------------ ---------------
TRANSACTION DATE AMOUNT OF SECURITIES NAME OF CONSIDERATION PERSONS OR CLASS EXEMPTION FROM
SOLD UNDERWRITER OR RECEIVED OF PERSONS TO REGISTRATION
PLACEMENT AGENT WHOM THE CLAIMED
SECURITIES WERE
SOLD
- ------------------ ---------------------- ------------------ ------------------ ------------------ ---------------
- ------------------ ---------------------- ------------------ ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
6/10/98 787,182 Shares (1) None (1) Stockholders of Section 4(2) of
Viaweb Inc. the Securities
Act of 1933, as
amended
- ------------------ ---------------------- ------------------ ------------------ ------------------ ---------------
</TABLE>
(1) Pursuant to an Agreement and Plan of Merger dated June 4, 1998, by and
among Yahoo!, XY Acquisition Corporation, a wholly-owned subsidiary of
Yahoo!, and Viaweb Inc. ("Viaweb"), on June 10, 1998 (the effective date of
the acquisition), all outstanding shares of Viaweb capital stock were
converted into 787,182 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 June 12, 1998.
40
<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.
b. Reports on Form 8-K:
1) On June 8, 1998, the Company filed a report on Form 8-K,
pursuant to Item 5 of such Form, announcing that it had
entered into an Agreement and Plan of Merger to acquire
Viaweb Inc.
2) On June 12, 1998, the Company filed a report on Form 8-K (as
amended by Form 8-K/A filed on June 18, 1998), pursuant to
Items 2 and 7 of such Form, regarding its acquisition of
Viaweb Inc.
41
<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: January 21, 1999 By: /s/ Gary Valenzuela
-------------------------
Gary Valenzuela
Senior Vice President, Finance
and Administration, and Chief
Financial Officer
(Principal Financial Officer)
Dated: January 21, 1999 By: /s/ James J. Nelson
-------------------------
James J. Nelson
Vice President, Finance
(Principal Accounting Officer)
42
<PAGE>
YAHOO! INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Title No.
- ----- ---
<S> <C>
Financial Data Schedule .....................................................27
</TABLE>
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE YAHOO!
INC. FORM 10-Q/A FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 89,278,000
<SECURITIES> 53,852,000
<RECEIVABLES> 20,443,000
<ALLOWANCES> 3,648,000
<INVENTORY> 0
<CURRENT-ASSETS> 164,136,000
<PP&E> 13,854,000
<DEPRECIATION> 4,867,000
<TOTAL-ASSETS> 226,129,000
<CURRENT-LIABILITIES> 44,023,000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> 175,124,000
<TOTAL-LIABILITY-AND-EQUITY> 226,129,000
<SALES> 0
<TOTAL-REVENUES> 71,416,000
<CGS> 0
<TOTAL-COSTS> 9,054,000
<OTHER-EXPENSES> 65,075,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 936,000
<INCOME-TAX> 4,131,000
<INCOME-CONTINUING> (3,195,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,195,000)
<EPS-PRIMARY> (0.04)<F1>
<EPS-DILUTED> (0.04)
<FN>
<F1>REFLECTS BASIC EPS ACCORDING TO SFAS 128
</FN>
</TABLE>
