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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-28018
YAHOO! INC.
(Exact name of registrant as specified in its charter)
California 77-0398689
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3420 Central Expressway
Santa Clara, California 95051
----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 731-3300
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days: Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1998
- -------------------------------- -------------------------------
Common Stock, $0.00067 par value 46,286,690
YAHOO! INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
at March 31, 1998 and December 31, 1997................... 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997........ 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997........ 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 16
Item 2. Changes in Securities........................................ 17
Item 3. Defaults Upon Senior Securities.............................. 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
Item 5. Other Information............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
Signatures................................................................. 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YAHOO! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
------------ ------------
(unaudited) (audited)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 44,977,000 $ 62,538,000
Short-term investments in marketable securities........... 71,920,000 27,772,000
Accounts receivable, net.................................. 12,978,000 10,986,000
Prepaid expenses.......................................... 4,764,000 5,893,000
------------ ------------
Total current assets................................... 134,639,000 107,189,000
Long-term investments in marketable securities................. 7,647,000 16,702,000
Property and equipment, net.................................... 8,007,000 7,035,000
Investment in Yahoo! Japan..................................... 2,864,000 2,828,000
Other assets................................................... 7,248,000 8,130,000
------------ ------------
$160,405,000 $141,884,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,283,000 $ 4,711,000
Accrued expenses and other current liabilities............ 17,832,000 12,481,000
Deferred revenue.......................................... 10,102,000 4,852,000
Due to related parties.................................... 1,029,000 1,412,000
------------ ------------
Total current liabilities.............................. 33,246,000 23,456,000
------------ ------------
Minority interests in consolidated subsidiaries................ 473,000 716,000
Shareholders' equity:
Common Stock.............................................. 20,000 20,000
Additional paid-in capital................................ 150,730,000 146,106,000
Accumulated deficit....................................... (23,686,000) (27,971,000)
Cumulative translation adjustment......................... (378,000) (443,000)
------------ ------------
Total shareholders' equity............................. 126,686,000 117,712,000
------------ ------------
$160,405,000 $141,884,000
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
YAHOO! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
------------------------------------
March 31, March 31,
1998 1997
------------ ------------
Net revenues.......................................... $ 30,206,000 $ 10,065,000
Cost of revenues...................................... 3,917,000 1,437,000
------------ ------------
Gross profit....................................... 26,289,000 8,628,000
------------ ------------
Operating expenses:
Sales and marketing.............................. 16,096,000 7,415,000
Product development.............................. 4,534,000 2,249,000
General and administrative....................... 1,992,000 1,297,000
------------ ------------
Total operating expenses...................... 22,622,000 10,961,000
------------ ------------
Income (loss) from operations......................... 3,667,000 (2,333,000)
Investments income, net............................... 1,446,000 1,391,000
Minority interests in operations
of consolidated subsidiaries................... 243,000 202,000
------------ ------------
Income (loss) before income taxes..................... 5,356,000 (740,000)
Provision for income taxes............................ 1,071,000 --
------------ ------------
Net income (loss)..................................... $ 4,285,000 $ (740,000)
============ ============
Net income (loss) per share:
Basic...................................... $ 0.10 $ (0.02)
============ ============
Diluted.................................... $ 0.08 $ (0.02)
============ ============
Weighted average common shares and equivalents
used in per share calculation:
Basic...................................... 43,052,000 42,231,000
============ ============
Diluted.................................... 53,374,000 42,231,000
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
YAHOO! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
-----------------------------------
March 31, March 31,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ 4,285,000 $ (740,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................................... 877,000 355,000
Compensation expense on stock option grants............................ 157,000 74,000
Minority interests in operations of consolidated subsidiaries.......... (243,000) (202,000)
Changes in assets and liabilities:
Accounts receivable, net............................................ (1,992,000) (220,000)
Prepaid expenses and other assets................................... 1,843,000 (7,035,000)
Accounts payable.................................................... (428,000) 41,000
Accrued expenses and other current liabilities...................... 5,351,000 (253,000)
Deferred revenue.................................................... 5,250,000 (67,000)
Due to related parties.............................................. (383,000) 14,000
----------- -----------
Net cash provided by (used in) operating activities............................ 14,717,000 (8,033,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment........................................ (1,717,000) (1,406,000)
Purchases of investments in marketable securities............................ (42,226,000) (12,071,000)
Sales and maturities of investments in marketable securities................. 7,133,000 20,769,000
----------- -----------
Net cash provided by (used in) investing activities............................ (36,810,000) 7,292,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net.................................. 4,467,000 707,000
Proceeds from lease obligations.............................................. -- 521,000
----------- -----------
Net cash provided by financing activities....................................... 4,467,000 1,228,000
----------- -----------
Effect of exchange rate changes on cash and cash equivalents................... 65,000 (34,000)
----------- -----------
Net change in cash and cash equivalents........................................ (17,561,000) 453,000
Cash and cash equivalents at beginning of period............................... 62,538,000 33,547,000
----------- -----------
Cash and cash equivalents at end of period..................................... $44,977,000 $34,000,000
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
YAHOO! INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Yahoo! Inc., including its subsidiaries ("Yahoo!" or the "Company"),
is a global Internet media company that offers a network of branded World Wide
Web (the "Web") programming that serves millions of users daily. The Company
was incorporated in California on March 5, 1995 and commenced operations on that
date. The Company conducts its business within one industry segment.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period.
These financial statements should be read in conjunction with the
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997. Certain prior period balances
have been reclassified to conform to current period presentation. The condensed
consolidated financial statements for the period ended March 31, 1997 have been
restated to reflect the October 1997 acquisition of Four11 Corporation.
NOTE 2 - COMMITMENTS
During March 1997, the Company entered into certain agreements with
Netscape Communications Corporation ("Netscape") under which the Company co-
developed and operates an Internet information navigation service called
"Netscape Guide by Yahoo!" (the "Guide"). The Co-Marketing agreement provides
that revenue from advertising on the Guide, which is managed by the Company, is
to be shared between the Company and Netscape. Under the terms of the Trademark
License agreement, the Company made a one-time non-refundable trademark license
fee payment of $5,000,000 in March 1997 which is being amortized over the
initial two-year term. Under the terms of the Co-Marketing agreement and based
on the level of first year traffic on the Guide, the second year commitment to
Netscape in guarantees against shared advertising revenues was reduced by
$10,000,000 resulting in a second year commitment of up to approximately
$5,000,000, subject to certain minimum levels of impressions being reached on
the Guide during the second year.
During April 1998, the Company agreed with Netscape to extend its
current domestic Premier Provider agreement, which was scheduled to end on April
30, 1998, until the end of May 1998. At March 31, 1998, including the extension,
the Company's
6
minimum future expense obligation to Netscape under the domestic and
international Premier Provider agreements is approximately $1,400,000. During
March 1998, traffic from the Netscape Premier Provider programs accounted for
approximately 6% of total traffic on Yahoo! properties. At the time of this
filing, the Company has not determined whether it will continue to participate
in future Premier Provider programs should such participation be available.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustment and
unrealized gain/loss on available for sale securities. The change in the
cumulative translation adjustment for the quarter ended March 31, 1998 increased
comprehensive income by $65,000. The change in the cumulative translation
adjustment for the quarter ended March 31, 1997 reduced comprehensive income by
$34,000.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information, the discussion in this Report
----------------------------------------------------------------
contains forward-looking statements that involve risks and uncertainties. Such
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forward-looking statements include, among others, those statements including the
- --------------------------------------------------------------------------------
words, "expects", "anticipates", "intends", "believes" and similar language. The
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Company's actual results could differ materially from those discussed herein.
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Factors that could cause or contribute to such differences include, but are not
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limited to, those discussed below, and the risks discussed under the captions,
- ------------------------------------------------------------------------------
"Risk Factors", "Competition", and "Proprietary Rights" in the Company's Annual
- --------------------------------------------------------------------------------
Report on Form 10-K for the year ended December 31, 1997 (a copy of which is
- ----------------------------------------------------------------------------
available at www.sec.gov or upon request from the Company).
- ----------------------------------------------------------
OVERVIEW
Yahoo! Inc. is a global Internet media company that offers a network of
branded World Wide Web programming that serves millions of users daily. As the
first online navigational guide to the Web, www.yahoo.com is the single largest
guide in terms of traffic, advertising, household and business user reach, and
is one of the most recognized brands associated with the Internet. Yahoo! Inc.
provides targeted Internet resources and communications services for a broad
range of audiences, based on demographic, key-subject and geographic interests.
The Company was incorporated in California on March 5, 1995 and commenced
operations on that date. In August 1995, the Company commenced selling
advertisements on its Web pages and recognized its initial revenues. In April
1996, the Company completed its initial public offering.
The Company's revenues are derived principally from the sale of banner
advertisements on short-term contracts. The Company's standard rates for
advertising currently range from approximately $0.02 per impression for general
rotation to approximately $0.08 per impression for highly targeted audiences and
properties. To date, the duration of the Company's advertising commitments has
ranged from one week to two years. During 1997, the Company also began selling
a combination of sponsorship and banner advertising contracts. In general,
these sponsorship advertising contracts have longer terms (ranging from three
months to two years) than standard banner advertising contracts and also involve
more integration with Yahoo! services, such as the placement of buttons which
provide users with direct links to the advertiser's Web site. Advertising
revenues on both banner and sponsorship contracts are recognized ratably over
the period in which the advertisement is displayed, provided that no significant
Company obligations remain at the end of a period and collection of the
resulting receivable is probable. Company obligations typically include
guarantees of minimum number of "impressions," or times that an advertisement
appears in pages viewed by users of the Company's online properties. To the
extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenues until the remaining guaranteed
impression levels are achieved. The Company also earns additional revenue on
sponsorship contracts for fees relating to the design, coordination, and
integration of the customer's content and links into Yahoo! online properties.
These development fees are recognized as revenue once the related activities
have been performed and the customer's web links are available on Yahoo! online
properties. A number of the Company's
8
agreements provide that Yahoo! receive revenues from electronic commerce
transactions. Currently, these revenues are recognized by the Company upon
notification from the advertiser of revenues earned by Yahoo! and, to date, have
not been significant.
During March 1997, the Company entered into certain agreements with
Netscape under which the Company co-developed and operates an Internet
information navigation service called "Netscape Guide by Yahoo!". The Co-
Marketing agreement provides that revenue from advertising on the Guide, which
is managed by the Company, is to be shared between the Company and Netscape.
Under the terms of the Trademark License agreement, the Company made a one-time
non-refundable trademark license fee payment of $5,000,000 in March 1997 which
is being amortized over the initial two-year term. Under the terms of the Co-
Marketing agreement and based on the level of first year traffic on the Guide,
the second year commitment to Netscape in guarantees against shared advertising
revenues was reduced by $10,000,000 resulting in a second year commitment of up
to approximately $5,000,000, subject to certain minimum levels of impressions
being reached on the Guide during the second year. During the first year of the
agreement which ended March 31, 1998, Netscape's share of the Guide revenue was
$2,600,000.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $30,206,000 for the quarter ended March 31, 1998, a
200% increase from $10,065,000 during the first quarter in 1997. The increase
was due primarily to the increasing number of advertisers purchasing space on
Yahoo! properties. Approximately 1,600 customers advertised on Yahoo! properties
during the quarter ended March 31, 1998 as compared to approximately 700 during
the first quarter of 1997. Advertising purchases by SOFTBANK, a 29% shareholder
of the Company at March 31, 1998, and its related companies accounted for
approximately 1% and 9% of net revenues in the quarters ended March 31, 1998 and
1997, respectively. Contracted prices on these orders are comparable to those
given to other major customers of the Company. No one customer accounted for 10%
or more of revenues during the quarters ended March 31, 1998 and 1997.
International revenues have accounted for less than 10% of net revenues in the
quarters ended March 31, 1998 and 1997. Barter revenues also represented less
than 10% of net revenues during those quarters. There can be no assurance that
customers will continue to purchase advertising on the Company's Web pages or
that market prices for Web-based advertising will not decrease due to
competitive or other factors. Additionally, while the Company has experienced
strong growth in its business, the Company does not believe that this growth
rate will be sustainable.
COST OF REVENUES
Cost of revenues consist of the expenses associated with the production
and usage of Yahoo! and the Company's other online media properties. These costs
primarily consist of fees paid to third parties for content included on the
Company's properties, Internet connection charges, equipment depreciation, and
compensation. Cost of revenues were $3,917,000 for the quarter ended March 31,
1998, or 13% of net revenues as
9
compared to $1,437,000, or 14% of net revenues for the quarter ended March 31,
1997. The absolute dollar increase in cost of revenues is primarily attributable
to an increase in the quantity of content available on Yahoo! and the Company's
other online media properties, and the increased usage of these properties. The
Company anticipates that its content and Internet connection expenses will
increase with the quantity and quality of content available on Yahoo! and the
Company's other online media properties, and increased usage of these
properties. As measured in page views (defined as electronic page displays), the
Company delivered an average of over 95 million page views per day in March 1998
compared with an average of approximately 30 million page views per day in March
1997. Yahoo! Japan, an unconsolidated joint venture of the Company which began
operations in April 1996, is included in these page views figures and accounted
for an average of approximately 6 million page views per day in March 1998 and
an average of approximately 2 million page views per day in March 1997. The
Company anticipates that its content and Internet connection expenses will
continue to increase in absolute dollars for the foreseeable future. The Company
currently anticipates cost of revenues to be in the range of 12% to 16% of net
revenues for the remainder of 1998.
SALES AND MARKETING
Sales and marketing expenses were $16,096,000 for the quarter ended
March 31, 1998, or 53% of net revenues as compared to $7,415,000, or 74% of net
revenues for the quarter ended March 31, 1997. Sales and marketing expenses
consist primarily of advertising and other marketing related expenses (which
include Netscape Premier Provider and Netscape Guide amortization costs),
compensation and employee-related expenses, and sales commissions. The increase
in absolute dollars is primarily attributable to increases in compensation
expense associated with an increase in sales and marketing personnel; growth in
the subsidiaries in France, Germany, and the United Kingdom and the addition of
subsidiaries subsequent to March 31, 1997 in Singapore, Australia, Korea,
Sweden, Denmark, and Norway; an increase in advertising costs associated with
the Company's aggressive brand-building strategy; amortization of the Netscape
Guide trademark license which began during the second quarter of 1997; and an
increase in the total costs incurred in the Netscape search programs. The
Company anticipates that sales and marketing expenses in absolute dollars will
increase in future periods as it continues to pursue an aggressive brand
building strategy and continues to build its direct sales organization. As a
percentage of net revenues, the Company currently anticipates that sales and
marketing expenses will remain near the current level during the second quarter
of 1998 and trend somewhat lower over the remainder of 1998.
PRODUCT DEVELOPMENT
Product development expenses were $4,534,000, or 15% of net revenues
for the quarter ended March 31, 1998 as compared to $2,249,000, or 22% of net
revenues for the quarter ended March 31, 1997. Product development expenses
consist primarily of employee compensation relating to developing and enhancing
the features and functionality of Yahoo! and the Company's other online media
properties. The increase in absolute dollars is primarily attributable to
increases in the number of engineers that develop and enhance Yahoo! and the
Company's other online media properties. To date,
10
all internal product development costs have been expensed as incurred. Acquired
technology for which technological feasibility has been established is
capitalized and amortized over its useful life. The Company believes that
significant investments in product development are required to remain
competitive. Consequently, the Company expects to incur increased product
development expenditures in absolute dollars in future periods. As a percentage
of net revenues, the Company currently anticipates that product development
expenses will approximate current levels during the remainder of 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1,992,000, or 7% of net
revenues for the quarter ended March 31, 1998 as compared to $1,297,000, or 13%
of net revenues for the quarter ended March 31, 1997. General and administrative
expenses consist primarily of fees for professional services and compensation.
The increase in absolute dollars is primarily attributable to increases in usage
of professional services and in personnel. The Company believes that the
absolute dollar level of general and administrative expenses will increase in
future periods, as a result of increased fees for professional services and an
increase in personnel. As a percentage of net revenues, the Company currently
anticipates that general and administrative expenses will approximate current
levels during the remainder of 1998.
INVESTMENT INCOME, NET
Investment income, net of investment expense, was $1,446,000 for the
quarter ended March 31, 1998. For the quarter ended March 31, 1997, investment
income was $1,391,000. The nominal increase in investment income during the
current quarter from the year ago quarter was attributable to a higher average
investment balance which was partially offset by lower interest rates.
Investment income in future periods is expected to fluctuate as a result of
fluctuations in average cash balances maintained by the Company and changes in
the market rates of its investments.
MINORITY INTERESTS IN OPERATIONS OF CONSOLIDATED SUBSIDIARIES
Minority interests in losses from operations of consolidated
subsidiaries were $243,000 for the quarter ended March 31, 1998 as compared to
$202,000 for the year ago quarter. The current quarter minority interest is
attributable to losses in the Europe and Korea joint ventures. Minority interest
from the year ago quarter is attributable to losses in the Europe and other
joint ventures. The Company expects that minority interests in operations of
consolidated subsidiaries in the aggregate will continue to fluctuate in future
periods as a function of the results from consolidated subsidiaries. When, and
if, the consolidated subsidiaries become profitable, the minority interests
elimination on the statement of operations will have an adverse effect on the
Company's net income.
INCOME TAXES
Based on the current estimate of operating results and certain other
factors, the Company expects its effective tax rate to be approximately 20%
through fiscal year 1998.
11
The Company believes sufficient uncertainty exists regarding the realizability
of its deferred tax assets such that a full valuation allowance continues to be
required. The portion of the deferred tax asset attributable to the exercise of
employee stock options is reflected in the U.S. net operating loss carryforward
and is expected to increase through fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
Yahoo! invests predominantly in instruments that are highly liquid, of
quality investment grade, and predominantly have maturities of less than one
year with the intent to make such funds readily available for operating
purposes. At March 31, 1998, the Company had cash and cash equivalents and
investments in marketable securities totaling $124,544,000 compared to
$107,012,000 at December 31, 1997.
For the three months ended March 31, 1998, cash provided by operating
activities of $14,717,000 was primarily due to increases in accrued liabilities,
deferred revenue, and net income. For the three months ended March 31, 1997,
cash used in operating activities of $8,033,000 was primarily due to increases
in prepaid expenses and other assets, which resulted primarily from a $5,000,000
one-time non-refundable license payment to Netscape under the Netscape Guide by
Yahoo! agreement and a $1,000,000 payment to Netscape under the Premier Provider
agreement.
Cash used in investing activities was $36,810,000 for the three months
ended March 31, 1998. Purchases (net of sales and maturities) of investments in
marketable securities during the period were $35,093,000 and capital
expenditures totaled $1,717,000. Capital expenditures have generally been
comprised of purchases of computer hardware and software as well as leasehold
improvements related to leased facilities, and are expected to increase in
future periods. Cash provided by investing activities was $7,292,000 for the
three months ended March 31, 1997. Sales and maturities (net of purchases) of
investments in marketable securities during the period were $8,698,000 and
capital expenditures totaled $1,406,000.
For the three months ended March 31, 1998, cash provided by financing
activities of $4,467,000 was due to the issuance of Common Stock pursuant to the
exercise of stock options. For the three months ended March 31, 1997, cash
provided by financing activities of $1,228,000 was due to the issuance of Common
Stock pursuant to the exercise of stock options and proceeds received under
lease obligations.
The Company currently has no material commitments other than those
under the Netscape Co-Marketing agreement, the Netscape Premier Provider
agreements, and operating lease agreements. Under the terms of the amended Co-
Marketing agreement, the Company has remaining fixed expenses in the form of
advertising revenue guarantees of up to $5,000,000 to be paid over the second
year of the agreement which ends March 31, 1999. Under the terms of the Premier
Provider agreements, the Company has minimum future expense obligations of
approximately $1,400,000 at March 31, 1998. The Company has experienced a
substantial increase in its capital expenditures and operating lease
arrangements since its inception, which is consistent with increased
12
staffing, and anticipates that this will continue in the future. Additionally,
the Company will continue to evaluate possible acquisitions of, or investments
in businesses, products, and technologies that are complementary to those of the
Company, which may require the use of cash. Management believes existing cash
and investments will be sufficient to meet the Company's operating requirements
for at least the next twelve months; however, the Company may sell additional
equity or debt securities or obtain credit facilities. The sale of additional
securities could result in additional dilution to the Company's shareholders.
ADDITIONAL RISK FACTORS
Yahoo! has a limited operating history upon which an evaluation of the
Company can be based, and its prospects are subject to the risks, expenses, and
uncertainties frequently encountered by companies in the new and rapidly
evolving markets for Internet products and services, including the Web-based
advertising market. Specifically, such risks include, without limitation, the
failure to continue to develop and extend the Yahoo! brand, the failure to
develop new media properties, the inability of the Company to maintain and
increase the levels of traffic on Yahoo! properties, the development or
acquisition of equal or superior services or products by competitors, the
failure of the market to adopt the Web as an advertising medium, the failure to
successfully sell Web-based advertising through the Company's recently developed
internal sales force, potential reductions in market prices for Web-based
advertising as a result of competition or other factors, the failure of the
Company to effectively generate commerce-related revenues through sponsored
services and placements in Yahoo! properties, the inability of the Company to
effectively integrate the technology and operations of any other acquired
businesses or technologies with its operations, the failure of the Company to
successfully develop and offer personalized Web-based services, such as e-mail
services, to consumers without errors or interruptions in service, and the
inability to continue to identify, attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks.
As of March 31, 1998, the Company had an accumulated deficit of
$23,686,000. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible and, therefore, the recent revenue
growth experienced by the Company should not be taken as indicative of the rate
of revenue growth, if any, that can be expected in the future. The Company
believes that period-to-period comparisons of its operating results are not
meaningful and that the results for any period should not be relied upon as an
indication of future performance. The Company currently expects to continue to
significantly increase its operating expenses to expand its sales and marketing
operations, to continue to develop and extend the Yahoo! brand, to fund greater
levels of product development, to develop and commercialize additional media
properties, and to acquire complementary businesses and technologies. The
Company derives the majority of its revenues from the sale of advertisements
under short-term contracts, which are difficult to forecast accurately. The
Company's expense levels are based in part on its expectations concerning future
revenue and, to a large extent, are fixed. The Company also has fixed expenses
in the form of advertising revenue guarantees of up to $5,000,000 over the next
12 months ending March 31, 1999 relating to the Netscape Guide by Yahoo!, which
subject the Company to additional risk in the event that advertising revenues
from this
13
property are not sufficient to offset guaranteed payments and related operating
expenses, including amortization of the Netscape trademark license. Quarterly
revenues and operating results depend substantially upon the advertising
revenues received within the quarter, which are difficult to forecast
accurately. Accordingly, the cancellation or deferral of a small number of
advertising or sponsorship contracts could have a material adverse effect on the
Company's business, results of operations, and financial condition. The Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall, and any significant shortfall in revenue in
relation to the Company's expectations would have an immediate adverse effect on
the Company's business, operating results, and financial condition. In addition,
the Company plans to continue to significantly increase its operating expenses
to expand its sales and marketing operations, to continue to develop and extend
the Yahoo! brand, to fund greater levels of product development, and to develop
and commercialize additional media properties. To the extent that such expenses
precede or are not subsequently followed by increased revenues, the Company's
business, operating results, and financial condition will be materially and
adversely affected. As a result of these factors, there can be no assurance that
the Company will not incur significant losses on a quarterly and annual basis in
the future.
The Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of usage of the Internet,
demand for Internet advertising, the addition or loss of advertisers, the level
of user traffic on Yahoo! and the Company's other online media properties, the
advertising budgeting cycles of individual advertisers, the amount and timing of
capital expenditures and other costs relating to the expansion of the Company's
operations, the introduction of new products or services by the Company or its
competitors, pricing changes for Web-based advertising, the timing of initial
set-up, engineering or development fees that may be paid in connection with
larger advertising and distribution arrangements, technical difficulties with
respect to the use of Yahoo! or other media properties developed by the Company,
incurrence of costs relating to future acquisitions, general economic
conditions, and economic conditions specific to the Internet and online media.
As a strategic response to changes in the competitive environment, the Company
may from time to time make certain pricing, service or marketing decisions, or
business combinations that could have a material adverse effect on the Company's
business, results of operations, and financial condition. The Company has
experienced, and expects to continue to experience, seasonality in its business,
with user traffic on Yahoo! and the Company's other online media properties
being lower during the summer and year-end vacation and holiday periods, when
usage of the Web and the Company's services typically experience slower growth
or decline. Additionally, seasonality may affect the amount of customer
advertising dollars placed with the Company in the first and third calendar
quarters as advertisers historically spend less during these quarters.
A key element of the Company's strategy is to generate advertising
revenues through sponsored services and placements by third parties in Yahoo!
online properties in addition to banner advertising. In connection with these
arrangements, the Company may receive sponsorship fees as well as a portion of
transaction revenues received by the third-party sponsor from users originated
through the Yahoo! placement, in return for minimum levels of user impressions
to be provided by the Company. To the extent implemented, these
14
arrangements expose the Company to potentially significant financial risks,
including the risk that the Company fails to deliver required minimum levels of
user impressions, third party sponsors do not renew the agreements at the end of
their term, and the arrangements do not generate anticipated levels of shared
transaction revenue. In addition, because the Company has limited experience
with these arrangements, the Company is unable to determine what effect such
arrangements will have on gross margins and results of operations. Although
transaction-based fees have not to date represented a material portion of the
Company's net revenues, if and to the extent such revenues become significant,
the foregoing factors could result in greater variations in the Company's
quarterly operating results and could have a material adverse effect on the
Company's business, results of operations, and financial condition.
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. In addition, the
Company expects the market for Web-based advertising, to the extent it continues
to develop, to be intensely competitive. There are no substantial barriers to
entry in these markets, and the Company expects that competition will continue
to intensify. The Company competes with many other providers of online
navigation, information and community services including larger and more
established companies such as America Online Inc., Microsoft Corporation, and
Netscape. The Company also competes with online services and other Web site
operators, as well as traditional offline media such as television, radio and
print for a share of advertisers' total advertising budgets. The Company
believes that the number of companies selling Web-based advertising and the
available inventory of advertising space have increased substantially during
recent periods. Accordingly, the Company may face increased pricing pressure
for the sale of advertisements. There can be no assurance that the Company will
be able to compete successfully against its current or future competitors or
that competition will not have a material adverse effect on the Company's
business, operating results, and financial condition.
The Company has designed and tested the most current versions of its
products to be Year 2000 compliant. There can be no assurances that the
Company's current products do not contain undetected errors or defects with Year
2000 date functions that may result in material costs to the Company. Although
the Company is not aware of any material operational issues or costs associated
with preparing its internal systems for the Year 2000, there can be no
assurances that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems.
Due to all of the foregoing factors, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such an event, the trading price of the Company's
Common Stock would likely be materially and adversely affected.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1997, GTE New Media Services Incorporated ("GTE New Media"), an
affiliate of GTE, filed suit in Dallas, Texas against Netscape and the Company,
in which GTE New Media made a number of claims relating to the inclusion of
certain Yellow Pages hypertext links in the Netscape Guide by Yahoo!, an online
navigational property operated by the Company under an agreement with Netscape.
In this lawsuit, GTE New Media has alleged, among other things, that by
including such links to the Yellow Pages service operated by several Regional
Bell Operating Companies (the "RBOCs") within the Guide, the Company has
tortiously interfered with an alleged contractual relationship between GTE New
Media and Netscape relating to placement of links by Netscape for a Yellow Pages
service operated by GTE New Media. GTE New Media seeks injunctive relief as
well as actual and punitive damages. In October 1997, GTE New Media brought
suit in the U.S. District Court for the District of Columbia, against the RBOCs,
Netscape, and the Company, in which GTE New Media has alleged, among other
things, that the alleged exclusion of the GTE New Media Yellow Pages from the
Netscape Guide Yellow Pages service violates federal antitrust laws, and GTE New
Media seeks injunctive relief and damages (trebled under federal antitrust laws)
from such alleged actions. The Company believes that the claims against the
Company in these lawsuits are without merit and intends to contest them
vigorously. Although the Company cannot predict with certainty the outcome of
these lawsuits or the expenses that may be incurred in defending the lawsuits,
the Company does not believe that the result in the lawsuits will have a
material adverse effect on the Company's financial position or results of
operations. 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 and other intellectual property rights, and a variety
of claims arising in connection with the Company's email, message boards, and
other communications and community features, such as claims alleging defamation
and invasion of privacy. The Company is not currently aware of any legal
proceedings or claims that the Company believes will have, individually or in
the aggregate, a material adverse effect on the Company's financial position or
results of operations.
16
ITEM 2. CHANGES IN SECURITIES
Yahoo! Inc. made the following unregistered sales of the Company's
Common Stock between December 31, 1997 and March 31, 1998:
PERSONS OR CLASS
NAME OF OF PERSONS TO WHOM EXEMPTION FROM
TRANSACTION AMOUNT OF SECURITIES UNDERWRITER OR CONSIDERATION THE SECURITIES REGISTRATION
DATE SOLD PLACEMENT AGENT RECEIVED WERE SOLD CLAIMED
- --------------------------------------------------------------------------------------------------------------------------
12/31/97 78,079 Shares (1) None (1) Accredited Persons Section 4(2) of
the Securities
Act of 1933, as
amended
- --------------------------------------------------------------------------------------------------------------------------
(1) In connection with a stock purchase agreement dated December 31, 1997 by and
among Yahoo!, SOFTBANK Holdings Inc., GeoCities, and certain shareholders of
GeoCities whereby Yahoo! acquired a $5,100,000 minority interest in
GeoCities, the Company issued an aggregate of 78,079 shares of the
Company's Common Stock to GeoCities and certain shareholders of GeoCities.
The resale of these shares has been registered on a Registration Statement
on Form S-3 filed with the Securities and Exchange Commission on January 8,
1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 17, 1998, the Company held its Annual Meeting of Shareholders.
At the meeting, the shareholders elected as directors Timothy Koogle (with
41,396,302 affirmative votes and 37,256 votes withheld), Jerry Yang (with
41,395,816 affirmative votes and 37,742 votes withheld), Eric Hippeau (with
41,393,817 affirmative votes and 39,741 votes withheld), Arthur H. Kern (with
41,393,830 affirmative votes and 39,728 votes withheld), and Michael Moritz
(with 41,393,906 affirmative votes and 39,652 votes withheld).
The shareholders also approved an amendment to the 1995 Stock Plan
increasing the number of shares of the Company's Common Stock reserved for
issuance thereunder by 2,000,000 shares (with 36,308,710 shares voting for,
5,020,403 against, and 104,445 abstaining).
The shareholders also ratified the appointment of Price Waterhouse LLP
as the independent accountants for the Company for the year ending December 31,
1998 (with 41,379,149 shares voting for, 31,372 against, and 23,037 abstaining).
17
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The exhibits listed in the accompanying Index to Exhibits are filed as
part of this Report on Form 10-Q.
b. Reports on Form 8-K:
1) On January 5, 1998, the Company filed a report on Form 8-K in
connection with the signing of a stock purchase agreement by
Yahoo!, SOFTBANK Holdings Inc., GeoCities, and certain shareholders
of GeoCities whereby Yahoo! acquired a minority interest in
GeoCities.
2) On January 15, 1998, the Company filed a report on Form 8-K
announcing its earnings and results of operations for the fourth
quarter and the fiscal year ended December 31, 1997.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
YAHOO! INC.
Dated: May 15, 1998 By: /s/ Gary Valenzuela
--------------------
Senior Vice President, Finance
and Administration, and Chief
Financial Officer
(Principal Financial Officer)
Dated: May 15, 1998 By: /s/ James J. Nelson
--------------------
Vice President, Finance
(Principal Accounting Officer)
19
YAHOO! INC.
INDEX TO EXHIBITS
Exhibit
Title No.
- ----- -------
Financial Data Schedule..................................... 27
20