UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

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 000-28018

Yahoo! Inc.

(Exact name of Registrant as specified in its charter)

Delaware	77-0398689
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

701 First Avenue

Sunnyvale, California 94089

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (408) 349-3300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed 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 by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at July 31, 2013
Common Stock, $0.001 par value	1,020,321,185

YAHOO! INC.

Table of Contents

PART I	FINANCIAL INFORMATION	3
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of December 31, 2012 (unaudited) and June 30, 2013 (unaudited)	3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2013 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2013 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2013 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	49
PART II	OTHER INFORMATION	50
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	62
	Signatures	63

2

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

YAHOO! INC.

Condensed Consolidated Balance Sheets

	December 31, 2012			June 30, 2013
	(Unaudited, in thousands except par values)
ASSETS
Current assets:
Cash and cash equivalents	$	2,667,778		$	1,142,223
Short-term marketable securities		1,516,175			1,486,591
Accounts receivable, net		1,008,448			941,811
Prepaid expenses and other current assets		460,312			887,677
Total current assets		5,652,713			4,458,302
Long-term marketable securities		1,838,425			2,161,814
Alibaba Group Preference Shares		816,261			—
Property and equipment, net		1,685,845			1,579,822
Goodwill		3,826,749			4,582,588
Intangible assets, net		153,973			398,300
Other long-term assets		289,130			171,210
Investments in equity interests		2,840,157			2,874,387
Total assets	$	17,103,253		$	16,226,423
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	184,831		$	120,028
Accrued expenses and other current liabilities		808,475			763,117
Deferred revenue		296,926			294,968
Total current liabilities		1,290,232			1,178,113
Long-term deferred revenue		407,560			333,229
Capital lease and other long-term liabilities		124,587			125,639
Deferred and other long-term tax liabilities, net		675,271			730,708
Total liabilities		2,497,650			2,367,689
Commitments and contingencies (Note 11)		—			—
Yahoo! Inc. stockholders’ equity:
Common stock, $0.001 par value; 5,000,000 shares authorized; 1,189,816 shares issued and 1,115,233 shares outstanding as of December 31, 2012 and 1,203,061 shares issued and 1,065,046 shares outstanding as of June 30, 2013		1,187			1,198
Additional paid-in capital		9,563,348			9,770,201
Treasury stock at cost, 74,583 shares as of December 31, 2012 and 138,015 shares as of June 30, 2013		(1,368,043	)		(2,795,869	)
Retained earnings		5,792,459			6,513,894
Accumulated other comprehensive income		571,249			319,440
Total Yahoo! Inc. stockholders’ equity		14,560,200			13,808,864
Noncontrolling interests		45,403			49,870
Total equity		14,605,603			13,858,734
Total liabilities and equity	$	17,103,253		$	16,226,423

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

YAHOO! INC.

Condensed Consolidated Statements of Income

	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2013			June 30, 2012			June 30, 2013
	(Unaudited, in thousands except per share amounts)
Revenue	$	1,217,794		$	1,135,244		$	2,439,027		$	2,275,612
Operating expenses:
Cost of revenue — traffic acquisition costs		137,025			64,316			281,116			130,384
Cost of revenue — other		278,453			271,262			532,432			549,269
Sales and marketing		272,910			279,738			558,178			536,757
Product development		199,628			236,248			428,106			455,828
General and administrative		136,117			135,039			260,388			268,460
Amortization of intangibles		9,756			8,084			19,809			15,449
Restructuring charges (reversals), net		129,092			3,578			134,809			(3,484	)
Total operating expenses		1,162,981			998,265			2,214,838			1,952,663
Income from operations		54,813			136,979			224,189			322,949
Other income, net		20,175			23,606			22,453			40,678
Income before income taxes and earnings in equity interests		74,988			160,585			246,642			363,627
Provision for income taxes		(26,523	)		(50,267	)		(82,942	)		(80,003	)
Earnings in equity interests		179,991			224,690			352,234			442,278
Net income		228,456			335,008			515,934			725,902
Net income attributable to noncontrolling interests		(1,825	)		(3,858	)		(2,960	)		(4,467	)
Net income attributable to Yahoo! Inc.	$	226,631		$	331,150		$	512,974		$	721,435
Net income attributable to Yahoo! Inc. common stockholders per share — basic	$	0.19		$	0.31		$	0.42		$	0.66
Net income attributable to Yahoo! Inc. common stockholders per share — diluted	$	0.18		$	0.30		$	0.42		$	0.65
Shares used in per share calculation — basic		1,213,320			1,079,389			1,214,551			1,086,780
Shares used in per share calculation — diluted		1,221,719			1,094,694			1,224,102			1,101,395
Stock-based compensation expense by function:
Cost of revenue — other	$	2,614		$	3,029		$	5,508		$	6,607
Sales and marketing	$	18,981		$	23,775		$	40,078		$	39,820
Product development	$	17,808		$	20,537		$	37,279		$	28,800
General and administrative	$	10,168		$	20,795		$	22,672		$	37,514
Restructuring expense reversals	$	(3,429	)	$	—		$	(3,429	)	$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

YAHOO! INC.

Condensed Consolidated Statements of Comprehensive Income

	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2013			June 30, 2012			June 30, 2013
	(Unaudited, in thousands)
Net income	$	228,456		$	335,008		$	515,934		$	725,902
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities, net of taxes of $106 and $2,862 for the three months ended June 30, 2012 and 2013, respectively, and $206 and $3,017 for the six months ended June 30, 2012 and 2013, respectively		6,143			3,031			5,680			4,069
Reclassification adjustment for realized (gains) losses on available-for-sale securities included in net income, net of taxes of $(932) and $150 for the three months ended June 30, 2012 and 2013, respectively, and $(5,356) and $173 for the six months ended June 30, 2012 and 2013, respectively		1,630			(251	)		9,358			(290	)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax		7,773			2,780			15,038			3,779
Foreign currency translation adjustments (“CTA”):
Foreign CTA gains (losses), net of tax		(231,371	)		(243,854	)		(221,137	)		(525,359	)
Net investment hedge CTA gains (losses), net of tax		—			101,023			—			269,737
Net foreign CTA gains (losses), net of tax		(231,371	)		(142,831	)		(221,137	)		(255,622	)
Cash flow hedges:
Unrealized gains on cash flow hedges, net of tax		—			11			—			11
Reclassification adjustment for cash flow hedges, net of tax		—			23			—			23
Net change in unrealized gains on cash flow hedges, net of tax		—			34			—			34
Other comprehensive income (loss)		(223,598	)		(140,017	)		(206,099	)		(251,809	)
Comprehensive income		4,858			194,991			309,835			474,093
Less: comprehensive income attributable to noncontrolling interests		(1,825	)		(3,858	)		(2,960	)		(4,467	)
Comprehensive income attributable to Yahoo! Inc.	$	3,033		$	191,133		$	306,875		$	469,626

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

YAHOO! INC.

Condensed Consolidated Statements of Cash Flows

	Six Months Ended
	June 30, 2012			June 30, 2013
	(Unaudited, in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	515,934		$	725,902
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		254,539			285,290
Amortization of intangible assets		60,209			37,477
Stock-based compensation expense, net		102,108			112,741
Non-cash restructuring charges		38,638			547
Dividend income related to Alibaba Group Preference Shares		—			(35,726	)
Dividends received from equity investees		83,648			135,058
Tax benefits (detriments) from stock-based awards		(3,935	)		9,725
Excess tax benefits from stock-based awards		(16,770	)		(18,513	)
Deferred income taxes		(18,474	)		(27,997	)
Earnings in equity interests		(352,234	)		(442,278	)
(Gain) loss from sales of investments, assets, and other, net		(18,962	)		13,175
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net		(9,908	)		58,510
Prepaid expenses and other		11,018			(99,568	)
Accounts payable		(35,714	)		(59,754	)
Accrued expenses and other liabilities		(15,755	)		(69,761	)
Deferred revenue		(22,329	)		(75,318	)
Net cash provided by operating activities		572,013			549,510
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net		(215,922	)		(151,657	)
Purchases of marketable securities		(645,266	)		(2,244,302	)
Proceeds from sales of marketable securities		548,439			1,458,593
Proceeds from maturities of marketable securities		198,498			462,406
Proceeds related to the redemption of Alibaba Group Preference Shares		—			800,000
Proceeds from the sale of investments		26,132			—
Acquisitions, net of cash acquired		—			(1,024,157	)
Purchases of intangible assets		(3,088	)		(2,052	)
Other investing activities, net		(9,421	)		(3,139	)
Net cash used in investing activities		(100,628	)		(704,308	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net		77,871			123,092
Repurchases of common stock		(526,007	)		(1,427,825	)
Excess tax benefits from stock-based awards		16,770			18,513
Tax withholdings related to net share settlements of restricted stock units		(38,494	)		(51,137	)
Other financing activities, net		(2,222	)		(2,778	)
Net cash used in financing activities		(472,082	)		(1,340,135	)
Effect of exchange rate changes on cash and cash equivalents		(22,424	)		(30,622	)
Net change in cash and cash equivalents		(23,121	)		(1,525,555	)
Cash and cash equivalents at beginning of period		1,562,390			2,667,778
Cash and cash equivalents at end of period	$	1,539,269		$	1,142,223

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

YAHOO! INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company. Yahoo! Inc., together with its consolidated subsidiaries (“Yahoo!” or the “Company”), is focused on making the world’s daily habits inspiring and entertaining. By creating highly personalized experiences for its users, the Company keeps people connected to what matters most to them, across devices and around the world. The Company creates value for advertisers by connecting them with the audiences that build their businesses. Advertisers can build their businesses through advertising to targeted audiences on the Company’s online properties and services (“Yahoo! Properties”), or through a distribution network of third-party entities (“Affiliates”) who integrate the Company’s advertising offerings into their Websites or other offerings (those Websites and other offerings, “Affiliate sites”).

Basis of Presentation. The condensed consolidated financial statements include the accounts of Yahoo! Inc. and its majority-owned or otherwise controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the condensed consolidated balance sheets. The Company has included the results of operations of acquired companies from the date of the acquisition. Certain prior period amounts have been reclassified to conform to the current period presentation.

The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue, the useful lives of long-lived assets including property and equipment and intangible assets, investment fair values, stock-based compensation, goodwill, income taxes, contingencies, and restructuring charges. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results may differ from these estimates.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2012 was derived from the Company’s audited financial statements for the year ended December 31, 2012, but does not include all disclosures required by U.S. GAAP. However, the Company believes the disclosures are adequate to make the information presented not misleading.

7

Note 2 INVESTMENTS AND FAIR VALUE MEASUREMENTS

The following tables summarize the investments in available-for-sale securities (in thousands):

	December 31, 2012
	Gross Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government and agency securities	$	1,312,876	$	985	$	(45	)	$	1,313,816
Corporate debt securities, commercial paper, and bank certificates of deposit		2,039,809		1,597		(622	)		2,040,784
Corporate equity securities		230		—		(33	)		197
Alibaba Group Preference Shares		816,261		—		—			816,261
Total investments in available-for-sale securities	$	4,169,176	$	2,582	$	(700	)	$	4,171,058

	June 30, 2013
	Gross Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government and agency securities	$	815,125	$	283	$	(823	)	$	814,585
Corporate debt securities, commercial paper, and bank certificates of deposit		2,834,690		686		(6,692	)		2,828,684
Corporate equity and other marketable securities		5,366		19		—			5,385
Total investments in available-for-sale securities	$	3,655,181	$	988	$	(7,515	)	$	3,648,654

	December 31, 2012		June 30, 2013
Reported as:
Short-term marketable securities	$	1,516,175	$	1,486,591
Long-term marketable securities		1,838,425		2,161,814
Alibaba Group Preference Shares		816,261		—
Other assets		197		249
Total	$	4,171,058	$	3,648,654

Available-for-sale securities included in cash and cash equivalents on the condensed consolidated balance sheets are not included in the table above as the gross unrealized gains and losses were immaterial as of December 31, 2012 and June 30, 2013 as the carrying value approximates fair value because of the short maturity of those instruments. Realized gains and losses from sales of marketable securities were not material for the three and six months ended June 30, 2012 and 2013.

The contractual maturities of available-for-sale marketable securities were as follows (in thousands):

	December 31, 2012		June 30, 2013
Due within one year	$	1,516,175	$	1,486,591
Due after one year through five years		1,838,425		2,161,814
Total available-for-sale marketable securities	$	3,354,600	$	3,648,405

8

The following tables show all investments in an unrealized loss position for which an other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

	December 31, 2012
	Less than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Government and agency securities	$	165,025	$	(45	)	$	—	$	—	$	165,025	$	(45	)
Corporate debt securities, commercial paper, and bank certificates of deposit		729,046		(622	)		—		—		729,046		(622	)
Corporate equity securities		197		(33	)		—		—		197		(33	)
Total investments in available-for-sale securities	$	894,268	$	(700	)	$	—	$	—	$	894,268	$	(700	)

	June 30, 2013
	Less than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Government and agency securities	$	428,008	$	(823	)	$	—	$	—	$	428,008	$	(823	)
Corporate debt securities, commercial paper, and bank certificates of deposit		1,944,015		(6,692	)		—		—		1,944,015		(6,692	)
Total investments in available-for-sale securities	$	2,372,023	$	(7,515	)	$	—	$	—	$	2,372,023	$	(7,515	)

The Company’s investment portfolio consists of liquid high-quality fixed income government, agency, and corporate debt securities, money market funds, and time deposits with financial institutions. Investments in fixed rate instruments carry a degree of interest rate risk. Fixed rate securities may have their fair value adversely impacted due to a rise in interest rates or by a deterioration of the credit quality of the issuer. The longer the term of the securities, the more susceptible they are to changes in market rates. Investments are reviewed periodically to identify possible other-than-temporary impairment. The Company has no current requirement or intent to sell the securities in an unrealized loss position. The Company expects to recover up to (or beyond) the initial cost of investment for securities held.

The Company’s investment in the Alibaba Group Preference Shares is presented as an asset carried at fair value on the Company’s condensed consolidated balance sheets as of December 31, 2012. As of December 31, 2012, the carrying value of the Alibaba Group Preference Shares approximated the fair value. As of December 31, 2012, the total fair value of the Alibaba Group Preferences Shares was $822 million, which included $6 million of accrued dividend income recorded within prepaid expenses and other current assets and $16 million of accrued dividend income recorded as part of the carrying value of the Alibaba Group Preference Shares. On May 16, 2013, Alibaba Group exercised its right to redeem the Alibaba Group Preference Shares for $846 million in cash. The cash received represented the redemption value, which included the stated value of $800 million plus accrued dividends of $46 million.

9

The following table sets forth the financial assets and liabilities, measured at fair value, by level within the fair value hierarchy as of December 31, 2012 (in thousands):

	Fair Value Measurements at Reporting Date Using
Assets	Level 1		Level 2			Level 3		Total
Money market funds(1)	$	685,707	$	—		$	—	$	685,707
Available-for-sale securities:
Government and agency securities(1)		—		2,464,227			—		2,464,227
Commercial paper and bank certificates of deposit(1)		—		892,769			—		892,769
Corporate debt securities(1)		—		1,298,123			—		1,298,123
Time deposits		—		84,555			—		84,555
Alibaba Group Preference Shares		—		—			816,261		816,261
Corporate equity securities(2)		197		—			—		197
Foreign currency derivative contracts(3)		—		5,007			—		5,007
Available-for-sale securities at fair value	$	685,904	$	4,744,681		$	816,261	$	6,246,846
Liabilities
Foreign currency derivative contracts(3)		—		(6,662	)		—		(6,662	)
Total assets and liabilities at fair value	$	685,904	$	4,738,019		$	816,261	$	6,240,184

The following table sets forth the financial assets and liabilities, measured at fair value, by level within the fair value hierarchy as of June 30, 2013 (in thousands):

	Fair Value Measurements at Reporting Date Using
Assets	Level 1		Level 2			Level 3		Total
Money market funds(1)	$	461,628	$	—		$	—	$	461,628
Available-for-sale securities:
Government and agency securities(1)		—		831,917			—		831,917
Commercial paper and bank certificates of deposit(1)		—		455,838			—		455,838
Corporate debt securities(1)		—		2,372,846			—		2,372,846
Time deposits		—		74,687			—		74,687
Corporate equity and other marketable securities(2)		249		5,137			—		5,386
Foreign currency derivative contracts(3)		—		438,692			—		438,692
Available-for-sale securities at fair value	$	461,877	$	4,179,117		$	—	$	4,640,994
Liabilities
Foreign currency derivative contracts(3)		—		(2,017	)		—		(2,017	)
Total assets and liabilities at fair value	$	461,877	$	4,177,100		$	—	$	4,638,977

⁽¹⁾  The money market funds, government and agency securities, commercial paper and bank certificates of deposit, and corporate debt securities are classified as part of either cash and cash equivalents or investments in marketable securities in the condensed consolidated balance sheets.

⁽²⁾  The corporate equity securities are classified as part of the other long-term assets and other marketable securities are classified as investments in marketable securities in the condensed consolidated balance sheets.

⁽³⁾  Foreign currency derivative contracts are classified as part of either other current assets or other liabilities in the condensed consolidated balance sheets. The notional amounts of the foreign currency derivative contracts were $3.4 billion, including contracts designated as net investment hedges of $3 billion, as of December 31, 2012, and $4 billion, including contracts designated as net investment hedges of $3.5 billion, as of June 30, 2013.

The amount of cash and cash equivalents as of December 31, 2012 and June 30, 2013 included $597 million and $589 million, respectively, in cash deposits.

The fair values of the Company’s Level 1 financial assets and liabilities are based on quoted market prices of the identical underlying security. The fair values of the Company’s Level 2 financial assets and liabilities are obtained using quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices e.g. interest rates and yield curves. The Company utilizes a pricing service to assist in obtaining fair value pricing for the majority of the investment portfolio. The Company classified its investment in the Alibaba Group Preference Shares within Level 3 because it was valued using significant unobservable inputs. To estimate the fair value as of December 31, 2012, the Company performed benchmarking by comparing the terms and conditions of the Alibaba Group Preference Shares to dividend rates, subordination terms, and credit ratings of those of similar type instruments. The Company conducts reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

10

Activity between Levels of the Fair Value Hierarchy. During the year ended December 31, 2012, the Company did not make any transfers between Level 1, Level 2, or Level 3 assets or liabilities. During the six months ended June 30, 2013, the Company did not make any transfers between Level 1 and Level 2 assets or liabilities.

Note 3 CONSOLIDATED FINANCIAL STATEMENT DETAILS

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income were as follows (in thousands):

	December 31, 2012		June 30, 2013
Unrealized gains on available-for-sale securities, net of tax	$	9,121	$	12,900
Foreign currency translation, net of tax		562,128		306,540
Accumulated other comprehensive income	$	571,249	$	319,440

Noncontrolling Interests

Noncontrolling interests were as follows (in thousands):

	December 31, 2012		June 30, 2013
Beginning noncontrolling interests	$	40,280	$	45,403
Net income attributable to noncontrolling interests		5,123		4,467
Ending noncontrolling interests	$	45,403	$	49,870

Other Income, Net

Other income, net was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2013		June 30, 2012		June 30, 2013
Interest, dividend, and investment income	$	3,584	$	21,934	$	9,280	$	47,852
Other		16,591		1,672		13,173		(7,174	)
Total other income, net	$	20,175	$	23,606	$	22,453	$	40,678

Interest, dividend and investment income consists of income earned from cash in bank accounts, investments made in marketable securities and money market funds, and dividend income on the Alibaba Group Preference Shares.

Other consists of gains and losses from sales or impairments of marketable securities and/or investments in privately-held companies, foreign exchange gains and losses due to re-measurement of monetary assets and liabilities denominated in non-functional currencies, foreign exchange gains and losses on balance sheet hedges, and other non-operating items.

Reclassifications Out of Accumulated Other Comprehensive Income

Reclassifications out of accumulated other comprehensive income for the three months ended June 30, 2013 were as follows (in thousands):

	Amount Reclassified  from Accumulated Other Comprehensive Income			Affected Line Item in  the Statement of Income
Realized losses on cash flow hedges, net of tax	$	23			Revenue
Realized gains on available-for-sale securities, net of tax		(251	)		Other income, net
Total reclassifications for the period	$	(228	)

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Reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2013 were as follows (in thousands):

	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement of Income
Realized losses on cash flow hedges, net of tax	$	23			Revenue
Realized gains on available-for-sale securities, net of tax		(290	)		Other income, net
Total reclassifications for the period	$	(267	)

Note 4 ACQUISITIONS

Transactions completed in 2013

Tumblr. On June 19, 2013, the Company completed the acquisition of Tumblr, Inc. (“Tumblr”), a blog-hosting website that allows users to post their own content as well as follow or re-blog posts made by other users. The acquisition of Tumblr is expected to bring a significant community of users to the Yahoo! network.

The purchase price exceeded the fair value of the net tangible and identifiable intangible assets acquired from Tumblr and, as a result, the Company recorded goodwill in connection with this transaction. Under the terms of the agreement, the Company acquired all of the equity interests (including all outstanding vested options) in Tumblr. Tumblr stockholders and vested optionholders were paid in cash, outstanding Tumblr unvested options and restricted stock units were assumed and converted into equivalent awards covering Yahoo! common stock and a portion of the Tumblr shares held by its founder were exchanged for Yahoo! common stock.

The total purchase price of approximately $990 million consisted mainly of cash consideration. The preliminary allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):

Cash and marketable securities acquired	$	16,587
Other tangible assets acquired		73,978
Amortizable intangible assets:
Developed technology		23,700
Customer contracts and related relationships		182,400
Trade name		56,500
Goodwill		750,893
Total assets acquired		1,104,058
Liabilities assumed		(113,847	)
Total	$	990,211

In connection with the acquisition, the Company is recognizing stock-based compensation expense of $70 million over a period of up to 4 years. This amount is comprised of the assumed unvested stock options and restricted stock units, valued at $29 million, and the Yahoo! common stock, valued at $41 million, issued to Tumblr’s founder but subject to holdback and release over four years provided he remains an employee of the Company. In addition, the transaction resulted in contingent cash consideration of $40 million to be paid to Tumblr’s founder over 4 years provided that Tumblr’s founder remains an employee of the Company. Such cash payments will be recognized as compensation expense over the 4-year service period.

The amortizable intangible assets have useful lives not exceeding 6 years and a weighted average useful life of 6 years. No amounts have been allocated to in-process research and development and $751 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and is not deductible for tax purposes. This acquisition is expected to bring a significant community of users to the Yahoo! network by deploying Yahoo!’s personalization technology and search infrastructure to deliver relevant content to the Tumblr user base. Operating results from the date of acquisition were not significant to the Company’s consolidated results of operations.

Other Acquisitions — Business Combinations. During the six months ended June 30, 2013, the Company acquired nine other companies, which were accounted for as business combinations. The total aggregate purchase price for these other acquisitions was $54 million. The total cash consideration of $54 million less cash acquired of $1 million resulted in a net cash outlay of $53 million. The preliminary allocation of the purchase price of the assets and liabilities assumed based on their relative fair values was $42 million allocated to goodwill, $18 million to amortizable intangible assets, $1 million to cash acquired, and $7 million to assumed liabilities.

The Company’s business combinations completed during the six months ended June 30, 2013 did not have a material impact on the Company’s condensed consolidated financial statements, and therefore pro forma disclosures have not been presented.

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Transactions completed in 2012

The Company did not make any acquisitions during the six months ended June 30, 2012.

Note 5 GOODWILL

The Company’s goodwill balance was $3.8 billion as of December 31, 2012, of which $2.9 billion was recorded in the Americas segment, $0.6 billion in the EMEA (Europe, Middle East and Africa) segment, and $0.3 billion in the Asia Pacific segment. As of June 30, 2013, the Company’s goodwill balance was $4.6 billion, of which $2.9 billion was recorded in the Americas segment, $0.6 billion in the EMEA segment, $0.3 billion in the Asia Pacific segment and $0.8 billion is related to Tumblr. The increase in the carrying amount of goodwill of $756 million reflected on the Company’s condensed consolidated balance sheets during the six months ended June 30, 2013 was primarily due to additions to goodwill of $793 million related to acquisitions made during the six months ended June 30, 2013 offset by net foreign currency translation losses of $37 million. The goodwill recorded in connection with the Tumblr acquisition is not yet allocated to a reporting segment as the Company is currently evaluating how it will report this acquisition for segment reporting purposes.

Note 6 INTANGIBLE ASSETS, NET

The following table summarizes the Company’s intangible assets, net (in thousands):

	December 31, 2012		June 30, 2013
	Net		Gross Carrying Amount		Accumulated Amortization(*)			Net
Customer, affiliate, and advertiser related relationships	$	62,393	$	314,112	$	(84,035	)	$	230,077
Developed technology and patents		71,634		216,961		(123,398	)		93,563
Trade names, trademarks, and domain names		19,946		106,882		(32,222	)		74,660
Total intangible assets, net	$	153,973	$	637,955	$	(239,655	)	$	398,300

^(*)  Cumulative foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities increased total intangible assets by approximately $18 million as of June 30, 2013.

For the three months ended June 30, 2012 and 2013, the Company recognized amortization expense for intangible assets of $29 million and $19 million, respectively, including $19 million and $11 million in cost of revenue—other for the three months ended June 30, 2012 and 2013, respectively. For the six months ended June 30, 2012 and 2013, the Company recognized amortization expense for intangible assets of $60 million and $37 million, respectively, including $40 million and $22 million in cost of revenue—other for the six months ended June 30, 2012 and 2013, respectively. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the remainder of 2013 and each of the succeeding years is as follows: six months ending December 31, 2013: $54 million; 2014: $90 million; 2015: $69 million; 2016: $45 million; and thereafter $125 million.

Note 7 BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO YAHOO! INC. COMMON STOCKHOLDERS PER SHARE

Basic and diluted net income attributable to Yahoo! common stockholders per share is computed using the weighted average number of common shares outstanding during the period, excluding net income attributable to participating securities (restricted stock units granted under the 1996 Directors’ Stock Plan (the “Directors’ Plan”)). Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares are calculated using the treasury stock method and consist of shares underlying unvested restricted stock units, the incremental common shares issuable upon the exercise of stock options, and shares to be purchased under the 1996 Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”). The Company calculates potential tax windfalls and shortfalls by including the impact of pro forma deferred tax assets.

The Company takes into account the effect on consolidated net income per share of dilutive securities of entities in which the Company holds equity interests that are accounted for using the equity method.

Potentially dilutive securities representing approximately 47 million and 48 million shares of common stock for the three and six months ended June 30, 2012, respectively, and 10 million and 17 million shares of common stock for the three and six months ended June 30, 2013, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been anti-dilutive.

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The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2013			June 30, 2012			June 30, 2013
Basic:
Numerator:
Net income attributable to Yahoo! Inc.	$	226,631		$	331,150		$	512,974		$	721,435
Less: Net income allocated to participating securities		(3	)		(7	)		(12	)		(18	)
Net income attributable to Yahoo! Inc. common stockholders — basic	$	226,628		$	331,143		$	512,962		$	721,417
Denominator:
Weighted average common shares		1,213,320			1,079,389			1,214,551			1,086,780
Net income attributable to Yahoo! Inc. common stockholders per share — basic	$	0.19		$	0.31		$	0.42		$	0.66
Diluted:
Numerator:
Net income attributable to Yahoo! Inc.	$	226,631		$	331,150		$	512,974		$	721,435
Less: Net income allocated to participating securities		(3	)		(7	)		(12	)		(18	)
Less: Effect of dilutive securities issued by equity investees		(1,246	)		(3,619	)		(2,512	)		(5,738	)
Net income attributable to Yahoo! Inc. common stockholders — diluted	$	225,382		$	327,524		$	510,450		$	715,679
Denominator:
Denominator for basic calculation		1,213,320			1,079,389			1,214,551			1,086,780
Weighted average effect of Yahoo! Inc. dilutive securities:
Restricted stock units		6,756			12,140			7,871			11,784
Stock options and employee stock purchase plan		1,643			3,165			1,680			2,831
Denominator for diluted calculation		1,221,719			1,094,694			1,224,102			1,101,395
Net income attributable to Yahoo! Inc. common stockholders per share — diluted	$	0.18		$	0.30		$	0.42		$	0.65

Note 8 INVESTMENTS IN EQUITY INTERESTS

The following table summarizes the Company’s investments in equity interests (dollars in thousands):

	December 31, 2012		Percent Ownership			June 30, 2013		Percent Ownership
Alibaba Group	$	276,389		24	%	$	617,021		24	%
Yahoo Japan		2,555,717		35	%		2,254,097		35	%
Other		8,051		24	%		3,269		24	%
Total	$	2,840,157				$	2,874,387

Equity Investment in Alibaba Group. The investment in Alibaba Group is being accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets, and goodwill, is classified as part of the investments in equity interests balance on the Company’s condensed consolidated balance sheets.

The Company’s accounting policy is to record its share of the results of Alibaba Group, and any related amortization expense and related tax impact, one quarter in arrears within earnings in equity interests in the condensed consolidated statements of income. As of June 30, 2013, Alibaba Group’s common shareholders’ equity is a net deficit as a result of the repurchase of its ordinary shares from the Company at fair value, which was significantly in excess of the book value per share. The Company’s remaining investment balance represents excess cost largely attributable to goodwill.

Initial Repurchase by Alibaba Group. On September 18, 2012 (the “Repurchase Closing Date”), Alibaba Group repurchased 523 million of the 1,047 million ordinary shares of Alibaba Group (the “Shares”) owned by the Company (the “Initial Repurchase”). The Initial Repurchase was made pursuant to the terms of the Share Repurchase and Preference Share Sale Agreement entered into by

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Yahoo! Inc., Alibaba Group and Yahoo! Hong Kong Holdings Limited, a Hong Kong corporation and wholly-owned subsidiary of Yahoo! Inc. (“YHK”) on May 20, 2012 (as amended on September 11, 2012, the “Repurchase Agreement”). Yahoo! received $13.54 per Share, or approximately $7.1 billion in total consideration, for 523 million Shares sold to Alibaba Group. Approximately $6.3 billion of the consideration was received in cash and $800 million was received in Alibaba Group Preference Shares, which Alibaba Group redeemed on May 16, 2013. The Initial Repurchase resulted in a pre-tax gain of approximately $4.6 billion for the year ended December 31, 2012. Yahoo! will continue to account for its remaining approximately 24 percent ownership interest in Alibaba Group under the equity method.

The Alibaba Group Preference Shares yielded semi-annual dividends at a rate per annum of up to 10 percent, with at least 3 percent payable in cash and the remainder accruing and increasing the liquidation preference. The Alibaba Group Preference Shares were callable by Alibaba Group at the redemption value (including accrued dividends). On May 16, 2013, the Company received $846 million in cash from Alibaba Group to redeem the Alibaba Group Preference Shares. The cash received represented the redemption value, which included the stated value of $800 million plus accrued dividends of $46 million.

The Repurchase Agreement provides that at the time Alibaba Group completes an initial public offering meeting certain specified criteria (a “Qualified IPO”), Yahoo! and YHK will sell, at Alibaba Group’s election (either directly to Alibaba Group or in the Qualified IPO), up to 261.5 million of their remaining Shares. If Shares are sold back to Alibaba Group in the Qualified IPO, the purchase price per Share will be equal to the per share price in the Qualified IPO less specified fees and underwriter discounts.

On the Repurchase Closing Date, the Company and Alibaba Group entered into an amendment of their existing Technology and Intellectual Property License Agreement (the “TIPLA”) pursuant to which Alibaba Group made an initial payment to the Company of $550 million in satisfaction of certain future royalty payments under the existing TIPLA. The Company will recognize this revenue over the remaining four-year term of the TIPLA. For the three and six months ended June 30, 2013, the Company recognized approximately $34 million and $69 million, respectively, in revenue related to the initial payment. Alibaba Group will continue making royalty payments until the earlier of the fourth anniversary of the effective date of the amendment and a Qualified IPO. The Company recognized revenue relating to the continuing royalty payments under the TIPLA of approximately $14 million and $21 million for the three months ended June 30, 2012 and 2013, respectively, and approximately $32 million and $56 million for the six months ended June 30, 2012 and 2013, respectively.

The following table presents Alibaba Group’s U.S. GAAP financial information, as derived from the Alibaba Group financial statements (in thousands):

	Three Months Ended				Six Months Ended
	March 31, 2012		March 31, 2013		March 31, 2012		March 31, 2013
Operating data:
Revenue	$	805,900	$	1,381,644	$	1,828,707	$	3,222,093
Gross profit	$	530,537	$	1,018,056	$	1,227,376	$	2,365,932
Income from operations	$	213,262	$	708,897	$	489,921	$	1,461,482
Net income	$	235,208	$	679,537	$	488,773	$	1,329,514
Net income attributable to Alibaba Group	$	220,483	$	668,676	$	457,395	$	1,310,849

	September 30, 2012		March 31, 2013
Balance sheet data(*):
Current assets	$	4,062,823	$	6,859,961
Long-term assets	$	3,204,144	$	3,315,066
Current liabilities	$	2,624,656	$	3,809,376
Long-term liabilities	$	4,705,347	$	4,603,806
Convertible preferred shares	$	1,317,526	$	1,680,376
Noncontrolling interests	$	65,907	$	85,449

^(*)  In the three months ended June 30, 2012, Alibaba Group purchased the remaining noncontrolling interest in Alibaba.com for total consideration of approximately $2.5 billion. The purchase was primarily financed by the issuance of debt. The excess of consideration over book value of the noncontrolling interest was recorded as a reduction to the shareholders’ equity of Alibaba Group, which increased the Company’s excess cost related to its investment in Alibaba Group.

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Equity Investment in Yahoo Japan. The investment in Yahoo Japan Corporation (“Yahoo Japan”) is being accounted for using the equity method and the total investment, including net tangible assets, identifiable intangible assets, and goodwill, is classified as part of the investments in equity interests balance on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Yahoo Japan, and any related amortization expense, one quarter in arrears within earnings in equity interests in the condensed consolidated statements of income.

The Company makes adjustments to the earnings in equity interests line in the condensed consolidated statements of income for any differences between U.S. GAAP and accounting principles generally accepted in Japan (“Japanese GAAP”), the standards by which Yahoo Japan’s financial statements are prepared.

The fair value of the Company’s ownership interest in the common stock of Yahoo Japan, based on the quoted stock price, was approximately $10 billion as of June 30, 2013.

During the three and six months ended June 30, 2012 and 2013, the Company received cash dividends from Yahoo Japan in the amount of $84 million and $77 million, net of withholding taxes, respectively, which were recorded as reductions to the Company’s investment in Yahoo Japan.

The following tables present summarized financial information derived from Yahoo Japan’s consolidated financial statements, which are prepared on the basis of Japanese GAAP. The Company has made adjustments to the Yahoo Japan financial information to address differences between Japanese GAAP and U.S. GAAP that materially impact the summarized financial information below. Due to these adjustments, the Yahoo Japan summarized financial information presented below is not materially different than such information presented on the basis of U.S. GAAP.

	Three Months Ended				Six Months Ended
	March 31, 2012		March 31, 2013		March 31, 2012		March 31, 2013
	(in thousands)
Operating data:
Revenue	$	1,069,974	$	1,121,453	$	2,139,301	$	2,278,643
Gross profit	$	919,132	$	934,003	$	1,816,840	$	1,915,065
Income from operations	$	585,443	$	551,488	$	1,127,941	$	1,165,980
Net income	$	348,093	$	348,297	$	650,697	$	691,711
Net income attributable to Yahoo Japan	$	346,899	$	346,163	$	648,092	$	686,713

	September 30, 2012		March 31, 2013
	(In thousands)
Balance sheet data:
Current assets	$	5,752,826	$	6,116,952
Long-term assets	$	1,837,829	$	1,709,526
Current liabilities	$	1,167,772	$	2,034,305
Long-term liabilities	$	49,461	$	42,217
Noncontrolling interests	$	31,034	$	76,654

Under technology and trademark license and other commercial arrangements with Yahoo Japan, the Company records revenue from Yahoo Japan based on a percentage of advertising revenue earned by Yahoo Japan. The Company recorded revenue from Yahoo Japan of approximately $66 million and $63 million for the three months ended June 30, 2012 and 2013, respectively, and approximately $136 million and $134 million for the six months ended June 30, 2012 and 2013, respectively. As of December 31, 2012 and June 30, 2013, the Company had net receivable balances from Yahoo Japan of approximately $43 million and $51 million, respectively.

Note 9 DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments, primarily forward contracts, to mitigate risk associated with adverse movements in foreign currency exchange rates.

The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. The Company presents its derivative assets and liabilities at their gross fair values on the condensed consolidated balance sheets.

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Net Investment Hedges. In December 2012, the Company started hedging, on an after-tax basis, its net investment in Yahoo Japan with forward contracts to reduce the risk that its investment in Yahoo Japan will be adversely affected by foreign currency exchange rate fluctuations. At inception, the forward contracts had maturities ranging from 9 to 15 months. The Company applies hedge accounting on its forward contracts for the net investment hedge of Yahoo Japan. The after-tax net investment hedge was less than the Yahoo Japan investment balance as of both December 31, 2012 and June 30, 2013. As such, the net investment hedge was considered to be effective, and, as a result, the changes in the fair value were recorded within accumulated other comprehensive income on the Company’s condensed consolidated balance sheets. The Company recognizes net investment derivative instruments as either an asset or a liability on the Company’s condensed consolidated balance sheets at fair value. The notional amounts of the foreign currency forward contracts were $3 billion and $3.5 billion as of December 31, 2012 and June 30, 2013, respectively. The fair value of the foreign currency forward contract assets was $3 million as of December 31, 2012, and was included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets. The fair value of the foreign currency forward contracts were a $436 million asset and a $1 million liability as of June 30, 2013, and were included in prepaid expenses and other current assets and capital lease and other long term liabilities, respectively, on the Company’s condensed consolidated balance sheets. Pre-tax net gains of $3 million and $435 million due to changes in the Japanese yen exchange rates were recorded as of December 31, 2012 and June 30, 2013, respectively, and were included in accumulated other comprehensive income on the Company’s condensed consolidated balance sheets.

Cash Flow Hedges. In May 2013, the Company began hedging a portion of its forecasted revenue from Yahoo Japan with forward contracts to reduce the risk that its expected future cash flows from Yahoo Japan will be adversely affected by foreign currency exchange rate fluctuations. The Company entered into foreign currency forward contracts designated as cash flow hedges of varying maturities through January 31, 2014. For derivatives designated as cash flow hedges, the effective portion of the unrealized gains or losses on these forward contracts is recorded in accumulated other comprehensive income on the Company’s condensed consolidated balance sheets and reclassified into revenue on the condensed consolidated statements of income when the underlying hedged revenue is recognized. If the cash flow hedges were to become ineffective, the ineffective portion would be immediately recorded in other income, net on the Company’s condensed consolidated statements of income. The cash flow hedges were considered to be effective as of June 30, 2013. The notional amounts of the foreign currency forward contracts were $137 million as of June 30, 2013. The fair value of the foreign currency forward contract net asset was less than $1 million as of June 30, 2013, which was included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets. A pre-tax gain of less than $1 million was recorded as of June 30, 2013, which was included in accumulated other comprehensive income on the Company’s condensed consolidated balance sheets. For the three and six months ended June 30, 2013, the Company also recorded a loss of less than $1 million, net of tax, for cash flow hedges that settled, which was included in revenue on the condensed consolidated statements of income. The Company did not enter into any derivative financial instruments of this nature as of June 30, 2012. The Company expects all of the forward contracts designated as cash flow hedges to be reclassified to revenue within fiscal year 2013, as it expects to recognize the hedged anticipated revenue related to these contracts by December 31, 2013.

Balance Sheet Hedges. The Company recognizes balance sheet derivative instruments as either assets or liabilities on the Company’s condensed consolidated balance sheets at fair value. Changes in the fair value of these derivatives are recorded in other income, net on the Company’s condensed consolidated statements of income. The notional amounts of the foreign currency forward contracts were $356 million and $316 million as of December 31, 2012 and June 30, 2013, respectively. As of December 31, 2012, the fair value of the foreign currency forward contracts was a $5 million liability and was included in accrued expenses and other current liabilities on the Company’s condensed consolidated balance sheet. As of June 30, 2013, the fair value of the foreign currency forward contracts was a $1 million net asset and was included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets. A loss of $5 million and a loss of less than $1 million were recorded for the three months ended June 30, 2012 and 2013, respectively, and were included in other income, net on the Company’s condensed consolidated statements of income. A loss of $6 million and a gain of $4 million were recorded for the six months ended June 30, 2012 and 2013, respectively, and were included in other income, net on the Company’s condensed consolidated statements of income. The Company paid $2 million in cash for the settlement of some of the foreign currency forward contracts during the six months ended June 30, 2013.

Foreign currency forward contracts activity for the six months ended June 30, 2013 was as follows (in millions):

	Beginning fair value			Settlement		Gain (loss) recorded in other income, net		Gain (loss) recorded in other comprehensive income			Gain (loss) recorded in revenue			Ending fair value
Net investment hedges	$	3		$	—	$	—	$	432	(1)	$	—		$	435
Cash flow hedges		—			—		—		—	(2)		—	(3)		—
Balance sheet hedges		(5	)		2		4		—			—			1

⁽¹⁾  This amount does not reflect the tax impact of $162 million recorded during the six months ended June 30, 2013. The $273 million after tax impact of the gain recorded under other comprehensive income was included in accumulated other comprehensive income on the Company’s condensed consolidated balance sheets.

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⁽²⁾  This amount does not reflect the tax impact of less than $1 million recorded during the six months ended June 30, 2013. The less than $1 million after tax impact of the gain was included in accumulated other comprehensive income on the Company’s condensed consolidated balance sheets.

⁽³⁾  For the three and six months ended June 30, 2013, the Company also recorded a loss of less than $1 million, net of tax, for cash flow hedges that settled, which was included in revenue on the condensed consolidated statements of income.

Note 10 CREDIT FACILITY

On October 19, 2012, the Company entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as Administrative Agent, and the other lenders party thereto from time to time. The Credit Agreement provides for a $750 million unsecured revolving credit facility for a term of 364 days, maturing October 18, 2013, and subject to an extension for additional 364-day periods in accordance with the terms and conditions of the Credit Agreement. The Company may elect to increase the revolving credit facility by up to $250 million if existing or new lenders provide additional revolving commitments in accordance with the terms of the Credit Agreement. The proceeds from borrowings under the Credit Agreement, if any, are expected to be used for general corporate purposes. Borrowings under the Credit Agreement will bear interest at a rate equal to, at the Company’s option, either (a) a customary London interbank offered rate (a “Eurodollar Rate”), or (b) a customary base rate (a “Base Rate”), in each case plus an applicable margin. The applicable margin for borrowings under the Credit Agreement will be based upon the leverage ratio of the Company and range from 1.25 percent to 1.50 percent with respect to Eurodollar Rate borrowings and 0.25 percent to 0.50 percent with respect to Base Rate borrowings.

As of June 30, 2013, the Company was in compliance with the financial covenants in the credit facility and no amounts were outstanding.

Note 11 COMMITMENTS AND CONTINGENCIES

Lease Commitments. The Company leases office space and data centers under operating and capital lease agreements with original lease periods of up to 12 years which expire between 2013 and 2025.

In May 2013, the Company entered into a 12 year operating lease agreement for four floors of the former New York Times building in New York City with a total expected minimum lease commitment of $125 million. The Company has the option to renew the lease for an additional five years. The lease requires monthly payments of approximately $1 million starting in July 2015 through June 2025.

A summary of gross and net lease commitments as of June 30, 2013 was as follows (in millions):

	Gross Operating Lease Commitments		Sublease Income			Net Operating Lease Commitments
Six months ending December 31, 2013	$	71	$	(6	)	$	65
Years ending December 31,
2014		117		(11	)		106
2015		97		(7	)		90
2016		68		(1	)		67
2017		49		—			49
2018		32		—			32
Due after 5 years		108		—			108
Total gross and net lease commitments	$	542	$	(25	)	$	517

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	Capital Lease Commitment
Six months ending December 31, 2013	$	8
Years ending December 31,
2014		15
2015		12
2016		9
2017		9
2018		9
Due after 5 years		4
Gross lease commitment	$	66
Less: interest		(17	)
Net lease commitment included in capital lease and other long-term liabilities	$	49

Affiliate Commitments. In connection with contracts to provide advertising services to Affiliates, the Company is obligated to make payments, which represent traffic acquisition costs (“TAC”), to its Affiliates. As of June 30, 2013, these commitments totaled $50 million, of which $42 million will be payable in the remainder of 2013, $6 million will be payable in 2014, $1 million will be payable in 2015, and $1 million will be payable in 2016.

Intellectual Property Rights. The Company is committed to make certain payments under various intellectual property arrangements of up to $30 million through 2023.

Other Commitments. In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, joint ventures and business partners, purchasers of assets or subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of agreements or representations and warranties made by the Company, services to be provided by the Company, intellectual property infringement claims made by third parties or, with respect to the sale of assets or a subsidiary, matters related to the Company’s conduct of the business and tax matters prior to the sale. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The Company has also agreed to indemnify certain former officers, directors, and employees of acquired companies in connection with the acquisition of such companies. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers, and former directors and officers of acquired companies, in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and it has not accrued any liabilities related to such indemnification obligations in the Company’s condensed consolidated financial statements.

As of June 30, 2013, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, the Company is not exposed to any financing, liquidity, market, or credit risk that could arise if the Company had engaged in such relationships. In addition, the Company identified no variable interests currently held in entities for which it is the primary beneficiary.

See Note 16 — “Search Agreement with Microsoft Corporation” for a description of the Company’s Search and Advertising Services and Sales Agreement (the “Search Agreement”) and License Agreement with Microsoft Corporation (“Microsoft”).

Legal Contingencies

Intellectual Property and General Matters. From time to time, third parties assert patent infringement claims against the Company. Currently, the Company is engaged in lawsuits regarding patent issues and has been notified of other potential patent disputes. In addition, 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, trade secrets, and other intellectual property rights, claims related to employment matters, and a variety of other claims, including claims alleging defamation, invasion of privacy, or similar claims arising in connection with the Company’s e-mail, message boards, photo and video sites, auction sites, shopping services, and other communications and community features.

Stockholder and Securities Matters. On June 14, 2007, a stockholder derivative action was filed in the United States District Court for the Central District of California by Jill Watkins against members of the board of directors (“Board”) and selected officers. The complaint filed by the

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plaintiff alleged breaches of fiduciary duties and corporate waste, similar to the allegations in a former class action relating to stock price declines during the period April 2004 to July 2006, and alleged violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On July 16, 2009, the plaintiff Watkins voluntarily dismissed the action against all defendants without prejudice. On July 17, 2009, plaintiff Miguel Leyte-Vidal, who had substituted in as plaintiff prior to the dismissal of the federal Watkins action, re-filed a stockholder derivative action in Santa Clara County Superior Court against members of the Board and selected officers. The Santa Clara County Superior Court derivative action purports to assert causes of action on behalf of the Company for violation of specified provisions of the California Corporations Code, for breaches of fiduciary duty regarding financial accounting and insider selling and for unjust enrichment. On September 19, 2011, the Court sustained Yahoo!’s demurrer to plaintiff’s third amended complaint without leave to amend. Plaintiff has appealed.

Since May 31, 2011, several related stockholder derivative suits were filed in the Santa Clara County Superior Court (“California Derivative Litigation”) and the United States District Court for the Northern District of California (“Federal Derivative Litigation”) purportedly on behalf of the Company against certain officers and directors of the Company and third parties. The California Derivative Litigation was filed by plaintiffs Cinotto, Lassoff, Zucker, and Koo, and consolidated under the caption In re Yahoo! Inc. Derivative Shareholder Litigation on June 24, 2011 and September 12, 2011. The Federal Derivative Litigation was filed by plaintiffs Salzman, Tawila, and Iron Workers Mid-South Pension Fund and consolidated under the caption In re Yahoo! Inc. Shareholder Derivative Litigation on October 3, 2011. The plaintiffs allege breaches of fiduciary duties, corporate waste, mismanagement, abuse of control, unjust enrichment, misappropriation of corporate assets, or contribution and seek damages, equitable relief, disgorgement and corporate governance changes in connection with Alibaba Group’s restructuring of its subsidiary Alipay.com Co., Ltd. (“Alipay”) and related disclosures. On June 7, 2012, the courts approved stipulations staying the California Derivative Litigation pending resolution of the Federal Derivative Litigation, and deferring the Federal Derivative Litigation pending a ruling on the motion to dismiss filed by the defendants in the related stockholder class actions, which are discussed below.

Since June 6, 2011, two purported stockholder class actions were filed in the United States District Court for the Northern District of California against the Company and certain officers and directors of the Company by plaintiffs Bonato and the Twin Cities Pipe Trades Pension Trust. In October 2011, the District Court consolidated the two actions under the caption In re Yahoo! Inc. Securities Litigation and appointed the Pension Trust Fund for Operating Engineers as lead plaintiff. In a consolidated amended complaint filed December 15, 2011, the lead plaintiff purports to represent a class of investors who purchased the Company’s common stock between April 19, 2011 and July 29, 2011, and alleges that during that class period, defendants issued statements that were materially false or misleading because they did not disclose information relating to Alibaba Group’s restructuring of Alipay. The complaint purports to assert claims for relief for violation of Section 10(b) and 20(a) of the Exchange Act and for violation of Rule 10b-5 thereunder, and seeks unspecified damages, injunctive and equitable relief, fees, and costs. On August 10, 2012, the court granted defendants’ motion to dismiss the consolidated amended complaint. Plaintiffs have appealed.

On July 30, 2013, a stockholder derivative action captioned Zucker v. Loeb, et al. was filed in the Supreme Court of New York for the County of New York against current and former members of the Board, Third Point LLC, and entities related to Third Point LLC. The complaint filed by the plaintiff asserts claims for alleged breach of fiduciary duty, waste, and unjust enrichment in connection with the Company’s repurchase of 40 million shares of Company stock beneficially owned by Third Point LLC. The complaint seeks a judgment declaring that the defendants breached their fiduciary duties, an award of restitution, and corporate governance changes.

Mexico Matter. On November 16, 2011, plaintiffs Worldwide Directories, S.A. de C.V. (“WWD”), and Ideas Interactivas, S.A. de C.V. (“Ideas”) filed an action in the 49th Civil Court of Mexico against the Company, Yahoo! de Mexico, S.A. de C.V. (“Yahoo! Mexico”), Yahoo International Subsidiary Holdings, Inc., and Yahoo Hispanic Americas LLC. The complaint alleged claims of breach of contract, breach of promise, and lost profits in connection with various commercial contracts entered into among the parties between 2002 and 2004, relating to a business listings service, and alleged total damages of approximately $2.75 billion. On December 7, 2011, Yahoo! Mexico filed a counterclaim against WWD for payments of approximately $2.6 million owed to Yahoo! Mexico for services rendered. On April 10, 2012, plaintiffs withdrew their claim filed against Yahoo International Subsidiary Holdings, Inc. and Yahoo Hispanic Americas LLC.

On November 28, 2012, the 49th Civil Court of Mexico entered a non-final judgment against the Company and Yahoo! Mexico in the amount of USD $2.75 billion and a non-final judgment in favor of Yahoo! Mexico on its counterclaim against WWD in the amount of $2.6 million. The judgment against the Company and Yahoo! Mexico purported to leave open for determination in future proceedings certain other alleged damages that were not quantified in the judgment. The judgment was issued by a law clerk to the trial court judge who presided over the entire case during the trial court proceedings but stepped down from his position shortly before the judgment was entered.

On December 12, 2012 and December 13, 2012, respectively, Yahoo! Mexico and the Company appealed the judgment to a three-magistrate panel of the Superior Court of Justice for the Federal District (the “Superior Court”). On May 15, 2013, the Superior Court reversed the judgment, overturned all monetary awards against the Company and reduced the monetary award against Yahoo! Mexico to $172,500. The Superior Court affirmed the award of $2.6 million in favor of Yahoo! Mexico on its counterclaim.

Plaintiffs have appealed the Superior Court’s decision to the Mexican Federal Civil Collegiate Court for the First Circuit (“Civil Collegiate Court”). The Company has appealed the Superior Court’s decision not to award it statutory costs in the underlying proceeding. Yahoo! Mexico has appealed the Superior Court’s award of $172,500, the Superior Court’s decision not to award it additional moneys beyond the $2.6 million award on its counterclaims, and the Superior Court’s decision not to award it statutory costs. These appeals are all pending before the Civil Collegiate Court, where review is limited to whether the Superior Court’s decision is unconstitutional, unlawful, or both.

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The Company believes the plaintiffs’ claims are without legal or factual merit. First, the plaintiffs’ claims are based on agreements that were either terminated by agreement with releases or had expired or terminated in accordance with their terms, a non-binding letter of intent pursuant to which no definitive agreements were ever entered into by the parties, and correspondence that did not constitute agreements. Second, the loss of profits of the type claimed by plaintiffs are not awardable under Mexico law because they were not a direct and immediate consequence of a breach of contract. Of the $2.75 billion in total damages alleged by plaintiffs, more than $2.4 billion were for loss of profits. Third, the plaintiffs’ alleged damages and loss of profits were further precluded by the agreements at issue through, among other things, contractual and legal limitations of liability. Fourth, the plaintiffs’ pleadings in the complaint, as well as documentary evidence filed by the plaintiffs in support of their allegations, were generally deficient to support or establish plaintiffs’ claims. Fifth, the decision failed to consider substantially all of the defenses asserted by the Company and Yahoo! Mexico. Finally, the Company believes that the law clerk who entered the judgment lacked the requisite authority to issue the judgment.

The Company has not recorded an accrual for the judgment, which was reversed, as explained above. The Company cannot assure the ultimate outcome of the pending or further appeals.

The Company has determined, based on current knowledge, that the amount or range of reasonably possible losses, including reasonably possible losses in excess of amounts already accrued, is not reasonably estimable with respect to certain matters described above. The Company has also determined, based on current knowledge, that the aggregate amount or range of losses that are estimable with respect to the Company’s legal proceedings, including the matters described above other than the Mexico matter, would not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Amounts accrued as of December 31, 2012 and June 30, 2013 were not material. The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties, and cannot be predicted with certainty. In the event of a determination adverse to Yahoo!, its subsidiaries, directors, or officers in these matters, the Company may incur substantial monetary liability, and be required to change its business practices. Either of these events could have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company may also incur substantial legal fees, which are expensed as incurred, in defending against these claims.

Note 12 STOCKHOLDERS’ EQUITY AND EMPLOYEE BENEFITS

Employee Stock Purchase Plan. As of June 30, 2013, there was $9 million of unamortized stock-based compensation expense related to the Company’s Employee Stock Purchase Plan, which will be recognized over a weighted average period of 0.8 years.

Stock Options. The Company’s 1995 Stock Plan, the Directors’ Plan, and other stock-based award plans assumed through acquisitions are collectively referred to as the “Plans.” Stock option activity under the Company’s Plans for the six months ended June 30, 2013 is summarized as follows (in thousands, except per share amounts):

	Shares			Weighted Average Exercise Price Per Share
Outstanding at December 31, 2012		38,092		$	21.42
Options granted		30		$	24.44
Options assumed		1,035		$	7.73
Options exercised(*)		(5,073	)	$	15.79
Options expired		(2,647	)	$	30.41
Options cancelled/forfeited		(550	)	$	15.15
Outstanding at June 30, 2013		30,887		$	21.24

^(*)  The Company issued new shares to satisfy stock option exercises.

As of June 30, 2013, there was $35 million of unamortized stock-based compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 1.5 years.

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The fair value of option grants is determined using the Black-Scholes option pricing model with the following weighted average assumptions:

	Stock Options						Purchase Plan (1)
	Three Months Ended						Three Months Ended
	June 30, 2012			June 30, 2013			June 30, 2012			June 30, 2013
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate(2)		0.8	%		0.5	%		1.1	%		0.1	%
Expected volatility		32.3	%		31.5	%		34.0	%		29.4	%
Expected life (in years)(2)		4.00			3.25			1.36			0.24
	Stock Options						Purchase Plan (1)
	Six Months Ended						Six Months Ended
	June 30, 2012			June 30, 2013			June 30, 2012			June 30, 2013
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate(2)		0.7	%		0.5	%		1.2	%		0.1	%
Expected volatility		32.3	%		31.2	%		34.1	%		29.4	%
Expected life (in years)(2)		4.04			3.63			1.25			0.24

⁽¹⁾  Assumptions for the Employee Stock Purchase Plan relate to the annual average of the enrollment periods. During the year ended December 31, 2012, enrollment was permitted in May and November of each year. Beginning in 2013, enrollment is permitted in February, May, August, and November of each year.

⁽²⁾  Beginning in November 2012, the Employee Stock Purchase Plan was modified to consist of three-month offering periods.

Restricted stock unit activity for the six months ended June 30, 2013 is summarized as follows (in thousands, except per share amounts):

	Shares			Weighted Average Grant Date Fair Value Per Share
Awarded and unvested at December 31, 2012(*)		33,801		$	17.63
Granted(*)		20,320		$	21.71
Assumed		2,364		$	26.24
Vested		(6,480	)	$	15.32
Forfeited		(3,776	)	$	16.69
Awarded and unvested at June 30, 2013(*)		46,229		$	20.26

^(*)  Includes the maximum number of shares issuable under the Company’s performance-based executive incentive restricted stock unit awards.

As of June 30, 2013, there was $469 million of unamortized stock-based compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average period of 2.8 years.

During the six months ended June 30, 2012 and 2013, 7.2 million shares and 6.5 million shares, respectively, that were subject to previously granted restricted stock units vested. These vested restricted stock units were net share settled. During the six months ended June 30, 2012 and 2013, the Company withheld 2.5 million shares and 2.4 million shares, respectively, based upon the Company’s closing stock price on the vesting date to settle the employees’ minimum statutory obligation for the applicable income and other employment taxes. The Company then remitted cash to the appropriate taxing authorities.

Total payments for the employees’ tax obligations to the relevant taxing authorities were $38 million and $51 million, respectively, for the six months ended June 30, 2012 and 2013 and are reflected as a financing activity within the condensed consolidated statements of cash flows. The payments were used for tax withholdings related to the net share settlements of restricted stock units. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.

Performance-Based Executive Incentive Equity Awards. The financial performance stock options awarded by the Company in November 2012 include multiple performance periods. In January 2013, the Compensation Committee established performance goals under these stock options for the first performance period (the six months ended June 30, 2013) and the second performance period (the full year ending December 31, 2013). These options are held by Ms. Mayer, Mr. de Castro and Mr. Goldman (the first

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performance period for Mr. Goldman is the full year ending December 31, 2013). The number of stock options that ultimately vest for each performance period will range from 0 percent to 100 percent of the target amount for such period stated in each executive’s award agreement based on the Company’s performance. The financial performance metrics (and their weightings) under the performance options are revenue ex-TAC (50 percent), operating income (30 percent) and free cash flow (20 percent). The financial performance goals for each metric are established at the beginning of each performance period and, accordingly, the portion (or “tranche”) of the award subject to each goal is treated as a separate grant for accounting purposes. The grant date fair values of the first and second tranches of the November 2012 financial performance stock options were $12 million and $14 million, respectively, and are being recognized over six and twelve month service periods, respectively. The Company began recording stock-based compensation expense for these tranches in January 2013, when the financial performance goals were established and approved.

In February 2013, the Compensation Committee approved additional long-term performance-based incentive equity awards to Ms. Mayer and other senior officers. These restricted stock units generally will be eligible to vest in equal annual installments over four years (three years for Ms. Mayer) based on the Company’s attainment of annual financial performance goals as well as the executive’s continued employment through the vesting date. The number of restricted stock units that ultimately vest each year will range from 0 percent to 200 percent of the annual target amount stated in each executive’s award agreement based on the Company’s performance. The annual financial performance metrics and goals are established at the beginning of each fiscal year and, accordingly, the tranche of the award subject to each annual goal is treated as a separate annual grant for accounting purposes. In February 2013, financial performance metrics and goals were established for the first performance period (the fiscal year ending December 31, 2013). The financial performance metrics (and their weightings) for fiscal year 2013 are revenue ex-TAC (60 percent), operating income (20 percent) and free cash flow (20 percent). The grant date fair value of the first tranche of the February 2013 annual financial performance restricted stock unit grants was $9 million and is being recognized over a one-year service period.

Stock Repurchases. In May 2012, the Board authorized a stock repurchase program allowing the Company to repurchase up to $5 billion of its outstanding shares of common stock from time to time. The May 2012 repurchase program, according to its terms, will expire in June 2015 unless revoked earlier by the Board. The aggregate amount available under the May 2012 repurchase program was approximately $2 billion at June 30, 2013. Repurchases under the repurchase programs may take place in the open market or in privately negotiated transactions, including structured and derivative transactions such as accelerated share repurchase transactions, and may be made under a Rule 10b5-1 plan. During the six months ended June 30, 2013, the Company repurchased approximately 63 million shares of its common stock under this stock repurchase program at an average price of $22.51 per share for a total of $1.4 billion.

See Note 17 – “Subsequent Events” for information regarding stock repurchases that occurred after June 30, 2013.

Note 13 RESTRUCTURING CHARGES (REVERSALS), NET

Restructuring charges (reversals), net was comprised of the following (in thousands):

	Three Months Ended June 30, 2012										Six Months Ended June 30, 2012
	Restructuring Plans Prior to 2012		Q2’12 Restructuring Plan			Q4’12 Korea Business Closure		Total			Restructuring Plans Prior to 2012		Q2’12 Restructuring Plan			Q4’12 Korea Business Closure		Total
Employee severance pay and related costs	$	670	$	91,066		$	—	$	91,736		$	3,661	$	91,066		$	—	$	94,727
Non-cancelable lease, contract terminations, and other charges		1,530		617			—		2,147			4,256		617			—		4,873
Other non-cash charges, net		—		38,638			—		38,638			—		38,638			—		38,638
Sub-total before reversal of stock-based compensation expense		2,200		130,321			—		132,521			7,917		130,321			—		138,238
Reversal of stock-based compensation expense for forfeitures		—		(3,429	)		—		(3,429	)		—		(3,429	)		—		(3,429	)
Restructuring charges, net	$	2,200	$	126,892		$	—	$	129,092		$	7,917	$	126,892		$	—	$	134,809

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	Three Months Ended June 30, 2013											Six Months Ended June 30, 2013
	Restructuring Plans Prior to 2012			Q2’12 Restructuring Plan			Q4’12 Korea Business Closure		Total			Restructuring Plans Prior to 2012			Q2’12 Restructuring Plan			Q4’12 Korea Business Closure			Total
Employee severance pay and related costs	$	(436	)	$	(2,712	)	$	—	$	(3,148	)	$	(439	)	$	(12,977	)	$	(103	)	$	(13,519	)
Non-cancelable lease, contract terminations, and other charges		6,624			33			69		6,726			9,435			98			(36	)		9,497
Other non-cash charges, net		—			—			—		—			—			—			538			538
Restructuring charges (reversals), net	$	6,188		$	(2,679	)	$	69	$	3,578		$	8,996		$	(12,879	)	$	399		$	(3,484	)

Although the Company does not allocate restructuring charges to its segments, the amounts of the restructuring charges relating to each segment are presented below.

Restructuring Plans Prior to 2012. Prior to 2012, the Company implemented workforce reductions, a strategic realignment, and consolidation of certain real estate facilities and data centers to reduce its cost structure, align resources with its product strategy, and improve efficiency. During the three and six months ended June 30, 2012, the Company incurred total pre-tax cash charges of $2 million and $8 million, respectively, in severance, facility, and other related costs under these restructuring plans, the majority of which related to the Americas segment. During the three and six months ended June 30, 2013, the Company incurred total pre-tax cash charges of $6 million and $9 million, respectively, in severance, facility, and other related costs under these restructuring plans. Of the $6 million recorded for the three months ended June 30, 2013, $2 million related to the Americas segment and $4 million related to the EMEA segment. Of the $9 million recorded for the six months ended June 30, 2013, $5 million related to the Americas segment and $4 million related to the EMEA segment.

Q2’12 Restructuring Plan. During the second quarter of 2012, the Company began implementing the Q2’12 Restructuring Plan to reduce its worldwide workforce by approximately 2,000 employees and to consolidate certain real estate and data center facilities. During the three months ended June 30, 2012, the Company incurred total pre-tax cash charges of $91 million in severance related costs and $39 million in non-cash facility and other asset impairment charges under this restructuring plan. The total pre-tax charges were offset by a $3 million credit related to non-cash stock-based compensation expense reversals for unvested stock awards that were forfeited. Of the $127 million in restructuring charges, net, recorded in the three months ended June 30, 2012, $86 million related to the Americas segment, $35 million related to the EMEA segment, and $6 million related to the Asia Pacific segment. During the three months ended June 30, 2013, the Company recorded a net credit of $3 million for severance-related cost reversals due to changes to original estimates and redeployments and voluntary resignations of employees prior to their planned severance dates. During the six months ended June 30, 2013, the Company recorded $6 million in severance and facility related costs which were offset by a credit of $19 million for severance-related cost reversals due to changes to original estimates and redeployments and voluntary resignations of employees prior to their planned severance dates. Of the $3 million credit in restructuring charges, net, recorded in the three months ended June 30, 2013, $2 million related to the Americas segment and $1 million related to the EMEA segment. Of the $13 million credit in restructuring charges, net, recorded in the six months ended June 30, 2013, $8 million related to the Americas segment and $5 million related to the EMEA segment.

Q4’12 Korea Business Closure. During the fourth quarter of 2012, the Company decided to close its Korea business by the end of 2012 to streamline its operations and focus its resources. During both the three and six months ended June 30, 2013, the Company recorded net pre-tax charges of less than $1 million in severance, facility and contract termination costs related to the Asia Pacific segment.

Restructuring Accruals. The $37 million restructuring liability as of June 30, 2013 consisted of $6 million for employee severance pay expenses, which the Company expects to pay out by the end of the fourth quarter of 2013, and $31 million relating to non-cancelable lease and contract termination costs, which the Company expects to pay over the terms of the related obligations which extend to the fourth quarter of 2021.

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The Company’s restructuring accrual activity for the six months ended June 30, 2013 is summarized as follows (in thousands):

	Restructuring Plans Prior to 2012			Q2’12 Restructuring Plan			Q4’12 Korea Business Closure			Total
Balance as of January 1, 2013	$	27,716		$	35,049		$	10,102		$	72,867
Employee severance pay and related costs		28			6,247			443			6,718
Non-cancelable lease, contract termination, and other charges		9,869			98			1,235			11,202
Other non-cash charges		—			—			538			538
Changes in estimates and reversals of previous charges		(901	)		(19,224	)		(1,817	)		(21,942	)
Restructuring charges (reversals), net for the six months ended June 30, 2013	$	8,996		$	(12,879	)	$	399		$	(3,484	)
Cash paid		(8,630	)		(14,243	)		(8,332	)		(31,205	)
Other non-cash charges		—			—			(538	)		(538	)
Foreign currency		(94	)		(381	)		(171	)		(646	)
Balance as of June 30, 2013	$	27,988		$	7,546		$	1,460		$	36,994

Restructuring accruals by segment consisted of the following (in thousands):

	December 31, 2012		June 30, 2013
Americas	$	42,689	$	22,854
EMEA		18,144		12,026
Asia Pacific		12,034		2,114
Total restructuring accruals	$	72,867	$	36,994

Note 14 INCOME TAXES

The Company’s effective tax rate is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Historically, the Company’s provision for income taxes has differed from the tax computed at the U.S. federal statutory income tax rate due to state taxes, the effect of non-U.S. operations, non-deductible stock-based compensation expense and adjustments to unrecognized tax benefits.

The effective tax rate reported for the three months ended June 30, 2013 was 31 percent compared to 35 percent for the same period in 2012. The effective tax rate for the three months ended June 30, 2013 was lower than in 2012 primarily due to an $11 million tax benefit recorded during the quarter ended June 30, 2013 relating to the resolution of certain tax matters associated with a one-time foreign earnings distribution made during the quarter ended September 30, 2012. The effective tax rate reported for the six months ended June 30, 2013 was 22 percent compared to 34 percent for the same period in 2012. The rates in both periods were lower than the U.S. federal statutory rate primarily due to the reductions of tax reserves for tax audits that were favorably settled. The reduction of tax reserves for the six months ended June 30, 2013 was related to various tax audits worldwide, settled and ongoing, and resulted in a net tax benefit of approximately $30 million.

The conclusion of the 2005 and 2006 IRS tax audit, discussed below, settled various international transfer pricing matters and had the effect of increasing the foreign tax credits available to offset the tax from the distribution of foreign earnings reported during the three months ended September 30, 2012. The increased foreign tax credits and the tax benefit relating to the resolution of certain tax matters associated with a one-time foreign earnings distribution made during the quarter ended September 30, 2012 mentioned above, resulted in a tax benefit during the six months ended June 30, 2013 of approximately $22 million.

The federal research and development credit expired on December 31, 2011. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Under this act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 and before January 1, 2014. This change resulted in a 2012 tax benefit of approximately $9 million, which was recognized during the six months ended June 30, 2013.

In connection with a review of the Company’s cash position and anticipated cash needs for investment in the Company’s core business, including potential acquisitions and capital expenditures, and stock repurchases, the Company made a one-time repatriation of cash from certain of its consolidated foreign subsidiaries in 2012. The remaining undistributed foreign earnings of approximately $2 billion principally related to Yahoo Japan, and future earnings, will continue to be indefinitely reinvested going forward.

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During the six months ended June 30, 2013, the Company settled the income tax examination for the 2005 and 2006 returns with the IRS Appeals Division. That settlement resulted in a reduction of tax reserves. The income tax examination for the 2007 and 2008 returns is currently under protest with the IRS Appeals Division relating to certain proposed adjustments to the Company’s intercompany transfer pricing methodology. An initial meeting with the IRS Appeals Division is expected to be held in 2013 to address those matters. The Company’s 2009 and 2010 returns are currently under IRS examination.

As of June 30, 2013, the Company’s 2005 through 2008 tax returns are also under various stages of audit by the California Franchise Tax Board. While the California Franchise Tax Board has not reached any conclusions on the 2007 and 2008 returns, the Company has protested the proposed California Franchise Tax Board’s adjustments to the 2005 and 2006 returns. The Company is also in various stages of examination and appeal in connection with its taxes in foreign jurisdictions, which generally span tax years 2005 through 2011.

The Company’s gross amount of unrecognized tax benefits as of June 30, 2013 was $715 million, of which $633 million is recorded on the condensed consolidated balance sheets. The gross unrecognized tax benefits as of June 30, 2013 decreased by $12 million from the recorded balance as of December 31, 2012. While it is difficult to determine when the examinations will be settled or their final outcomes, certain audits in various jurisdictions related to multinational income tax issues are expected to be resolved in the foreseeable future. As a result, it is reasonably possible that the unrecognized tax benefits could be reduced by up to approximately $35 million in the next twelve months. The Company believes that it has adequately provided for any reasonably foreseeable adjustment and that any settlement will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

The Company may have additional tax liabilities in China related to the sale to Alibaba Group of 523 million Shares of Alibaba Group that took place during the year ended December 31, 2012. Any taxes assessed and paid in China are expected to be ultimately offset and recovered in the U.S.

During the year ended December 31, 2012, tax authorities from the Brazilian State of Sao Paulo assessed certain indirect taxes against the Company’s Brazilian subsidiary, Yahoo! do Brasil Internet Ltda., related to online advertising services. The assessment totaling approximately $85 million is for calendar years 2008 and 2009. The Company currently believes the assessment is without merit. The Company does not believe that it is probable the assessment will be sustained upon appeal and, accordingly, has not recorded an accrual for the assessment.

Note 15 SEGMENTS

The Company continues to manage its business geographically. The primary areas of measurement and decision-making are currently Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific. Management relies on an internal reporting process that provides revenue ex-TAC, which is defined as revenue less TAC, direct costs excluding TAC by segment, and consolidated income from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, the Company’s segments. The Company is currently evaluating how it will report the Tumblr acquisition for segment reporting purposes.

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The following tables present summarized information by segment (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2013		June 30, 2012		June 30, 2013
Revenue by segment:
Americas	$	821,751	$	828,537	$	1,657,784	$	1,670,732
EMEA		128,099		97,387		262,061		192,211
Asia Pacific		267,944		209,320		519,182		412,669
Total Revenue	$	1,217,794	$	1,135,244	$	2,439,027	$	2,275,612
TAC by segment:
Americas	$	45,910	$	37,120	$	88,865	$	74,642
EMEA		34,187		11,372		79,849		22,908
Asia Pacific		56,928		15,824		112,402		32,834
Total TAC	$	137,025	$	64,316	$	281,116	$	130,384
Revenue ex-TAC by segment:
Americas	$	775,841	$	791,417	$	1,568,919	$	1,596,090
EMEA		93,912		86,015		182,212		169,303
Asia Pacific		211,016		193,496		406,780		379,835
Total Revenue ex-TAC	$	1,080,769	$	1,070,928	$	2,157,911	$	2,145,228
Direct costs by segment(1):
Americas		181,510		172,268		360,735		342,392
EMEA		41,277		41,416		81,498		79,844
Asia Pacific		56,248		49,667		107,739		104,681
Global operating costs(2)(3)		410,519		438,395		832,417		863,524
Depreciation and amortization		157,739		160,489		310,987		322,581
Stock-based compensation expense		49,571		68,136		105,537		112,741
Restructuring charges (reversals), net		129,092		3,578		134,809		(3,484	)
Income from operations	$	54,813	$	136,979	$	224,189	$	322,949

⁽¹⁾  Direct costs for each segment include cost of revenue—other as well as other operating expenses that are directly attributable to the segment such as employee compensation expense (excluding stock-based compensation expense), local sales and marketing expenses, and facilities expenses.

⁽²⁾  Global operating costs include product development, service engineering and operations, general and administrative, and other corporate expenses that are managed on a global basis and that are not directly attributable to any segment.

⁽³⁾  The net cost reimbursements from Microsoft pursuant to the Search Agreement are primarily included in global operating costs.

	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2013		June 30, 2012		June 30, 2013
Capital expenditures, net:
Americas	$	96,443	$	75,061	$	179,327	$	140,477
EMEA		4,078		2,757		13,361		5,664
Asia Pacific		5,610		4,258		23,234		5,516
Total capital expenditures, net	$	106,131	$	82,076	$	215,922	$	151,657

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	December 31, 2012		June 30, 2013
Property and equipment, net:
Americas:
U.S	$	1,483,225	$	1,419,309
Other		1,869		1,541
Total Americas	$	1,485,094	$	1,420,850
EMEA		59,416		49,370
Asia Pacific		141,335		109,602
Total property and equipment, net	$	1,685,845	$	1,579,822

See Note 13 —“Restructuring Charges (Reversals), Net” for additional information regarding segments.

Enterprise Wide Disclosures:

The following table presents revenue for groups of similar services (in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2013		June 30, 2012		June 30, 2013
Display	$	534,972	$	471,742	$	1,046,189	$	926,813
Search		460,969		418,202		931,366		842,889
Other		221,853		245,300		461,472		505,910
Total revenue	$	1,217,794	$	1,135,244	$	2,439,027	$	2,275,612

	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2013		June 30, 2012		June 30, 2013
Revenue:
U.S.	$	779,321	$	784,726	$	1,578,971	$	1,589,479
International		438,473		350,518		860,056		686,133
Total revenue	$	1,217,794	$	1,135,244	$	2,439,027	$	2,275,612

Revenue is attributed to individual countries according to the online property that generated the revenue. No single foreign country was material to revenue for the three or six months ended June 30, 2012 and 2013.

Note 16 SEARCH AGREEMENT WITH MICROSOFT CORPORATION

On December 4, 2009, the Company entered into the Search Agreement with Microsoft, which provides for Microsoft to be the exclusive algorithmic and paid search services provider on Yahoo! Properties and non-exclusive provider of such services on Affiliate sites. The Company also entered into a License Agreement with Microsoft. Under the License Agreement, Microsoft acquired an exclusive 10-year license to the Company’s core search technology and will have the ability to integrate this technology into its existing Web search platforms. On February 18, 2010, the Company received regulatory clearance from both the U.S. Department of Justice and the European Commission and on February 23, 2010 the Company commenced implementation of the Search Agreement on a market-by-market basis. Under the Search Agreement, the Company will be the exclusive worldwide relationship sales force for both companies’ premium search advertisers, which include advertisers meeting certain spending or other criteria, advertising agencies that specialize in or offer search engine marketing services and their clients, and resellers and their clients seeking assistance with their paid search accounts. The term of the Search Agreement is 10 years from February 23, 2010, subject to earlier termination as provided in the Search Agreement.

During the first five years of the term of the Search Agreement, in the transitioned markets, the Company is entitled to receive 88 percent of the revenue generated from Microsoft’s services on Yahoo! Properties (the “Revenue Share Rate”) and the Company is also entitled to receive 88 percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue. For new Affiliates during the term of the Search Agreement, and for all Affiliates after the first five years of such term, the Company will receive 88 percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue and certain Microsoft costs are deducted. On February 23, 2015 (the fifth anniversary of the date that implementation of the Search Agreement commenced), Microsoft will have the option to terminate the Company’s sales exclusivity for premium search

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advertisers. If Microsoft exercises this option, the Revenue Share Rate will increase to 93 percent for the remainder of the term of the Search Agreement, unless the Company exercises its option to retain the Company’s sales exclusivity, in which case the Revenue Share Rate would be reduced to 83 percent for the remainder of the term. If Microsoft does not exercise such option, the Revenue Share Rate will be 90 percent for the remainder of the term of the Search Agreement. In the transitioned markets, the Company reports as revenue the 88 percent revenue share as the Company is not the primary obligor in the arrangement with the advertisers and publishers. The underlying search advertising services are provided by Microsoft. The Company’s uncollected 88 percent share in connection with the Search Agreement, which is included in accounts receivable, net, was $258 million and $262 million as of December 31, 2012 and June 30, 2013, respectively.

Under the Search Agreement, for each market, Microsoft generally guarantees Yahoo!’s revenue per search (“RPS Guarantee”) on Yahoo! Properties only for 18 months after the transition of paid search services to Microsoft’s platform in that market based on the difference in revenue per search between the pre-transition and post-transition periods and certain other factors. The Company records the RPS Guarantee as search revenue in the quarter the amount becomes fixed, which is typically the quarter in which the associated shortfall in revenue per search occurred. In the fourth quarter of 2011, Microsoft agreed to extend the RPS Guarantee in the U.S. and Canada through March 2013 and in the second quarter of 2013, Microsoft extended the RPS Guarantee in the U.S. through March 2014. In June 2013, Microsoft and Yahoo! agreed upon the RPS Guarantee payment amounts to be paid to the Company for the quarters ended December 31, 2012, March 31, 2013 and June 30, 2013. The Company also agreed to fixed quarterly payments in lieu of the RPS Guarantee in the U.S. for the quarters ending September 30, 2013, December 31, 2013 and March 31, 2014. In addition, the Company agreed to waive its right to receive any future RPS Guarantee payments in all other markets except Taiwan and Hong Kong.

The Company completed the transition of its algorithmic and paid search platforms to the Microsoft platform in the U.S. and Canada in the fourth quarter of 2010. In 2011, the Company completed the transition of algorithmic search in all other markets and the transition of paid search in India. In 2012, the Company completed the transition of paid search in most of the EMEA markets as well as six markets in Latin America. In the second quarter of 2013, the Company completed the transition of paid search in Brazil. The Company is continuing to work with Microsoft on transitioning paid search in the remaining markets. The market-by-market transition of the Company’s paid search platform to Microsoft’s platform and the migration of paid search advertisers and publishers to Microsoft’s platform are expected to continue through 2013, and possibly into 2014.

From February 23, 2010 until the applicable services are fully transitioned to Microsoft in all markets, Microsoft will also reimburse the Company for the costs of operating algorithmic and paid search services subject to specified exclusions and limitations. The Company’s results reflect search operating cost reimbursements from Microsoft under the Search Agreement of $17 million and $34 million for the three and six months ended June 30, 2012, respectively, and $18 million and $31 million for the three and six months ended June 30, 2013, respectively. Search operating cost reimbursements began during the quarter ended March 31, 2010 and will, subject to specified exclusions and limitations, continue until the Company has fully transitioned to Microsoft’s platform.

Reimbursement receivables are recorded as the reimbursable costs are incurred and are applied against the operating expense categories in which the costs were incurred. Of the total amounts incurred during the year ended December 31, 2012 and the six months ended June 30, 2013, the total reimbursements not yet received from Microsoft of $5 million and $4 million, respectively, were classified as part of prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets as of December 31, 2012 and June 30, 2013, respectively.

Note 17 SUBSEQUENT EVENTS

Stock Repurchase Transactions. From July 1, 2013 through August 8, 2013, the Company repurchased approximately 51 million shares of its common stock at an average price of $28.66 per share, for a total of $1.5 billion.

These repurchases included the Company’s repurchase of 40 million shares of its common stock beneficially owned by Third Point LLC on July 25, 2013. These shares were repurchased pursuant to a Purchase Agreement entered into on July 22, 2013, at $29.11 per share, which equaled the closing price of the Company’s common stock on July 19, 2013. The total purchase price for these shares was $1.164 billion. The repurchase transaction was funded primarily with cash as well as borrowings of $150 million under the Company’s unsecured revolving credit facility.

Acquisitions. From July 1, 2013 through August 8, 2013, the Company acquired seven companies, which will be accounted for as business combinations, for total aggregate consideration of approximately $162 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In addition to current and historical information, this Quarterly Report on Form 10-Q (“Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments, and business strategies. These statements can, in some cases, be identified by the use of terms such as “may,” “will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue” or the negative of such terms or other comparable terminology. This Report includes, among others, forward-looking statements regarding our:

• expectations about revenue, including display, search, and other revenue;

• expectations about growth in users;

• expectations about changes in our earnings in equity interests;

• expectations about operating expenses;

• anticipated capital expenditures;

• expectations about our share repurchase activity;

• expectations about the implementation and the financial and operational impacts of our Search Agreement with Microsoft;

• impact of recent acquisitions on our business and evaluation of, and expectations for, possible acquisitions of, or investments in, businesses, products, intangible assets, and technologies;

• projections and estimates with respect to our restructuring activities and changes to our organizational structure;

• expectations about the impact of the closure of our Korea business;

• expectations about the amount of unrecognized tax benefits, the outcome of tax assessment appeals, the adequacy of our existing tax reserves, and future tax expenditures, and tax rates;

• expectations about positive cash flow generation and existing cash, cash equivalents, and investments being sufficient to meet normal operating requirements; and

• expectations regarding the outcome of legal proceedings in which we are involved, including the outcome of our efforts to sustain the reversal of the judgment entered against us and one of our subsidiaries in a proceeding in Mexico.

These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part II, Item 1A. “Risk Factors” of this Report. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.

Overview

Yahoo! Inc., together with its consolidated subsidiaries (“Yahoo!,” the “Company,” “we,” or “us”), is focused on making the world’s daily habits inspiring and entertaining. By creating highly personalized experiences for our users, we keep people connected to what matters most to them, across devices and around the world. In turn, we create value for advertisers by connecting them with the audiences that build their businesses. Advertisers can build their businesses through advertising to targeted audiences on our online properties and services (“Yahoo! Properties”), or through our distribution network of third-party entities (“Affiliates”) who integrate our advertising offerings into their Websites or other offerings (those Websites and other offerings, “Affiliate sites”).

Our offerings to users on Yahoo! Properties currently fall into four categories: Yahoo.com; Communications; User-Generated Content; and Mobile & Emerging Products. We manage and measure our business geographically, principally in the Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific.

In the following Management’s Discussion and Analysis, we provide information regarding the following areas:

• Key Financial Metrics;

• Non-GAAP Financial Measures;

• Significant Transactions;

• Results of Operations;

• Liquidity and Capital Resources; and

• Critical Accounting Policies and Estimates.

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Key Financial Metrics

The key financial metrics we use are as follows: revenue; revenue less traffic acquisition costs (“TAC”), or revenue ex-TAC; income from operations; adjusted EBITDA; net income attributable to Yahoo! Inc.; net cash provided by operating activities; and free cash flow. Revenue ex-TAC, adjusted EBITDA, and free cash flow are financial measures that are not defined in accordance with U.S. generally accepted accounting principles (“GAAP”). We use these non-GAAP financial measures for internal managerial purposes and to facilitate period-to-period comparisons. See “Non-GAAP Financial Measures” below for a description of each of these non-GAAP financial measures.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2013		2012		2013
	(dollars in thousands)
Revenue	$	1,217,794	$	1,135,244	$	2,439,027	$	2,275,612
Revenue ex-TAC	$	1,080,769	$	1,070,928	$	2,157,911	$	2,145,228
Income from operations(*)	$	54,813	$	136,979	$	224,189	$	322,949
Adjusted EBITDA	$	397,715	$	369,182	$	782,022	$	754,787
Net income attributable to Yahoo! Inc.	$	226,631	$	331,150	$	512,974	$	721,435
Net cash provided by operating activities	$	274,560	$	330,828	$	572,013	$	549,510
Free cash flow	$	93,390	$	131,400	$	289,213	$	281,308
(*)    Includes:
Stock-based compensation expense	$	49,571	$	68,136	$	105,537	$	112,741
Restructuring charges (reversals), net	$	129,092	$	3,578	$	134,809	$	(3,484	)

Revenue ex-TAC (a Non-GAAP Financial Measure)

	Three Months Ended June 30,				Percent Change			Six Months Ended June 30,				Percent Change
	2012		2013					2012		2013
	(dollars in thousands)
Revenue	$	1,217,794	$	1,135,244		(7	)%	$	2,439,027	$	2,275,612		(7	)%
Less: TAC		137,025		64,316		(53	)%		281,116		130,384		(54	)%
Revenue ex-TAC	$	1,080,769	$	1,070,928		(1	)%	$	2,157,911	$	2,145,228		(1	)%

For the three and six months ended June 30, 2013, revenue ex-TAC decreased 1 percent compared to the same periods of 2012, due to a decline in display revenue ex-TAC partially offset by an increase in search and other revenue ex-TAC.

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Adjusted EBITDA (a Non-GAAP Financial Measure)

	Three Months Ended June 30,						Percent Change		Six Months Ended June 30,						Percent Change
	2012			2013					2012			2013
	(dollars in thousands)
Net income attributable to Yahoo! Inc.	$	226,631		$	331,150			46 %	$	512,974		$	721,435			41 %
Depreciation and amortization		157,739			160,489			2 %		310,987			322,581			4 %
Stock-based compensation expense		49,571			68,136			37 %		105,537			112,741			7 %
Restructuring charges (reversals), net		129,092			3,578			(97)%		134,809			(3,484	)		(103)%
Other income, net		(20,175	)		(23,606	)		17 %		(22,453	)		(40,678	)		81 %
Provision for income taxes		26,523			50,267			90 %		82,942			80,003			(4)%
Earnings in equity interests		(179,991	)		(224,690	)		25 %		(352,234	)		(442,278	)		26 %
Net income attributable to noncontrolling interests		1,825			3,858			111 %		2,960			4,467			51 %
Deal costs related to the sale of Alibaba Group shares		6,500			—			(100)%		6,500			—			(100)%
Adjusted EBITDA	$	397,715		$	369,182			(7)%	$	782,022		$	754,787			(3)%
Percentage of revenue ex-TAC(1)(2)		37	%		34	%				36	%		35	%

⁽¹⁾  Revenue ex-TAC is calculated as GAAP revenue less TAC.

⁽²⁾  Net income attributable to Yahoo! Inc. as a percentage of GAAP revenue for the three and six months ended June 30, 2013 was 29 percent and 32 percent, respectively. Net income attributable to Yahoo! Inc. as a percentage of GAAP revenue for the three and six months ended June 30, 2012 was 19 percent and 21 percent, respectively.

For the three and six months ended June 30, 2013, adjusted EBITDA decreased 7 percent and 3 percent, respectively, compared to the same periods of 2012, mainly due to a decline in revenue ex-TAC and an increase in global operating costs.

Free Cash Flow (a Non-GAAP Financial Measure)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2013			2012			2013
	(dollars in thousands)
Net cash provided by operating activities	$	274,560		$	330,828		$	572,013		$	549,510
Acquisition of property and equipment, net		(106,131	)		(82,076	)		(215,922	)		(151,657	)
Dividends received from equity investees		(83,648	)		(123,058	)		(83,648	)		(135,058	)
Excess tax benefits from stock-based awards		8,609			5,706			16,770			18,513
Free cash flow	$	93,390		$	131,400		$	289,213		$	281,308

For the three months ended June 30, 2013, free cash flow increased $38 million, or 41 percent, compared to the same period of 2012. The increase was primarily attributable to an increase in cash provided by operating activities and a decline in capital expenditures. For the six months ended June 30, 2013, free cash flow decreased $8 million, or 3 percent, compared to the same period of 2012. The decrease was primarily attributable to a decline in net cash provided by operating activities, partially offset by a decline in capital expenditures year-over-year.

Non-GAAP Financial Measures

Revenue ex-TAC

Revenue ex-TAC is a non-GAAP financial measure defined as GAAP revenue less TAC. TAC consists of payments made to Affiliates that have integrated our advertising offerings into their sites and payments made to companies that direct consumer and business traffic to Yahoo! Properties. Based on the terms of the Search Agreement with Microsoft described under “Significant Transactions” below, Microsoft retains a revenue share of 12 percent of the net (after TAC) search revenue generated on Yahoo! Properties and Affiliate sites in transitioned markets. We report the net revenue we receive under the Search Agreement as revenue and no longer present the associated TAC. Accordingly, for transitioned markets we report GAAP revenue associated with the Search Agreement on a net (after TAC) basis rather than a gross basis. For markets that have not yet transitioned, revenue continues to be recorded on a gross (before TAC) basis, and TAC is recorded as a part of operating expenses.

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Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure defined as net income attributable to Yahoo! Inc. before taxes, depreciation, amortization of intangible assets, stock-based compensation expense, other income, net (which includes interest), earnings in equity interests, net income attributable to noncontrolling interests, and certain gains, losses, and expenses that we do not believe are indicative of our ongoing results.

Free Cash Flow

Free cash flow is a non-GAAP financial measure defined as net cash provided by operating activities (adjusted to include excess tax benefits from stock-based awards), less (i) acquisition of property and equipment, net, and (ii) dividends received from equity investees.

For additional information about these non-GAAP financial measures, see “Non-GAAP Financial Measures” included in our Annual Report on Form 10-K for the year ended December 31, 2012 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Significant Transactions

Stock Repurchase Transactions

During the six months ended June 30, 2013, we repurchased 63 million shares of our outstanding common stock for $1.4 billion. From July 1, 2013 through August 8, 2013, we repurchased an additional approximately 51 million shares of our common stock for $1.5 billion. These repurchases included our repurchase of 40 million shares of common stock beneficially owned by Third Point LLC (“Third Point”) that we repurchased on July 25, 2013. These shares were repurchased pursuant to a Purchase Agreement entered into on July 22, 2013, at $29.11 per share, which equaled the closing price of our common stock on July 19, 2013. Following this repurchase, Third Point beneficially owns less than two percent of our outstanding common stock. As a result and in accordance with the terms of the Settlement Agreement, entered into on May 13, 2012 with Third Point and its affiliates, Daniel S. Loeb, Harry J. Wilson and Michael J. Wolf resigned from our board of directors on July 31, 2013.

As of August 8, 2013, approximately $555 million remains under the $5 billion stock repurchase program that was authorized by our board of directors in May 2012. We plan to continue to repurchase shares of our common stock under this program.

Acquisition of Tumblr

On June 19, 2013, we completed the acquisition of Tumblr, Inc. (“Tumblr”), a blog-hosting website that allows users to post their own content as well as follow or re-blog posts made by other users. The acquisition of Tumblr is expected to bring a significant community of users to the Yahoo! network. The total purchase price of approximately $990 million consisted mainly of cash consideration. See Note 4— “Acquisitions” in the Notes to our condensed consolidated financial statements for additional information.

Initial Repurchase of Alibaba Group Holding Limited Ordinary Shares

See Note 8—“Investments in Equity Interests” in the Notes to our condensed consolidated financial statements for information regarding the repurchase by Alibaba Group Holding Limited (“Alibaba Group”) of 523 million of the 1,047 million ordinary shares of Alibaba Group (the “Shares”) owned by us (the “Initial Repurchase”).

In September 2012, we received net cash proceeds after the payment of taxes and fees from the Initial Repurchase and the $550 million TIPLA payment of approximately $4.3 billion. We committed to return $3.65 billion of these after-tax proceeds to shareholders and have now completed this commitment.

On May 16, 2013, we received $846 million in cash from Alibaba Group to redeem the Alibaba Group Preference Shares. The cash received represented the redemption value, which included the stated value of $800 million plus accrued dividends of $46 million.

Search Agreement with Microsoft Corporation

On December 4, 2009, we entered into a Search and Advertising Services and Sales Agreement (the “Search Agreement”) with Microsoft Corporation (“Microsoft”), which provides for Microsoft to be the exclusive algorithmic and paid search services provider on Yahoo! Properties and non-exclusive provider of such services on Affiliate sites. We also entered into a License Agreement with Microsoft pursuant to which Microsoft acquired an exclusive 10-year license to our core search technology that it will be able to integrate into its existing Web search platforms. The global transition of our algorithmic and paid search platforms to Microsoft’s platform and the migration of paid search advertisers and publishers to Microsoft’s platform are being done on a market-by-market basis.

During the first five years of the Search Agreement, in transitioned markets, we are entitled to receive 88 percent of the revenue generated from Microsoft’s services on Yahoo! Properties. We are also entitled to receive 88 percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue. In the transitioned markets, for search revenue generated

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from Microsoft’s services on Yahoo! Properties and Affiliate sites, we report as revenue the 88 percent revenue share, as we are not the primary obligor in the arrangement with the advertisers and publishers. The underlying search advertising services are provided by Microsoft. For new Affiliates during the term of the Search Agreement, and for all Affiliates after the first five years of such term, we will receive 88 percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue and certain Microsoft costs are deducted. On February 23, 2015 (the fifth anniversary of the date that implementation of the Search Agreement commenced), Microsoft will have the option to terminate our sales exclusivity for premium search advertisers. If Microsoft exercises its option, the revenue share rate will increase to 93 percent for the remainder of the term of the Search Agreement, unless we exercise our option to retain our sales exclusivity, in which case the revenue share rate would be reduced to 83 percent for the remainder of the term. If Microsoft does not exercise such option, the revenue share rate will be 90 percent for the remainder of the term of the Search Agreement. The term of the Search Agreement is 10 years from February 23, 2010, subject to earlier termination as provided in the Search Agreement.

Under the Search Agreement, for each market, Microsoft generally guarantees Yahoo!’s revenue per search (“RPS Guarantee”) on Yahoo! Properties only for 18 months after the transition of paid search services to Microsoft’s platform in that market based on the difference in revenue per search between the pre-transition and post-transition periods and certain other factors. We record the RPS Guarantee as search revenue in the quarter the amount becomes fixed, which is typically the quarter in which the associated shortfall in revenue per search occurred. In the fourth quarter of 2011, Microsoft agreed to extend the RPS Guarantee in the U.S. and Canada through March 2013 and in the second quarter of 2013, Microsoft extended the RPS Guarantee in the U.S. through March 2014. In June 2013, Microsoft and we agreed upon the RPS Guarantee payment amounts to be paid to us for the quarters ended December 31, 2012, March 31, 2013 and June 30, 2013. We also agreed to fixed quarterly payments in lieu of the RPS Guarantee in the U.S. for the quarters ending September 30, 2013, December 31, 2013 and March 31, 2014. In addition, we agreed to waive our right to receive any future RPS Guarantee payments in all other markets except Taiwan and Hong Kong. We do not expect the remaining quarterly payments from Microsoft and any RPS Guarantee payments for Taiwan and Hong Kong to have a material impact on our expected future revenue.

We completed the transition of our algorithmic and paid search platforms to the Microsoft platform in the U.S. and Canada in the fourth quarter of 2010. In 2011, we completed the transition of algorithmic search in all other markets and the transition of paid search in India. In 2012, we completed the transition of paid search in most of the EMEA markets as well as six markets in Latin America. In the second quarter of 2013, we completed the transition of paid search in Brazil. We are continuing to work with Microsoft on transitioning paid search in the remaining markets. The market-by-market transition of our paid search platform to Microsoft’s platform and the migration of paid search advertisers and publishers to Microsoft’s platform are expected to continue through 2013, and possibly into 2014.

From February 23, 2010 until the applicable services are fully transitioned to Microsoft in all markets, Microsoft will also reimburse us for the costs of operating algorithmic and paid search services subject to specified exclusions and limitations. Our results reflect search operating cost reimbursements from Microsoft under the Search Agreement of $17 million and $34 million for the three and six months ended June 30, 2012, respectively, and $18 million and $31 million for the three and six months ended June 30, 2013, respectively. Search operating cost reimbursements are expected to decline as we fully transition all markets and, in the long term, the underlying expenses are not expected to be incurred under our cost structure.

We record receivables for the reimbursements as costs are incurred and apply them against the operating expense categories in which the costs were incurred. Of the total amounts incurred during the year ended December 31, 2012 and the six months ended June 30, 2013, the total reimbursements not yet received from Microsoft of $5 million and $4 million, were classified as part of prepaid expenses and other current assets on our condensed consolidated balance sheets as of December 31, 2012 and June 30, 2013, respectively.

See Note 16 — “Search Agreement with Microsoft Corporation” in the Notes to our condensed consolidated financial statements for additional information.

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Results of Operations

	Three Months Ended June 30,				Percent Change		Six Months Ended June 30,					Percent Change
	2012		2013				2012		2013
	(dollars in thousands)
Revenue for groups of similar services:
Display	$	534,972	$	471,742		(12)%	$	1,046,189	$	926,813			(11)%
Search		460,969		418,202		(9)%		931,366		842,889			(9)%
Other		221,853		245,300		11 %		461,472		505,910			10 %
Total revenue	$	1,217,794	$	1,135,244		(7)%	$	2,439,027	$	2,275,612			(7)%
Cost of revenue — traffic acquisition costs		137,025		64,316		(53)%		281,116		130,384			(54)%
Cost of revenue — other		278,453		271,262		(3)%		532,432		549,269			3 %
Sales and marketing		272,910		279,738		3 %		558,178		536,757			(4)%
Product development		199,628		236,248		18 %		428,106		455,828			6 %
General and administrative		136,117		135,039		(1)%		260,388		268,460			3 %
Amortization of intangibles		9,756		8,084		(17)%		19,809		15,449			(22)%
Restructuring charges (reversals), net		129,092		3,578		(97)%		134,809		(3,484	)		(103)%
Total operating expenses	$	1,162,981	$	998,265		(14)%	$	2,214,838	$	1,952,663			(12)%
Income from operations	$	54,813	$	136,979		150 %	$	224,189	$	322,949			44 %
Includes:
Stock-based compensation expense	$	49,571	$	68,136		37 %	$	105,537	$	112,741			7 %

The following table sets forth selected information concerning our results of operations as a percentage of revenue for the period indicated:

	Three Months Ended June 30,				Six Months Ended June  30,
	2012		2013		2012		2013
Revenue for groups of similar services:
Display		44%		42%		43%		41%
Search		38%		37%		38%		37%
Other		18%		21%		19%		22%
Total revenue		100%		100%		100%		100%
Cost of revenue — traffic acquisition costs		11%		6%		12%		6%
Cost of revenue — other		23%		24%		22%		24%
Sales and marketing		22%		24%		23%		23%
Product development		16%		21%		17%		20%
General and administrative		11%		12%		11%		12%
Amortization of intangibles		1%		1%		1%		1%
Restructuring charges (reversals), net		11%		—		5%		—
Total operating expenses		95%		88%		91%		86%
Income from operations		5%		12%		9%		14%

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Management Reporting

We continue to manage our business geographically. The primary areas of measurement and decision-making are currently the Americas, EMEA, and Asia Pacific. Management relies on an internal reporting process that provides revenue ex-TAC, direct costs excluding TAC by segment, and consolidated income from operations for making decisions related to the evaluation of the financial performance of, and allocating resources to, our segments. The Company is currently evaluating how it will report the Tumblr acquisition for segment reporting purposes.

	Three Months Ended				Percent Change		Six Months Ended					Percent Change
	June 30, 2012		June 30, 2013				June 30, 2012		June 30, 2013
	(dollars in thousands)
Revenue by segment:
Americas	$	821,751	$	828,537		1 %	$	1,657,784	$	1,670,732			1 %
EMEA		128,099		97,387		(24)%		262,061		192,211			(27)%
Asia Pacific		267,944		209,320		(22)%		519,182		412,669			(21)%
Total revenue	$	1,217,794	$	1,135,244		(7)%	$	2,439,027	$	2,275,612			(7)%
TAC by segment:
Americas	$	45,910	$	37,120		(19)%	$	88,865	$	74,642			(16)%
EMEA		34,187		11,372		(67)%		79,849		22,908			(71)%
Asia Pacific		56,928		15,824		(72)%		112,402		32,834			(71)%
Total TAC	$	137,025	$	64,316		(53)%	$	281,116	$	130,384			(54)%
Revenue ex-TAC by segment:
Americas	$	775,841	$	791,417		2 %	$	1,568,919	$	1,596,090			2 %
EMEA		93,912		86,015		(8)%		182,212		169,303			(7)%
Asia Pacific		211,016		193,496		(8)%		406,780		379,835			(7)%
Total revenue ex-TAC	$	1,080,769	$	1,070,928		(1)%	$	2,157,911	$	2,145,228			(1)%
Direct costs by segment(1):
Americas		181,510		172,268		(5)%		360,735		342,392			(5)%
EMEA		41,277		41,416		—		81,498		79,844			(2)%
Asia Pacific		56,248		49,667		(12)%		107,739		104,681			(3)%
Global operating costs(2)(3)		410,519		438,395		7 %		832,417		863,524			4 %
Depreciation and amortization		157,739		160,489		2 %		310,987		322,581			4 %
Stock-based compensation expense		49,571		68,136		37 %		105,537		112,741			7 %
Restructuring charges (reversals), net		129,092		3,578		(97)%		134,809		(3,484	)		(103)%
Income from operations	$	54,813	$	136,979		150 %	$	224,189	$	322,949			44 %

⁽¹⁾  Direct costs for each segment include cost of revenue — other, as well as other operating expenses that are directly attributable to the segment such as employee compensation expense (excluding stock-based compensation expense), local sales and marketing expenses, and facilities expenses.

⁽²⁾  Global operating costs include product development, service engineering and operations, general and administrative, and other corporate expenses that are managed on a global basis and that are not directly attributable to any particular segment.

⁽³⁾  The net cost reimbursements from Microsoft pursuant to the Search Agreement are primarily included in global operating costs.

Revenue

We generate revenue principally from display and search advertising on Yahoo! Properties and Affiliate sites. The majority of our revenue comes from display and search advertising on Yahoo! Properties. Our margins on revenue from Yahoo! Properties advertising are higher than our margins on revenue from display and search advertising on Affiliate sites as we pay TAC to our Affiliates. Additionally, we generate revenue from other sources including listings-based services, facilitating commercial transactions, royalties, and consumer and business fee-based services.

We earn revenue from guaranteed or “premium” display advertising by delivering advertisements according to advertisers’ specified criteria, such as number of impressions during a fixed period on a specific placement. Also, we earn revenue from non-guaranteed or “non-premium” display advertising by delivering advertisements for advertisers purchasing inventory on a preemptible basis, which means that the advertisement may or may not appear, inventory is not reserved and position placement is not assured. Generally, we make our non-premium display inventory available through the Right Media Exchange.

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We are increasing our strategic focus on the mobile industry due to a shift in Internet access by users and have hired engineering and technical talent to help us accelerate our efforts in mobile development. At present, our display and search revenue from mobile are not material.

For additional information about how we generate and recognize revenue, see “Results of Operations—Revenue” included in our Annual Report on Form 10-K for the year ended December 31, 2012 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Display and Search Metrics

We present information below regarding the “Number of Ads Sold” and “Price-per-Ad” for display and the number of “Paid Clicks” and “Price-per-Click” for search. This information is derived from internal data. We periodically review and refine our methodologies for monitoring, gathering, and counting Number of Ads Sold and Paid Clicks. Based on this process, from time to time, we update such methodologies.

Due to the closure of the Korea business in the fourth quarter of 2012, “Number of Ads Sold,” “Paid Clicks,” “Price-per-Ad,” and “Price-per-Click,” as presented below, exclude the Korea market for all periods presented.

“Number of Ads Sold” is defined as the total number of ads displayed, or impressions, for paying advertisers on Yahoo! Properties. “Price-per-Ad” is defined as display revenue from Yahoo! Properties divided by our Number of Ads Sold. Our price and volume metrics for display are based on display revenue which we report on a gross basis (before TAC). Our price and volume metrics for display exclude both the Number of Ads Sold and the related revenue for certain regions where we did not retain historical information in a manner that would support period-to-period comparison on these metrics. The countries and regions included in our display metrics are: the United States, the United Kingdom, France, Germany, Spain, Italy, Taiwan, Hong Kong, Southeast Asia, and India.

“Paid Clicks” are defined as the total number of times an end-user clicks on a sponsored listing on Yahoo! Properties and Affiliate sites for which an advertiser pays on a per click basis. “Price-per-Click” is defined as search revenue divided by our Paid Clicks. Although Paid Clicks and Price-per-Click are predominantly search metrics, we include Paid Clicks and the related revenue from certain display advertisements that are sold on a price-per-click basis. The revenue associated with display Paid Clicks is not material and is excluded from our display price volume metrics. Our price and volume metrics for search are based on gross search revenue (before TAC) in all markets in which we operate and include any Microsoft RPS Guarantee payments.

Display Revenue

Display revenue for the three and six months ended June 30, 2013 decreased by 12 percent and 11 percent, respectively, as compared to the same periods of 2012. The decline for the three and six months ended June 30, 2013 was primarily attributable to a decline in pricing due to more ads sold on a non-premium basis.

For the three and six months ended June 30, 2013, Number of Ads Sold decreased 2 percent and 5 percent, respectively, and Price-per-Ad decreased 12 percent and 7 percent, respectively, as compared to the same periods of 2012. The decrease in Number of Ads Sold for the three and six months ended June 30, 2013 was attributable to a decline in supply of premium placements. The decrease in Price-per-Ad for the three months ended June 30, 2013 was due to a lower percentage of ads sold on a premium basis and a decline in pricing for non-premium advertising year-over-year. The decrease in Price-per-Ad for the six months ended June 30, 2013 was due to a shift in the mix of ads sold towards lower monetizing geographic regions, as well as a lower percentage of ads sold on a premium basis.

Search Revenue

Search revenue for both the three and six months ended June 30, 2013 decreased by 9 percent, as compared to the same periods of 2012. Search revenue decreased for the three and six months ended June 30, 2013 due to declines in the Asia Pacific region resulting from the closure of our Korea business, and declines in the EMEA region due to the required change in revenue presentation for transitioned markets from a gross (before TAC) to a net (after TAC) basis. This was partially offset by increased search revenue in the Americas region which resulted from an increase in sponsored searches on Yahoo! Properties and higher revenue per search.

For the three and six months ended June 30, 2013, Paid Clicks increased 21 percent and 19 percent, respectively, and Price-per-Click decreased 8 percent and 7 percent, respectively, as compared to the same periods of 2012. The increase in Paid Clicks for the three months ended June 30, 2013 was attributable to improved ad formats launched late last year and an increase in Paid Clicks resulting from the redesign of the search user experience. The increase in Paid Clicks for the six months ended June 30, 2013 was attributable to improved ad formats launched late last year. The decrease in Price-per-Click for the three and six months ended June 30, 2013 was primarily due to a higher mix of traffic in lower monetizing geographic regions.

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Other Revenue

Other revenue for the three and six months ended June 30, 2013 increased by 11 percent and 10 percent, respectively, as compared to the same periods of 2012. The increase for both the three and six months ended June 30, 2013 was primarily due to increased royalty revenue resulting from the amended TIPLA agreement with Alibaba Group. This was partially offset by a decrease in listings-based revenue in the Americas region.

Revenue ex-TAC by Segment

Americas

Americas revenue ex-TAC for the three and six months ended June 30, 2013 increased $16 million, or 2 percent, and $27 million, or 2 percent, respectively, as compared to the same periods of 2012. The increase in Americas revenue ex-TAC for the three and six months ended June 30, 2013 was primarily attributable to increased search revenue ex-TAC and fees revenue. The increase in search revenue ex-TAC was attributable to an increase in Paid Clicks on Yahoo! Properties, as well as higher revenue per search. The increase in fees revenue was primarily due to increased royalty revenue resulting from the amended TIPLA agreement with Alibaba Group. This was partially offset by a decline in display revenue ex-TAC on Yahoo! Properties due to declines in the Number of Ads Sold and Price-per-Ad.

Revenue ex-TAC in the Americas accounted for approximately 74 percent of total revenue ex-TAC for both the three and six months ended June 30, 2013 compared to 72 percent and 73