EX-99.1 2 a5251058ex991.txt YAHOO! EXHIBIT 99.1 Exhibit 99.1 Yahoo! Reports Third Quarter 2006 Financial Results Revenues - $1,580 Million, Operating Income - $202 Million, Operating Income before Depreciation, Amortization and Stock-Based Compensation Expense - $474 Million SUNNYVALE, Calif.--(BUSINESS WIRE)--Oct. 17, 2006--Yahoo! Inc. (Nasdaq:YHOO) today reported results for the third quarter ended September 30, 2006. "While we are tremendously excited about many things happening at Yahoo!, we are not satisfied with our third quarter financial performance. We continued to grow and believe that we outperformed the graphical market but not at a rate that met our expectations," said Terry Semel, chairman and CEO of Yahoo! "Looking forward, we are excited about the roll-out of our new Project Panama advertising platform. In addition, we plan to invest, innovate and secure leading positions in the areas where we see the biggest growth opportunities. We know we have work to do, but we are confident that Yahoo! has the talent and resources to strengthen our leading position on the Internet, capitalize on the huge growth opportunities ahead, and deliver significant returns for shareholders." Third Quarter 2006 Financial Results -- Revenues were $1,580 million for the third quarter of 2006, a 19 percent increase compared to $1,330 million for the same period of 2005. -- Marketing services revenue was $1,370 million for the third quarter of 2006, an 18 percent increase compared to $1,160 million for the same period of 2005. -- Fees revenue was $210 million for the third quarter of 2006, a 23 percent increase compared to $170 million for the same period of 2005. -- Revenues excluding traffic acquisition costs ("TAC") were $1,121 million for the third quarter of 2006, a 20 percent increase compared to $932 million for the same period of 2005. -- Gross profit for the third quarter of 2006 was $899 million, a 13 percent increase compared to $796 million for the same period of 2005. -- Operating income for the third quarter of 2006 was $202 million (including $121 million for stock-based compensation expense recorded under the fair value method), a 25 percent decrease compared to $270 million (including $14 million for stock-based compensation expense recorded under the intrinsic value method) for the same period of 2005. -- Operating income before depreciation, amortization and stock-based compensation expense for the third quarter of 2006 was $474 million, a 23 percent increase compared to $385 million for the same period of 2005. -- Cash flow from operating activities for the third quarter of 2006 was $390 million, an 11 percent decrease compared to $440 million for the same period of 2005. -- Free cash flow for the third quarter of 2006 was $288 million (including $101 million for a previously announced land purchase), a 16 percent decrease compared to $345 million for the same period of 2005. -- Net income for the third quarter of 2006 was $159 million or $0.11 per diluted share (including $80 million of stock-based compensation expense, net of tax, recorded under the fair value method), compared to $254 million or $0.17 per diluted share for the same period of 2005 (including $8 million of stock-based compensation expense, net of tax, recorded under the intrinsic value method) for the third quarter of 2005. -- Adjusted net income for the third quarter of 2006 was $155 million or $0.11 per diluted share (including $80 million of stock-based compensation expense, net of tax, recorded under the fair value method and excluding certain investment and other gains and charges of $3 million, net of tax), compared to adjusted net income of $165 million or $0.11 per diluted share (including $59 million of stock compensation expense, net of tax, recorded under the fair value method, excluding $8 million of stock compensation expense, net of tax, recorded under the intrinsic value method and excluding certain gains on the sale of certain investments of $38 million, net of tax adjustments) for the third quarter of 2005. -- Adjusted net income for the third quarter of 2006 was $235 million or $0.16 per diluted share (excluding $80 million of stock-based compensation expense, net of tax, and excluding certain investment and other gains and charges of $3 million, net of tax), compared to adjusted net income of $224 million or $0.15 per diluted share (excluding $8 million of stock-based compensation expense, net of tax, and excluding certain gains on the sale of certain investments of $38 million, net of tax adjustments) for the third quarter of 2005. -- Explanations of the Company's non-GAAP financial measures and the related reconciliations to the GAAP financial measures the Company considers most comparable are included in the accompanying "Note to Unaudited Condensed Consolidated Statements of Operations", "Reconciliations to Unaudited Condensed Consolidated Statements of Operations" and "Reconciliation of GAAP Net Income and Net Income Per Share to Non-GAAP Adjusted Net Income and Adjusted Net Income Per Share". "Although we faced unanticipated challenges in the third quarter, we continued to generate strong year-over-year increases in both revenue and free cash flow, on top of an already very large base," said Susan Decker, chief financial officer, Yahoo! "Our profitability and cash generation remain strong, and we will continue to be disciplined by investing in assets we believe will enhance user experience and generate strong returns for our employees, partners and shareholders." Segment Financial Results -- United States revenues for the third quarter of 2006 were $1,054 million, a 14 percent increase compared to $923 million for the same period of 2005. -- International revenues for the third quarter of 2006 were $526 million, a 29 percent increase compared to $407 million for the same period of 2005. -- United States segment operating income before depreciation, amortization and stock-based compensation expense for the third quarter of 2006 was $366 million, a 19 percent increase compared to $306 million for the same period of 2005. -- International segment operating income before depreciation, amortization and stock-based compensation expense for the third quarter of 2006 was $108 million, a 37 percent increase compared to $79 million for the same period of 2005. Cash Flow Information Free cash flow was $288 million (including $101 million for a previously announced land purchase) in the third quarter of 2006 compared to $345 million for the same period of 2005. In addition, Yahoo! used $1,092 million for direct stock repurchases and generated $42 million from the issuance of common stock as a result of the exercise of employee stock options. Cash, cash equivalents and investments in marketable debt securities were $3,230 million at September 30, 2006 as compared to $3,965 million at June 30, 2006, a decrease of $735 million. Please refer to the "Note to Unaudited Condensed Consolidated Statements of Operations" for definitions of certain key non-GAAP financial measures used here and in the "Business Outlook" attached to this press release. Stock Repurchase Program Yahoo! today announced that its Board of Directors has approved a stock repurchase program, effective October 12, 2006. Under the program, Yahoo! is authorized to repurchase up to $3 billion of its outstanding shares of common stock from time to time over the next five years, depending on market conditions, share price and other factors. The repurchase may be made on the open market, in block trades or otherwise and may include derivative transactions. Quarterly Conference Call Yahoo! will host a conference call to discuss third quarter results at 5:00 p.m. Eastern Time today. A live webcast of the conference call, together with supplemental financial information, can be accessed through the Company's Investor Relations website at http://yhoo.client.shareholder.com/earnings.cfm. In addition, an archive of the webcast can be accessed through the same link. An audio replay of the call will be available following the conference call by calling 877-213-9653 or 630-652-3041, reservation number: 15931668. About Yahoo! Yahoo! Inc. is a leading global Internet brand and one of the most trafficked Internet destinations worldwide. Yahoo! seeks to provide online products and services essential to users' lives, and offers a full range of tools and marketing solutions for businesses to connect with Internet users around the world. Yahoo! is headquartered in Sunnyvale, California. This press release and its attachments include the following financial measures defined as non-GAAP financial measures by the Securities and Exchange Commission: revenues excluding traffic acquisition costs or TAC, operating income before depreciation, amortization and stock-based compensation expense, free cash flow, and adjusted net income and adjusted net income per share. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles. See "Note to Unaudited Condensed Consolidated Statements of Operations", "Reconciliations to Unaudited Condensed Consolidated Statements of Operations" and "Reconciliation of GAAP Net Income and Net Income Per Share to Non-GAAP Adjusted Net Income and Adjusted Net Income Per Share" included in this press release for further information regarding these non-GAAP financial measures. This press release and its attachments contain forward-looking statements that involve risks and uncertainties concerning Yahoo!'s expected financial performance (including without limitation the statements and information in the Business Outlook section and the quotations from management in this press release), as well as Yahoo!'s strategic and operational plans. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. The potential risks and uncertainties include, among others, the successful implementation, and acceptance by advertisers, of the Company's new search advertising platform, the Company's ability to compete with new or existing competitors; reduction in spending by, or loss of, marketing services customers; the demand by customers for Yahoo!'s premium services; acceptance by users of new products and services; risks related to joint ventures and the integration of recent acquisitions; risks related to the Company's international operations; failure to manage growth and diversification; adverse results in litigation, including intellectual property infringement claims; the Company's ability to protect its intellectual property and the value of its brands; dependence on key personnel; dependence on third parties for technology, services, content and distribution; and general economic conditions. All information set forth in this release and its attachments is as of October 17, 2006. Yahoo! does not intend, and undertakes no duty, to update this information to reflect future events or circumstances. More information about potential factors that could affect the Company's business and financial results is included under the captions, "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the year ended December 31, 2005 and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, which are on file with the SEC and available at the SEC's website at www.sec.gov. Additional information will also be set forth in those sections in Yahoo!'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, which will be filed with the SEC in the fourth quarter of 2006. Yahoo! and the Yahoo! logos are trademarks and/or registered trademarks of Yahoo! Inc. All other names are trademarks and/or registered trademarks of their respective owners. Yahoo! Inc. Unaudited Condensed Consolidated Statements of Operations (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- 2005 2006 2005 2006 ---------------------- --------------------- Revenues $1,329,929 $1,580,322 $3,756,668 $4,723,231 Cost of revenues(1) 534,381 681,120 1,501,463 1,984,830 ---------- ---------- ---------- ---------- Gross profit 795,548 899,202 2,255,205 2,738,401 ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing(2) 267,992 331,025 747,916 988,030 Product development(2) 148,433 202,079 400,329 628,399 General and administrative(2) 82,162 130,984 247,549 391,198 Amortization of intangibles(1) 26,904 32,774 80,634 97,635 --------------------- ---------- ---------- Total operating expenses 525,491 696,862 1,476,428 2,105,262 ---------- ---------- ---------- ---------- Income from operations 270,057 202,340 778,777 633,139 Other income, net 65,995 50,268 1,095,725 121,794 ---------- ---------- ---------- ---------- Income before income taxes, earnings in equity interests and minority interests 336,052 252,608 1,874,502 754,933 Provision for income taxes (113,797) (124,372) (750,087) (350,002) Earnings in equity interests 32,164 30,190 94,647 78,261 Minority interests in operations of consolidated subsidiaries (646) 103 (6,040) (474) ---------- ---------- ---------- ---------- Net income $ 253,773 $ 158,529 $1,213,022 $ 482,718 ========== ========== ========== ========== Net income per share - diluted $ 0.17 $ 0.11 $ 0.82 $ 0.33 ========== ========== ========== ========== Shares used in per share calculation - diluted 1,486,876 1,442,429 1,482,739 1,471,832 ========== ========== ========== ========== (2) Stock-based compensation expense was allocated as follows: Cost of revenues $ - $ 1,689 $ - $ 4,956 Sales and marketing 2,278 42,470 5,277 119,826 Product development 6,817 38,260 13,820 112,147 General and administrative 4,429 39,072 14,841 92,926 ---------- ---------- ---------- ---------- Total stock-based compensation expense $ 13,524 $ 121,491 $ 33,938 $ 329,855 ========== ========== ========== ========== ---------------------------------------------------------------------- Supplemental Financial Data (See Note) -------------------------- Revenues excluding TAC $ 932,115 $1,121,467 $2,627,982 $3,331,820 Operating income before depreciation, amortization and stock- based compensation expense $ 385,122 $ 473,738 $1,098,624 $1,365,528 Free cash flow $ 344,637 $ 287,915 $ 962,077 $ 988,691 Adjusted net income per diluted share excluding stock-based compensation expense and other items $ 0.15 $ 0.16 $ 0.42 $ 0.48 Adjusted net income per diluted share including fair value stock-based compensation expense and excluding other items $ 0.11 $ 0.11 $ 0.31 $ 0.33 ---------------------------------------------------------------------- (1) Yahoo! has changed its classification of amortization expense related to developed technology and patents acquired through acquisitions. Amortization expense of $14 million and $42 million for the three and nine months ended September 30, 2005, respectively, has been reclassified to cost of revenues from operating expenses. (2) Prior to January 1, 2006, Yahoo! accounted for stock-based compensation under Accounting Principles Board, Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB 25, Yahoo! historically used the intrinsic value method to account for stock-based compensation expense. As of January 1, 2006, Yahoo! accounts for stock-based compensation expense under the fair value method in accordance with Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"). As Yahoo! adopted the modified prospective transition method, results for prior periods have not been restated under the fair value method for GAAP purposes. Yahoo! is presenting non-GAAP adjusted net income and adjusted net income per diluted share financial measures which include stock- based compensation expense calculated under the fair value method and exclude other items, for all periods presented. Yahoo! is also presenting non-GAAP adjusted net income and adjusted net income per diluted share financial measures which exclude stock- based compensation expense and other items for all periods presented. Yahoo! Inc. Note to Unaudited Condensed Consolidated Statements of Operations This press release and its attachments include the non-GAAP financial measures of revenues excluding traffic acquisition costs or TAC, operating income before depreciation, amortization and stock-based compensation expense, free cash flow and adjusted net income and adjusted net income per share, which are reconciled to gross profit, income from operations, cash flow from operating activities, and net income and net income per share, respectively, which we believe are the most comparable GAAP measures. We use these non-GAAP financial measures for internal managerial purposes, when publicly providing our business outlook, and to facilitate period-to-period comparisons. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, gross profit, income from operations, cash flow from operating activities, and net income and net income per share calculated in accordance with generally accepted accounting principles. Revenues excluding TAC is defined as gross profit plus other cost of revenues. Under GAAP, both our revenues and cost of revenues include TAC. In defining revenues excluding TAC as our non-GAAP gross profit measure, we have removed TAC from both revenues and cost of revenues. TAC consists of payments made to affiliates that have integrated our sponsored search offerings into their websites and payments made to companies that direct consumer and business traffic to the Yahoo! website. We present revenues excluding TAC: (1) to provide a metric for our investors to analyze and value our Company and (2) to provide investors one of the primary metrics used by the Company for evaluation and decision-making purposes. We provide revenues excluding TAC because we believe it is useful to investors in valuing our Company. One of the ways investors value companies is to apply a multiple to revenues. Since a significant portion of the GAAP revenues associated with our sponsored search offerings is paid to our third party affiliates, we believe investors find it more meaningful to apply multiples to revenues excluding TAC to assess our value as this avoids "double counting" revenues that are paid to, and being reported by, our third party affiliates. Further, management uses revenues excluding TAC for evaluating the performance of our business, making operating decisions, budgeting purposes, and as a factor in determining management compensation. A limitation of revenues excluding TAC is that it is a measure which we have defined for internal and investor purposes that may be unique to the Company and therefore it may not enhance the comparability of our results to other companies in our industry who have similar business arrangements but address the impact of TAC differently. Operating income before depreciation, amortization and stock-based compensation expense is defined as income from operations before depreciation, amortization of intangible assets and stock-based compensation expense. We consider this measure to be an important indicator of the operational strength of the Company. We exclude depreciation and amortization because while tangible and intangible assets support our businesses, we do not believe the related non-cash depreciation and amortization costs are directly attributable to the underlying operating performance of our business and therefore should not be included in our periodic operating cash earnings presented as a non-GAAP measure. In addition, because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense, and the subjective assumptions involved in those determinations, we believe excluding stock-based compensation enhances the ability of management and investors to compare our core operating results over multiple periods with those of other companies. We do not include depreciation, amortization and stock-based compensation expense in our internal measures or in the measures used by the Company to formulate our business outlook presented with our quarterly financial information to investors. A limitation associated with this non-GAAP measure, operating income before depreciation, amortization and stock-based compensation expense, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures. A further limitation associated with this measure is that it does not include stock-based compensation expense related to the Company's workforce. Free cash flow is defined as cash flow from operating activities, less net capital expenditures and dividends received and including the excess tax benefits from stock-based compensation. We consider free cash flow to be a liquidity measure which provides useful information to management and investors about the amount of cash generated by the business after the acquisition of property and equipment, which can then be used for strategic opportunities including, among others, investing in the Company's business, making strategic acquisitions, strengthening the balance sheet and repurchasing stock. A limitation of free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. Adjusted net income is defined as net income excluding certain gains, losses and expenses and their related tax effects that we do not believe are indicative of our ongoing operating results and further adjusted for stock-based compensation expense under two different methods. Effective January 1, 2006, we adopted SFAS 123R under the modified prospective transition method and therefore have recorded stock-based compensation expense under the fair value method for the three and nine months ended September 30, 2006. Prior to January 1, 2006, including the three and nine months ended September 30, 2005, we recorded stock-based compensation expense under the intrinsic value method. We have included two non-GAAP measures for adjusted net income and adjusted net income per share. In one calculation of adjusted net income and adjusted net income per share, we have excluded stock-based compensation expense in addition to certain gains, losses and expenses and their related tax effects. In the alternative calculation of adjusted net income and adjusted net income per share, we have included stock-based compensation expense calculated under the fair value method (as previously disclosed) for the three and nine months ended September 30, 2005, in addition to excluding certain gains, losses and expenses and their related tax effects, so that both presented periods include stock-based compensation expense under the fair value method. We consider adjusted net income and adjusted net income per share to be profitability measures which facilitate the forecasting of our operating results for future periods and allow for the comparison of our results to historical periods and to other companies in our industry. A limitation of adjusted net income and adjusted net income per share is that they do not include all items that impact our net income and net income per share for the period. Yahoo! Inc. Reconciliations to Unaudited Condensed Consolidated Statements of Operations (in thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2005 2006 2005 2006 ----------- ----------- ----------- ----------- Revenues for groups of similar services: Marketing services $1,159,572 $1,370,374 $3,278,669 $4,137,473 Fees 170,357 209,948 477,999 585,758 ---------- ---------- ---------- ---------- Total revenues $1,329,929 $1,580,322 $3,756,668 $4,723,231 ========== ========== ========== ========== Revenues by segment: United States $ 922,860 $1,054,048 $2,611,103 $3,221,220 International 407,069 526,274 1,145,565 1,502,011 ---------- ---------- ---------- ---------- Total revenues $1,329,929 $1,580,322 $3,756,668 $4,723,231 ========== ========== ========== ========== Cost of revenues: Traffic acquisition costs ("TAC") $ 397,814 $ 458,855 $1,128,686 $1,391,411 Other cost of revenues 136,567 222,265 372,777 593,419 ---------- ---------- ---------- ---------- Total cost of revenues $ 534,381 $ 681,120 $1,501,463 $1,984,830 ========== ========== ========== ========== Revenues excluding TAC: Gross profit $ 795,548 $ 899,202 $2,255,205 $2,738,401 Other cost of revenues 136,567 222,265 372,777 593,419 ---------- ---------- ---------- ---------- Revenues excluding TAC $ 932,115 $1,121,467 $2,627,982 $3,331,820 ========== ========== ========== ========== Revenues excluding TAC by segment: United States: Gross profit $ 596,957 $ 654,203 $1,687,566 $2,015,710 Other cost of revenues 106,660 182,393 294,988 484,055 ---------- ---------- ---------- ---------- Revenues excluding TAC $ 703,617 $ 836,596 $1,982,554 $2,499,765 ========== ========== ========== ========== International: Gross profit $ 198,591 $ 244,999 $ 567,639 $ 722,691 Other cost of revenues 29,907 39,872 77,789 109,364 ---------- ---------- ---------- ---------- Revenues excluding TAC $ 228,498 $ 284,871 $ 645,428 $ 832,055 ========== ========== ========== ========== Operating income before depreciation, amortization and stock-based compensation expense: Income from operations $ 270,057 $ 202,340 $ 778,777 $ 633,139 Depreciation and amortization 101,541 149,907 285,909 402,534 Stock-based compensation expense 13,524 121,491 33,938 329,855 ---------- ---------- ---------- ---------- Operating income before depreciation, amortization and stock-based compensation expense $ 385,122 $ 473,738 $1,098,624 $1,365,528 ========== ========== ========== ========== Operating income before depreciation, amortization and stock-based compensation expense by segment: Operating income before depreciation, amortization and stock-based compensation expense - United States $ 306,031 $ 365,550 $ 867,690 $1,041,417 Operating income before depreciation, amortization and stock-based compensation expense - International 79,091 108,188 230,934 324,111 ---------- ---------- ---------- ---------- Operating income before depreciation, amortization and stock-based compensation expense $ 385,122 $ 473,738 $1,098,624 $1,365,528 ========== ========== ========== ========== United States: Income from operations $ 209,735 $ 132,300 $ 602,028 $ 417,395 Depreciation and amortization 83,413 123,163 233,607 326,801 Stock-based compensation expense 12,883 110,087 32,055 297,221 ---------- ---------- ---------- ---------- Operating income before depreciation, amortization and stock-based compensation expense - United States $ 306,031 $ 365,550 $ 867,690 $1,041,417 ========== ========== ========== ========== International: Income from operations $ 60,322 $ 70,040 $ 176,749 $ 215,744 Depreciation and amortization 18,128 26,744 52,302 75,733 Stock-based compensation expense 641 11,404 1,883 32,634 ---------- ---------- ---------- ---------- Operating income before depreciation, amortization and stock-based compensation expense - International $ 79,091 $ 108,188 $ 230,934 $ 324,111 ========== ========== ========== ========== Free cash flow: Cash flow from operating activities $ 440,131 $ 389,654 $1,230,041 $1,204,219 Acquisition of property and equipment, net (95,494) (240,761) (257,294) (557,586) Dividends received - - (10,670) (12,908) Excess tax benefits from stock-based compensation - 139,022 - 354,966 ---------- ---------- ---------- ---------- Free cash flow $ 344,637 $ 287,915 $ 962,077 $ 988,691 ========== ========== ========== ========== Yahoo! Inc. Reconciliation of GAAP Net Income and Net Income Per Share to Non-GAAP Adjusted Net Income and Adjusted Net Income Per Share (in thousands, except per share amounts) Adjusted Net Income and Adjusted Net Income Per Share Excluding Stock- based Compensation Expense and Other Items Three Months Ended September 30, 2005 ----------------------------------------- GAAP Non-GAAP Non-GAAP adjustments ----------------------------------------- Revenues $ 1,329,929 $ - $1,329,929 Cost of revenues 534,381 - 534,381 ----------- ----------- ---------- Gross profit 795,548 - 795,548 ----------- ----------- ---------- Operating expenses: Sales and marketing 267,992 (2,278) (a) 265,714 Product development 148,433 (6,817) (a) 141,616 General and administrative 82,162 (4,429) (a) 77,733 Amortization of intangibles 26,904 - 26,904 ----------- ----------- ---------- Total operating expenses 525,491 (13,524) 511,967 ----------- ----------- ---------- Income from operations 270,057 13,524 283,581 Other income, net 65,995 (26,863) (b) 39,132 ----------- ----------- ---------- Income before income taxes, earnings in equity interests and minority interests 336,052 (13,339) 322,713 Provision for income taxes (113,797) (16,366)(c)(d) (130,163) Earnings in equity interests 32,164 - 32,164 Minority interests in operations of consolidated subsidiaries (646) - (646) ----------- ----------- ---------- Net income $ 253,773 $ (29,705) $ 224,068 =========== =========== ========== Net income per share - diluted $ 0.17 $ 0.15 =========== ========== Shares used in per share calculation - diluted 1,486,876 1,486,876 =========== ========== Three Months Ended September 30, 2006 ---------------------------------------- GAAP Non-GAAP Non-GAAP adjustments ---------------------------------------- Revenues $ 1,580,322 $ - $1,580,322 Cost of revenues 681,120 (1,689) (e) 679,431 ----------- ----------- ---------- Gross profit 899,202 1,689 900,891 ----------- ----------- ---------- Operating expenses: Sales and marketing 331,025 (42,470) (e) 288,555 Product development 202,079 (38,260) (e) 163,819 General and administrative 130,984 (29,072) (e)(f) 101,912 Amortization of intangibles 32,774 - 32,774 ----------- ----------- ---------- Total operating expenses 696,862 (109,802) 587,060 ----------- ----------- ---------- Income from operations 202,340 111,491 313,831 Other income, net 50,268 (14,316) (g) 35,952 ----------- ----------- ---------- Income before income taxes, earnings in equity interests and minority interests 252,608 97,175 349,783 Provision for income taxes (124,372) (20,264) (h)(i) (144,636) Earnings in equity interests 30,190 - 30,190 Minority interests in operations of consolidated subsidiaries 103 - 103 ----------- ----------- ---------- Net income $ 158,529 $ 76,911 $ 235,440 =========== =========== ========== Net income per share - diluted $ 0.11 $ 0.16 =========== ========== Shares used in per share calculation - diluted 1,442,429 1,442,429 =========== ========== Nine Months Ended September 30, 2005 ----------------------------------------- GAAP Non-GAAP Non-GAAP adjustments ----------------------------------------- Revenues $ 3,756,668 $ - $3,756,668 Cost of revenues 1,501,463 - 1,501,463 ----------- ----------- Gross profit 2,255,205 - 2,255,205 ----------- ----------- ---------- Operating expenses: Sales and marketing 747,916 (5,277) (a) 742,639 Product development 400,329 (13,820) (a) 386,509 General and administrative 247,549 (14,841) (a) 232,708 Amortization of intangibles 80,634 - 80,634 ----------- ----------- ---------- Total operating expenses 1,476,428 (33,938) 1,442,490 ----------- ----------- ---------- Income from operations 778,777 33,938 812,715 Other income, net 1,095,725 (1,001,790) (b) 93,935 ----------- ----------- ---------- Income before income taxes, earnings in equity interests and minority interests 1,874,502 (967,852) 906,650 Provision for income taxes (750,087) 382,947 (c)(d) (367,140) Earnings in equity interests 94,647 - 94,647 Minority interests in operations of consolidated subsidiaries (6,040) - (6,040) ----------- ----------- ---------- Net income $ 1,213,022 $ (584,905) $ 628,117 =========== =========== ========== Net income per share - diluted $ 0.82 $ 0.42 =========== ========== Shares used in per share calculation - diluted 1,482,739 1,482,739 =========== ========== Nine Months Ended September 30, 2006 ---------------------------------------- GAAP Non-GAAP Non-GAAP adjustments ---------------------------------------- Revenues $ 4,723,231 $ - $4,723,231 Cost of revenues 1,984,830 (4,956) (e) 1,979,874 ----------- ----------- ---------- Gross profit 2,738,401 4,956 2,743,357 ----------- ----------- ---------- Operating expenses: Sales and marketing 988,030 (119,826) (e) 868,204 Product development 628,399 (112,147) (e) 516,252 General and administrative 391,198 (82,926) (e)(f) 308,272 Amortization of intangibles 97,635 - 97,635 ----------- ----------- ---------- Total operating expenses 2,105,262 (314,899) 1,790,363 ----------- ----------- ---------- Income from operations 633,139 319,855 952,994 Other income, net 121,794 (14,316) (g) 107,478 ----------- ----------- ---------- Income before income taxes, earnings in equity interests and minority interests 754,933 305,539 1,060,472 Provision for income taxes (350,002) (84,337) (h)(i) (434,339) Earnings in equity interests 78,261 - 78,261 Minority interests in operations of consolidated subsidiaries (474) - (474) ----------- ----------- ---------- Net income $ 482,718 $ 221,202 $ 703,920 =========== =========== ========== Net income per share - diluted $ 0.33 $ 0.48 =========== ========== Shares used in per share calculation - diluted 1,471,832 1,471,832 =========== ========== Yahoo! Inc. Reconciliation of GAAP Net Income and Net Income Per Share to Non-GAAP Adjusted Net Income and Adjusted Net Income Per Share (in thousands, except per share amounts) Adjusted Net Income and Adjusted Net Income Per Share Including Stock- based Compensation Expense Under the Fair Value Method and Excluding Other Items Three Months Ended September 30, 2005 ----------------------------------------- GAAP Non-GAAP Non-GAAP adjustments ----------------------------------------- Net income $ 253,773 $(88,275)(j)(k)(l)$ 165,498 =========== ======== ========== Net income per share - diluted $ 0.17 $ 0.11 =========== ========== Shares used in per share calculation - diluted 1,486,876 2,032 (m) 1,488,908 =========== ======== ========== Three Months Ended September 30, 2006 ---------------------------------------- GAAP Non-GAAP Non-GAAP adjustments ---------------------------------------- Net income $ 158,529 $ (3,246)(i)(n) $ 155,283 =========== ========== ========== Net income per share - diluted $ 0.11 $ 0.11 =========== ========== Shares used in per share calculation - diluted 1,442,429 1,442,429 =========== ========== Nine Months Ended September 30, 2005 ----------------------------------------- GAAP Non-GAAP Non-GAAP adjustments ----------------------------------------- Net income $1,213,022 $(757,668)(j)(k)(l)$ 455,354 ========== ========= ========== Net income per share - diluted $ 0.82 $ 0.31 ========== ========== Shares used in per share calculation - diluted 1,482,739 1,704 (m) 1,484,443 ========== ========= ========== Nine Months Ended September 30, 2006 ---------------------------------------- GAAP Non-GAAP Non-GAAP adjustments ---------------------------------------- Net income $ 482,718 $ (3,246)(i)(n) $ 479,472 =========== ========== ========== Net income per share - diluted $ 0.33 $ 0.33 =========== ========== Shares used in per share calculation - diluted 1,471,832 1,471,832 =========== ========== Notes: (a) To eliminate total stock-based compensation expense of $14 million and $34 million, respectively, as measured using the intrinsic value method under APB 25 for the three and nine months ended September 30, 2005. (b) To eliminate gains of $27 million and $1,002 million, respectively, on the sale of certain investments and settlements for the three and nine months ended September 30, 2005. (c) To eliminate income tax effects associated with adjustments referenced in (a) and (b). (d) To adjust the provision for income taxes for the three and nine months ended September 30, 2005 to reflect an effective tax rate of approximately 40 percent. (e) To eliminate total stock-based compensation expense of $121 million and $330 million, respectively, as measured using the fair value method under SFAS 123R for the three and nine months ended September 30, 2006. (f) To eliminate a $10 million credit from the reversal of an earn-out accrual. (g) To eliminate a non-cash gain of $14 million arising from increased dilution of our ownership in Alibaba, resulting in the recognition of a further gain on the sale of Yahoo! China. (h) To eliminate income tax effects associated with adjustments referenced in (e), (f), and (g). (i) To reduce the provision for income taxes to eliminate a charge of $11 million related to a subsidiary restructuring transaction reported in the three months ended December 31, 2005. (j) To eliminate gains referenced in (b), net of tax. (k) To include fair value stock-based compensation expense of $59 million and $173 million, net of tax, respectively, using the fair value method under Statement of Financial Accounting Standards No.123 "Accounting for Stock-Based Compensation," ("SFAS123"), as previously disclosed and exclude recorded stock- based compensation expense of $8 million and $20 million, net of tax, respectively, using the intrinsic value method under APB 25 for the three and nine months ended September 30, 2005. (l) To adjust the provision for income taxes for the three and nine months ended September 30, 2005 to reflect an effective tax rate of approximately 42 percent on net income including fair value stock-based compensation expense referenced in (k). (m) To adjust the number of shares used in the diluted net income per share count for the impact of applying SFAS 123. (n) To eliminate items referenced in (f) and (g), net of tax. Yahoo! Inc. Business Outlook Business Outlook The following business outlook is based on current information and expectations as of October 17, 2006. Yahoo!'s business outlook as of today is expected to be available on the Company's Investor Relations website throughout the current quarter. Yahoo! does not expect, and undertakes no obligation, to update the business outlook prior to the release of the Company's next quarterly earnings announcement, notwithstanding subsequent developments; however, Yahoo! may update the business outlook or any portion thereof at any time at its discretion. Three months Year ending ending December 31, December 31, 2006 2006 ---------------- ---------------- Revenues excluding TAC (3) outlook (in millions): Gross profit $957 - $1,037 $3,697 - $3,777 Other cost of revenues 188 - 228 780 - 820 ---------------- ---------------- Revenues excluding TAC $1,145 - $1,265 $4,477 - $4,597 ================ ================ Operating income before depreciation, amortization and stock-based compensation expense(3) outlook (in millions): Income from operations $233 - $273 $866 - $906 Depreciation and amortization 134 -150 537 -553 Stock-based compensation expense 108 - 122 438 - 452 ---------------- ---------------- Operating income before depreciation, amortization and stock-based compensation expense $475 - $545 $1,841 - $1,911 ================ ================ (3) Refer to Note to Unaudited Condensed Consolidated Statements of Operations. Yahoo! Inc. Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2005 2006 2005 2006 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 253,773 $ 158,529 $ 1,213,022 $ 482,718 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 60,494 78,529 163,245 217,730 Amortization of intangible assets 41,047 71,378 122,664 184,804 Stock-based compensation expense 13,524 121,491 33,938 329,855 Tax benefits from stock- based compensation 121,180 110,812 723,748 275,093 Excess tax benefits from stock-based compensation - (139,022) - (354,966) Earnings in equity interests (32,164) (30,190) (94,647) (78,261) Dividends received - - 10,670 12,908 Minority interests in operations of consolidated subsidiaries 646 (103) 6,040 474 (Gain)/loss from sale of investments, assets and other, net (24,472) (13,741) (976,738) (15,811) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable, net (50,764) 6,575 (128,921) (46,780) Prepaid expenses and other (2,504) (12,289) 7,736 (28,252) Accounts payable 8,839 3,232 (5,354) 66,985 Accrued expenses and other liabilities 31,580 50,191 111,396 138,787 Deferred revenue 18,952 (15,738) 43,242 18,935 ----------- ----------- ----------- ----------- Net cash provided by operating activities 440,131 389,654 1,230,041 1,204,219 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment, net (95,494) (240,761) (257,294) (557,586) Purchases of marketable debt securities (1,157,592) (240,690) (6,632,419) (889,023) Proceeds from sales and maturities of marketable debt securities 1,415,056 585,532 6,789,521 1,431,206 Acquisitions, net of cash acquired (1,089) (5,971) (127,463) (61,300) Proceeds from sales of marketable equity securities 35,846 - 1,006,142 - Other investing activities, net (435) 19,120 (39,030) 18,476 ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities 196,292 117,230 739,457 (58,227) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net 75,027 41,626 377,751 231,451 Repurchases of common stock (208,457) (1,091,931) (373,352) (1,782,140) Structured stock repurchases, net (392,786) - (752,717) (227,705) Excess tax benefits from stock-based compensation - 139,022 - 354,966 Other financing activities, net 949 - 1,749 - ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities (525,267) (911,283) (746,569) (1,423,428) ----------- ----------- ----------- ----------- Effect of exchange rate changes on cash and cash equivalents (4,576) (1,565) (19,649) 33,002 Net change in cash and cash equivalents 106,580 (405,964) 1,203,280 (244,434) Cash and cash equivalents, beginning of period 1,920,423 1,591,223 823,723 1,429,693 ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 2,027,003 $ 1,185,259 $ 2,027,003 $ 1,185,259 =========== =========== =========== =========== Supplemental schedule of acquisition- related activities: Cash paid for acquisitions $ 1,140 $ 5,971 $ 128,592 $ 68,977 Cash acquired in acquisitions (51) - (1,129) (7,677) ----------- ----------- ----------- ----------- $ 1,089 $ 5,971 $ 127,463 $ 61,300 =========== =========== =========== =========== Common stock, restricted stock and stock options issued in connection with acquisitions $ - $ - $ 44,381 $ - =========== =========== =========== =========== Yahoo! Inc. Unaudited Condensed Consolidated Balance Sheets (in thousands) December 31, September 30, 2005 2006 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 1,429,693 $ 1,185,259 Marketable debt securities 1,131,141 923,792 Accounts receivable, net 721,723 784,460 Prepaid expenses and other current assets 166,976 166,111 ------------ ------------ Total current assets 3,449,533 3,059,622 Long-term marketable debt securities 1,439,014 1,120,930 Property and equipment, net 697,522 1,048,574 Goodwill 2,895,557 2,976,576 Intangible assets, net 534,615 407,368 Other assets 57,192 140,437 Investments in equity interests 1,758,401 1,863,560 ------------ ------------ Total assets $ 10,831,834 $ 10,617,067 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 70,291 $ 142,479 Accrued expenses and other current liabilities 827,589 987,280 Deferred revenue 306,172 329,385 ------------ ------------ Total current liabilities 1,204,052 1,459,144 Long-term deferred revenue 67,792 67,168 Long-term debt 749,995 749,960 Other long-term liabilities 243,580 265,738 Minority interests in consolidated subsidiaries - 7,818 Stockholders' equity 8,566,415 8,067,239 ------------ ------------ Total liabilities and stockholders' equity $ 10,831,834 $ 10,617,067 ============ ============ CONTACT: Yahoo! Inc. Kelly Delaney, 408-349-2579 (Media Relations) kellyd@yahoo-inc.com Cathy La Rocca, 408-349-5188 (Investor Relations) cathy@yahoo-inc.com or OutCast Communications Kim Milosevich, 415-345-4734 (Media Relations) kim@outcastpr.com