Altaba (AABA) 10-Q 10 May 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information
	3 Months Ended Mar. 31, 2010	Apr. 30, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-03-31
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Trading Symbol	YHOO
Entity Registrant Name	YAHOO INC
Entity Central Index Key	0001011006
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		1,385,062,910

Condensed Consolidated Statemen

Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Revenues	$1,596,960	$1,580,042
Cost of revenues	706,382	700,737
Gross profit	890,578	879,305
Operating expenses:
Sales and marketing	313,538	321,112
Product development	266,077	306,043
General and administrative	110,428	136,997
Amortization of intangibles	8,102	9,667
Restructuring charges, net	4,412	4,801
Total operating expenses	702,557	778,620
Income from operations	188,021	100,685
Other income, net	86,328	4,960
Income before income taxes and earnings in equity interests	274,349	105,645
Provision for income taxes	(49,444)	(35,884)
Earnings in equity interests	87,374	48,934
Net income	312,279	118,695
Net income attributable to noncontrolling interests	(2,088)	(1,137)
Net income attributable to Yahoo! Inc.	310,191	117,558
Net income attributable to Yahoo! Inc. common stockholders per share - basic	0.22	0.08
Net income attributable to Yahoo! Inc. common stockholders per share - diluted	0.22	0.08
Shares used in per share calculation - basic	1,398,308	1,391,526
Shares used in per share calculation - diluted	1,413,432	1,406,510
Stock-based compensation expense by function:
Cost of revenues	1,011	3,579
Sales and marketing	13,678	49,897
Product development	32,373	54,278
General and administrative	$13,721	$18,966

Condensed Consolidated Balance

Condensed Consolidated Balance Sheets (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	12 Months Ended Dec. 31, 2009
Current assets:
Cash and cash equivalents	$1,330,632	$1,275,430
Short-term marketable debt securities	1,911,423	2,015,655
Accounts receivable, net	900,253	1,003,362
Prepaid expenses and other current assets	428,156	300,325
Total current assets	4,570,464	4,594,772
Long-term marketable debt securities	1,001,654	1,226,919
Property and equipment, net	1,469,984	1,426,862
Goodwill	3,600,234	3,640,373
Intangible assets, net	288,294	355,883
Other long-term assets	135,067	194,933
Investments in equity interests	3,583,129	3,496,288
Total assets	14,648,826	14,936,030
Current liabilities:
Accounts payable	113,798	136,769
Accrued expenses and other current liabilities	1,049,481	1,169,815
Deferred revenue	351,795	411,144
Total current liabilities	1,515,074	1,717,728
Long-term deferred revenue	101,773	122,550
Capital lease and other long-term liabilities	135,797	83,021
Deferred and other long-term tax liabilities, net	448,237	494,095
Total liabilities	2,200,881	2,417,394
Commitments and contingencies (Note 10)
Yahoo! Inc. stockholders' equity:
Common stock, $0.001 par value; 5,000,000 shares authorized; 1,413,718 shares issued and 1,406,075 shares outstanding as of December 31, 2009 and 1,417,994 shares issued and 1,385,563 shares outstanding as of March 31, 2010	1,415	1,410
Additional paid-in capital	10,700,847	10,640,367
Treasury stock at cost, 7,643 shares as of December 31, 2009 and 32,431 shares as of March 31, 2010	(502,602)	(117,331)
Retained earnings	1,909,829	1,599,638
Accumulated other comprehensive income	311,052	369,236
Total Yahoo! Inc. stockholders' equity	12,420,541	12,493,320
Noncontrolling interests	27,404	25,316
Total equity	12,447,945	12,518,636
Total liabilities and equity	$14,648,826	$14,936,030

1_Condensed Consolidated Balanc

Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Share data in Thousands	Mar. 31, 2010	Dec. 31, 2009
Common stock, par value	0.001	0.001
Common stock, shares authorized	5,000,000	5,000,000
Common stock, shares issued	1,417,994	1,413,718
Common stock, shares outstanding	1,385,563	1,406,075
Treasury stock at cost, shares	32,431	7,643

2_Condensed Consolidated Statem

Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$312,279	$118,695
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	129,683	134,866
Amortization of intangible assets	35,563	46,707
Stock-based compensation expense, net	60,783	126,720
Non-cash restructuring charges		(558)
Tax benefits from stock-based awards	12,864	(2,705)
Excess tax benefits from stock-based awards	(32,889)	(22,127)
Deferred income taxes	28,687	5,826
Earnings in equity interests	(87,374)	(48,934)
Gain from sales of investments, assets, and other, net	(51,021)	(3,141)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net	89,192	136,535
Prepaid expenses and other	(127,120)	2,267
Accounts payable	(22,553)	(29,689)
Accrued expenses and other liabilities	(150,027)	(170,480)
Deferred revenue	(54,470)	(31,633)
Net cash provided by operating activities	143,597	262,349
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net	(112,541)	(70,481)
Purchases of marketable debt securities	(682,397)	(1,241,194)
Proceeds from sales of marketable debt securities	88,845	55,018
Proceeds from maturities of marketable debt securities	905,903	1,045,691
Purchases of intangible assets	(5,464)	(5,365)
Proceeds from the sale of a divested business	100,000
Net cash (used in) provided by investing activities	294,346	(216,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net	12,877	3,932
Repayments of capital lease obligations	(363)
Repurchases of common stock	(385,171)
Excess tax benefits from stock-based awards	32,889	22,127
Tax withholdings related to net share settlements of restricted stock awards and restricted stock units	(30,086)	(10,339)
Net cash provided by (used in) financing activities	(369,854)	15,720
Effect of exchange rate changes on cash and cash equivalents	(12,887)	(35,525)
Net change in cash and cash equivalents	55,202	26,213
Cash and cash equivalents at beginning of period	1,275,430	2,292,296
Cash and cash equivalents at end of period	$1,330,632	$2,318,509

THE COMPANY AND SUMMARY OF SIGN

THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	3 Months Ended Mar. 31, 2010
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	Note1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company.Yahoo! Inc., together with its consolidated subsidiaries (Yahoo! or the Company), attracts hundreds of millions of users every month through its innovative technology and engaging content and services, making it one of the most trafficked Internet destinations and a world class online media company. Yahoo!s vision is to be the center of peoples online lives by delivering personally relevant, meaningful Internet experiences. Together with the Companys owned and operated online properties and services (Yahoo! Properties or Owned and Operated sites), Yahoo! also provides its advertising offerings and access to Internet users beyond Yahoo! through its distribution network of third-party entities (Affiliates), who have integrated the Companys advertising offerings into their Websites, referred to as Affiliate sites, or their other offerings. The Company generates revenues by providing marketing services to advertisers across a majority of Yahoo! Properties and Affiliate sites. Additionally, although many of the services the Company provides to users are free, Yahoo! does charge fees for a range of premium services. 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 closing 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, revenues, and expenses and the related disclosure of contingent assets and liabilities. On a regular basis, the Company evaluates its estimates, including those related to uncollectible receivables, the useful lives of long-lived assets including property and equipment, investment fair values, stock-based compensation, goodwill and other intangible assets, 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 ass

BASIC AND DILUTED NET INCOME AT

BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO YAHOO! INC. COMMON STOCKHOLDERS PER SHARE
	3 Months Ended Mar. 31, 2010
BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO YAHOO! INC. COMMON STOCKHOLDERS PER SHARE	Note2BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO YAHOO! INC. COMMON STOCKHOLDERS PER SHARE Basic and diluted net income per share attributable to Yahoo! common stockholders is computed using the weighted average number of common shares outstanding during the period, excluding net income attributable to participating securities (restricted stock awards granted under the Companys 1995 Stock Plan and 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 unvested restricted stock and shares underlying unvested restricted stock units, the incremental common shares issuable upon the exercise of stock options, and shares to be purchased under 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 127million shares of common stock for the three months ended March31, 2009 and 86million shares of common stock for the three months ended March31, 2010 were excluded from the computation of diluted earnings per share for these periods because their effect would have been anti-dilutive. The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts): Three Months Ended March31, 2009 March31, 2010 Basic: Numerator: Net income attributable to Yahoo! Inc. $ 117,558 $ 310,191 Less: Net income allocated to participating securities (154 ) (44 ) Net income attributable to Yahoo! Inc. common stockholdersbasic $ 117,404 $ 310,147 Denominator: Weighted average common shares 1,391,526 1,398,308 Net income attributable to Yahoo! Inc. common stockholders per share basic $ 0.08 $ 0.22 Diluted: Numerator: Net income attributable to Yahoo! Inc. $ 117,558 $ 310,191 Less: Net income allocated to participating securities (4 ) (21 ) Less: Effect of dilutive securities issued by equity investees (208 ) (696 ) Net income attributable to Yahoo! Inc. common stockholdersdiluted $ 117,346 $ 309,474 Denominator: Denominator for basic calculation 1,391,526 1,398,308 Weighted average effect of Yahoo! dilutive securities: Restricted stock and restricted stock units 10,179 7,483 Stock options and employee stock purchase plan 4,805 7,641 Denomina

INVESTMENTS IN EQUITY INTERESTS

INVESTMENTS IN EQUITY INTERESTS
	3 Months Ended Mar. 31, 2010
INVESTMENTS IN EQUITY INTERESTS	Note3INVESTMENTS IN EQUITY INTERESTS The following table summarizes the Companys investments in equity interests (dollars in thousands): December31, 2009 March31, 2010 Percent Ownershipof CommonStockasof March31,2010 Alibaba Group $ 2,167,007 $ 2,208,473 43 % Yahoo Japan 1,329,281 1,374,656 35 % Total $ 3,496,288 $ 3,583,129 Equity Investment in Alibaba Group.The investment in Alibaba Group Holding Limited (Alibaba Group) is accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of investments in equity interests on the Companys condensed consolidated balance sheets. The Company records its share of the results of Alibaba Group and any related amortization expense, one quarter in arrears, within earnings in equity interests in the condensed consolidated statements of income. As of March31, 2010, the difference between the Companys carrying value of its investment in Alibaba Group and its proportionate share of Alibaba Groups stockholders equity is summarized as follows (in thousands): Carrying value of investment in Alibaba Group $ 2,208,473 Proportionate share of Alibaba Group stockholders equity 1,547,986 Excess of carrying value of investment over proportionate share of Alibaba Groups stockholders equity(*) $ 660,487 (*) The excess carrying value has been primarily assigned to goodwill. The following table presents Alibaba Groups U.S. GAAP condensed financial information, as derived from the Alibaba Group consolidated financial statements (in thousands): Three Months Ended December31, 2008 December31, 2009 Operating data: Revenues $ 152,648 $ 273,812 Gross profit $ 103,493 $ 212,885 Loss from operations(*) $ (45,610 ) $ (169,123 ) Net loss $ (51,004 ) $ (145,225 ) Net loss attributable to Alibaba Group $ (59,088 ) $ (156,696 ) September30, 2009 December31, 2009 Balance sheet data: Current assets $ 3,191,097 $ 3,525,652 Long-term assets $ 2,308,099 $ 2,263,149 Current liabilities $ 1,559,975 $ 1,937,937 Long-term liabilities $ 25,815 $ 43,638 Noncontrolling interests $ 185,055 $ 208,843 (*) The loss from operations of $169 million for the three months ended December31, 2009 is primarily due to Alibaba Groups impairment loss of $192 million on goodwill related to the business that Yahoo! contributed to Alibaba Group. This impairment does not impact Yahoo!s earnings in equity interests as Yahoo!s investment balance related to this contributed business was carried over at cost and therefore Yahoo! has no basis in the impaired goodwill. The Company also has commercial arrangements with Alibaba Group to provide technical, development, and advertising services. For the three months ended March31, 2009 and 2010, these transactions were not material. Equ

GOODWILL

GOODWILL
	3 Months Ended Mar. 31, 2010
GOODWILL	Note4GOODWILL The change in the carrying amount of goodwill for the three months ended March31, 2010 was primarily due to foreign currency translation losses of $23 million and a reduction of $19 million related to the allocation of goodwill for the sale of Zimbra, Inc., an acquisition made by the Company in October 2007.

INTANGIBLE ASSETS, NET

INTANGIBLE ASSETS, NET
	3 Months Ended Mar. 31, 2010
INTANGIBLE ASSETS, NET	Note5INTANGIBLE ASSETS, NET The following table summarizes the Companys intangible assets, net (in thousands): December31,2009 March31, 2010 Net GrossCarrying Amount Accumulated Amortization (*) Net Customer and advertiser related relationships $ 83,232 $ 128,284 $ (58,919 ) $ 69,365 Developed technology and patents 239,285 422,336 (233,940 ) 188,396 Trade names, trademarks, and domain names 33,366 76,628 (46,095 ) 30,533 Total intangible assets, net $ 355,883 $ 627,248 $ (338,954 ) $ 288,294 (*) Foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities, totaled approximately $15 million as of March31, 2010. For the three months ended March31, 2009 and 2010, the Company recognized amortization expense for intangible assets of $47million and $36million, respectively, including $37million in cost of revenues for the three months ended March31, 2009 and $27 million in cost of revenues for the three months ended March31, 2010. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the remainder of 2010 and each of the succeeding years is as follows: nine months ending December31, 2010: $83 million; 2011: $87 million; 2012: $62 million; 2013: $25 million; 2014: $12 million; 2015: $2 million; and cumulatively thereafter: $2 million.

OTHER INCOME, NET

OTHER INCOME, NET
	3 Months Ended Mar. 31, 2010
OTHER INCOME, NET	Note6OTHER INCOME, NET Other income, net is comprised of (in thousands): Three Months Ended March31, 2009 March31, 2010 Interest and investment income $ 6,848 $ 6,343 Investment gains, net 90 447 Gain on sale of Zimbra, Inc. 66,130 Other (1,978 ) 13,408 Total other income, net $ 4,960 $ 86,328 Interest and investment income consists of income earned from cash in bank accounts and investments made in marketable debt securities and money market funds. Investment gains, net include gains/losses from sales of marketable debt securities and/or investments in privately held companies. In February 2010, the Company sold Zimbra, Inc., an acquisition the Company made in October 2007, for net proceeds of $100 million. The Company recorded a pre-tax gain of $66 million. Other consists of foreign exchange gains and losses due to re-measurement of monetary assets and liabilities denominated in non-functional currencies and other non-operating items.

COMPREHENSIVE INCOME

COMPREHENSIVE INCOME
	3 Months Ended Mar. 31, 2010
COMPREHENSIVE INCOME	Note7COMPREHENSIVE INCOME Comprehensive income, net of taxes, is comprised of (in thousands): Three Months Ended March31, 2009 March31, 2010 Net income $ 118,695 $ 310,191 Change in net unrealized (losses) gains, net on available-for-sale securities, net of tax and reclassification adjustments (328 ) 1,046 Foreign currency translation adjustment 82,230 (59,230 ) Other comprehensive income (loss) 81,902 (58,184 ) Comprehensive income $ 200,597 $ 252,007 Comprehensive income attributable to noncontrolling interests (1,137 ) (2,088 ) Comprehensive income attributable to Yahoo! Inc. $ 199,460 $ 249,919 The following table summarizes the components of accumulated other comprehensive income (in thousands): December31, 2009 March31, 2010 Unrealized gains on available-for-sale securities, net of tax $ 4,921 $ 5,967 Foreign currency translation, net of tax 364,315 305,085 Accumulated other comprehensive income $ 369,236 $ 311,052

INVESTMENTS

INVESTMENTS
	3 Months Ended Mar. 31, 2010
INVESTMENTS	Note 8 INVESTMENTS The following tables summarize the investments in available-for-sale securities (in thousands): December31, 2009 Gross Amortized Costs Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Government and agency securities $ 1,781,674 $ 868 $ (1,825 ) $ 1,780,717 Municipal bonds 465,823 739 (3 ) 466,559 Corporate debt securities, commercial paper, and bank certificates of deposit 995,291 1,305 (1,298 ) 995,298 Corporate equity securities 2,597 2,597 Total investments in available-for-sale securities $ 3,245,385 $ 2,912 $ (3,126 ) $ 3,245,171 March31, 2010 Gross Amortized Costs Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Government and agency securities $ 1,610,216 $ 1,239 $ (615 ) $ 1,610,840 Municipal bonds 330,681 345 (4 ) 331,022 Corporate debt securities, commercial paper, and bank certificates of deposit 969,641 1,947 $ (373 ) 971,215 Corporate equity securities 1,331 1,331 Total investments in available-for-sale securities $ 2,911,869 $ 3,531 $ (992 ) $ 2,914,408 Reported as: December31, 2009 March31, 2010 Short-term marketable debt securities $ 2,015,655 $ 1,911,423 Long-term marketable debt securities 1,226,919 1,001,654 Other assets 2,597 1,331 Total $ 3,245,171 $ 2,914,408 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 for both 2009 and the three months ended March31, 2010 as the carrying value approximates fair value because of the short maturity of those instruments. The contractual maturities of available-for-sale marketable debt securities were as follows (in thousands): December31, 2009 March31, 2010 Due within one year $ 2,015,655 $ 1,911,423 Due after one year through five years 1,226,919 1,001,654 Total available-for-sale marketable debt securities $ 3,242,574 $ 2,913,077 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): December31, 2009 Less than 12 Months 12MonthsorGreater Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss U.S. Government and agency securities $ 886,657 $ (1,825 ) $ $ $ 886,657 $ (1,825 ) Municipal bonds

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION
	3 Months Ended Mar. 31, 2010
STOCK-BASED COMPENSATION	Note9STOCK-BASED COMPENSATION Employee Stock Purchase Plan. As of March31, 2010, there was $12 million of unamortized stock-based compensation cost related to the Companys employee stock purchase plan which is expected to be recognized over a weighted average period of 0.52 years. Stock Options.The Companys 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 Companys Plans for the three months ended March31, 2010 is summarized as follows (in thousands, except per share amounts): Shares WeightedAverage ExercisePriceper Share Outstanding at December31, 2009 119,593 $ 25.74 Options granted 4,922 $ 15.22 Options exercised(*) (1,237 ) $ 10.41 Options expired (4,366 ) $ 50.67 Options cancelled/forfeited (2,431 ) $ 18.95 Outstanding at March31, 2010 116,481 $ 24.67 (*) The Company issued new shares to satisfy stock option exercises. As of March31, 2010, there was $181 million of unrecognized stock-based compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 2.2years. The Company determines the grant-date fair value of stock options, including the options granted under the Companys employee stock purchase plan, using a Black-Scholes model, unless the options are subject to market conditions, in which case the Company uses a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. The following weighted average assumptions were used in determining the fair value of option grants using the Black-Scholes option pricing model: Stock Options Purchase Plan ThreeMonthsEnded ThreeMonthsEnded March31, 2009 March31, 2010 March31, 2009 March31, 2010 Expected dividend yield 0.0 % 0.0 % 0.0 % 0.0 % Risk-free interest rate 1.7 % 2.2 % 2.4 % 2.3 % Expected volatility 57.1 % 31.3 % 71.8 % 69.8 % Expected life (in years) 4.00 4.50 0.72 0.52 Restricted stock awards and restricted stock units activity for the three months ended March31, 2010 is summarized as follows (in thousands, except per share amounts): Shares WeightedAverage GrantDate Fair Value Awarded and unvested at December31, 2009(*) 26,189 $ 21.14 Granted(*) 13,334 $ 15.54 Vested (4,993 ) $ 20.56 Forfeited (1,386 ) $ 19.11 Awarded and unvested at March31, 2010(*) 33,144 $ 19.06 (*) Includes the maximum number of shares issuable under the Companys performance-based executive incentive restricted stock unit awards. As of March31, 2010, there was $292million of unrecognized stock-based compensation cost related to unvested restricted stock awards and restricted stock units which is expected to be recognized over a weighted average period of 2

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES
	3 Months Ended Mar. 31, 2010
COMMITMENTS AND CONTINGENCIES	Note10COMMITMENTS AND CONTINGENCIES Lease Commitments.The Company leases office space and data centers under operating lease and capital lease agreements with original lease periods of up to 16years, expiring between 2010 and 2026. During the first quarter of 2010, the Company entered into a purchase agreement to acquire for $73 million certain office space that was being occupied by the Company under an operating lease.Accordingly, the operating lease was re-classified to a capital lease and the Company recorded $73 million as a capital lease obligation in its condensed consolidated balance sheets. The transaction is expected to close in the second quarter of 2010. A summary of gross and net lease commitments as of March31, 2010 is as follows (in millions): GrossOperating Lease Commitments Sublease Income NetOperating Lease Commitments Nine months ending December31, 2010 $ 117 $ (4 ) $ 113 Years ending December31, 2011 139 (4 ) 135 2012 110 (2 ) 108 2013 92 (2 ) 90 2014 79 (1 ) 78 2015 67 (1 ) 66 Due after 5years 69 69 Total gross and net lease commitments $ 673 $ (14 ) $ 659 CapitalLease Commitment Nine months ending December31, 2010 $ 16 Years ending December31, 2011 12 2012 13 2013 13 2014 14 2015 14 Due after 5years 111 Gross lease commitment $ 193 Less: interest (79 ) Net lease commitment $ 114 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 March31, 2010, these commitments totaled $119 million, of which $95 million will be payable in the remainder of 2010 and $24 million will be payable in 2011. Intellectual Property Rights.The Company is committed to make certain payments under various intellectual property arrangements of up to $44 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 Companys breach of agreements or representations and warranties made by the Company, services to be provided by the Company, intellectual property infringement claims made by third parties or, with respect to the sale of assets or a subsidiary, matters related to the Companys conduct of the businessand 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 direct

SEGMENTS

SEGMENTS
	3 Months Ended Mar. 31, 2010
SEGMENTS	Note11SEGMENTS The Company manages its business geographically. Through the first quarter of 2010, the primary areas of measurement and decision-making are the U.S. and International. In the Companys Annual Report on Form 10-K for the year ended December31, 2009, the segment profitability measure reported by the Company was segment operating income before depreciation, amortization, and stock-based compensation expense. Management no longer uses this measure to evaluate the operational performance of the Companys segments. Beginning in the first quarter of 2010, management relies on an internal reporting process that provides revenues and direct costs by segment and consolidated income from operations for making decisions related to the evaluation of financial performance and allocating resources. Prior periods have been updated to conform to the measures currently being used by management to evaluate the operational performance of the Companys segments. Beginning in the second quarter of 2010, the business management structure will be redefined along three geographies: Americas, Asia Pacific, and EMEA (Europe, Middle East, and Africa), and as the Companys internal reporting is aligned to the new structure, segment reporting will be updated accordingly. The following tables present summarized information by segment (in thousands): Three Months Ended March31, 2009 March31, 2010 Revenues by segment: United States $ 1,187,930 $ 1,120,664 International 392,112 476,296 Total revenues 1,580,042 1,596,960 Direct costs by segment(1): United States 437,500 413,434 International 205,661 263,240 Global operating costs(2) 523,102 501,824 Restructuring charges, net 4,801 4,412 Depreciation and amortization 181,573 165,246 Stock-based compensation expense 126,720 60,783 Income from operations $ 100,685 188,021 Capital expenditures, net: United States $ 57,365 $ 92,716 International 13,116 19,825 Total capital expenditures, net $ 70,481 $ 112,541 December31, 2009 March31, 2010 Property and equipment, net: United States $ 1,310,677 $ 1,354,022 International 116,185 115,962 Total property and equipment, net $ 1,426,862 $ 1,469,984 (1) Direct costs for each segment include TAC, other cost of revenues, and other operating expenses that are directly attributable to the segment such as employee compensation expense, local sales and marketing expenses, and facilities expenses. (2) Global operating costs include product development, service engineering and operations, marketing, customer advocacy, general and administrative, and other corporate expenses that are managed on a global basis and that are not directly attributable to any segment. The following table presents revenues for groups of similar services (in thousands): Three Month

INCOME TAXES

INCOME TAXES
	3 Months Ended Mar. 31, 2010
INCOME TAXES	Note12INCOME TAXES The effective tax rate for the three months ended March31, 2010 was 18percent, compared to 34percent for the same period in 2009. The Companys U.S. federal and California income tax returns for the years ended December 31, 2005 and 2006 are currently under examination by the Internal Revenue Service (IRS) and the California Franchise Tax Board. During the quarter, the Company reached an agreement with the IRS in connection with several adjustments to its tax returns, with a favorable outcome on certain of the Companys reserves for tax uncertainties. As a result, the effective tax rate for the three months ended March31, 2010 differs from the statutory federal income tax rate of 35percent due to the reduction of the Companys reserves for tax uncertainties and the usage of loss carryforwards to offset the tax on the gain on the sale of Zimbra, Inc. In addition to those recognized benefits, the effective tax rate differs from the statutory rate as a result of several factors, including state taxes, the effect of non-U.S. operations, and non-deductible stock-based compensation expense. The effective tax rate for the three months ended March31, 2010 was lower than the rate for the same period in 2009, as a result of the same factors. As discussed above, during the quarter, the Company reached an agreement with the IRS in connection with several adjustments to its tax returns, and the Company adjusted its reserves accordingly.In addition, the IRS has given the Company notice of other proposed adjustments, including an intercompany transfer pricing adjustment that if not favorably settled with the IRS could have a significant impact on the Companys tax liability. The Company has not agreed to these proposed adjustments and currently believes that its existing reserves are adequate. The Companys gross amount of unrecognized tax benefits as of March31, 2010 is $776million, of which $443million is recorded on the condensed consolidated balance sheets. As discussed above, in the first quarter of 2010 the Company reached an agreement with the IRS in connection with several adjustments to prior years tax returns and this agreement resulted in a reduction to the Companys gross unrecognized tax benefit of $146 million. Of this $146 million reduction in unrecognized tax benefits, $81 million resulted in an effective tax rate benefit during the first quarter. These reductions to the gross unrecognized tax benefits have been offset by current year tax positions that increase unrecognized tax benefits. In total, the gross unrecognized tax benefits as of March31, 2010 decreased by $117 million from the recorded balance as of December31, 2009.

RESTRUCTURING CHARGES, NET

RESTRUCTURING CHARGES, NET
	3 Months Ended Mar. 31, 2010
RESTRUCTURING CHARGES, NET	Note13RESTRUCTURING CHARGES, NET Restructuring charges, net was comprised of the following (in thousands): Three Months Ended March31, 2009 March31, 2010 Employee severance pay and related costs $ 1,809 $ 258 Non-cancelable lease, contract termination, and other charges 2,992 4,154 Restructuring charges, net $ 4,801 $ 4,412 Q408 Restructuring Plan. During the fourth quarter of 2008, the Company implemented certain cost reduction initiatives, including a workforce reduction and consolidation of certain real estate facilities in the U.S. and internationally. During the three months ended March31, 2009, the Company incurred total pre-tax cash charges of approximately $5 million in severance, facility, and other restructuring costs related to the Q408 restructuring plan, consisting of $6 million in charges related to the U.S. segment offset by a $1 million reversal related to the International segment. During the three months ended March31, 2010, the Company incurred total pre-tax cash charges of approximately $4 million in facility and other restructuring costs related to the Q408 restructuring plan, consisting of $5 million in charges related to the U.S. segment, offset by a $1 million reversal related to the International segment. Q209 Restructuring Plan. During the second quarter of 2009, the Company implemented new cost reduction initiatives to further reduce the Companys worldwide workforce by approximately 5 percent. During the three months ended March31, 2010, the Company did not incur any charges related to the Q209 restructuring plan. Q409 Restructuring Charges. During the fourth quarter of 2009, the Company decided to close one of its international facilities and began implementation of a workforce realignment at the facility to focus resources on its strategic initiatives. The Company plans to exit the facility in the third quarter of 2010. In connection with the strategic realignment efforts, an executive of one of the Companys acquired businesses departed. During the three months ended March31, 2010, the Company incurred total pre-tax cash charges of less than $1 million in severance and other related costs related to the Q409 restructuring charges, consisting of charges related to the International segment. Restructuring Accruals. As of March31, 2009 and 2010, the aggregate outstanding restructuring liability related to the cost reduction initiatives was $37 million and $72 million, respectively. Of the $72 million restructuring liability as of March31, 2010, $17 million relates to employee severance pay expenses which the Company expects to substantially pay out by the end of the third quarter of 2010, and $55 million relates to non-cancelable lease costs which the Company expects to pay over the terms of the related obligations, which extend to the second quarter of 2017. The Companys restructuring accrual activity for the quarter ended March31, 2009 is summarized as follows (in thousands): Q408 Restructuring Plan Balance as of January1, 2009 $ 89,887 Employee severance pay and related cost

SEARCH AGREEMENT WITH MICROSOFT

SEARCH AGREEMENT WITH MICROSOFT CORPORATION
	3 Months Ended Mar. 31, 2010
SEARCH AGREEMENT WITH MICROSOFT CORPORATION	Note 14 SEARCH AGREEMENT WITH MICROSOFT CORPORATION On December 4, 2009, the Company entered into a Search and Advertising Services and Sales Agreement (Search Agreement) with Microsoft Corporation (Microsoft) under which Microsoft will be its exclusive platform technology provider for algorithmic and paid search services and non-exclusive provider for contextual advertising. The Company also entered into a License Agreement with Microsoft. Under the License Agreement, Microsoft acquired an exclusive 10-year license to the Companys core search technology and will have the ability to integrate this technology into its existing Web search platforms. The Company received regulatory clearance from both the U.S. Department of Justice and the European Commission on February 18, 2010 and commenced implementation of the Search Agreement on February 23, 2010. 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, the Company will be entitled to receive 88 percent of the net revenues generated from Microsofts services on Yahoo! Properties (the Revenue Share Rate) and it will also be entitled to receive its share (at the Revenue Share Rate) of the net revenues generated from Microsofts services on Affiliate sites after the Affiliates share of net revenues is deducted. 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 its share (at the Revenue Share Rate) of the net revenues generated from Microsofts services on Affiliate sites after the Affiliates share of net revenues and certain Microsoft costs are deducted. On the fifth anniversary of the date of implementation of the Search Agreement, Microsoft will have the option to terminate the Companys 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 the Company exercises its option to retain the Companys 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. Microsoft has agreed to reimburse the Company for certain transition costs up to an aggregate total of $150 million during the first three years of the Search Agreement. From February 23, 2010 until the applicable services are fully transitioned to Microsoft, Microsoft will also reimburse the Company for the costs of running its algorithmic and paid search services