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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-28018
YAHOO! INC.
(Exact name of registrant as specified in its charter)
California 77-0398689
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3420 Central Expressway
Santa Clara, California 95051
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 731-3300
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days: Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date; does not give effect to the
two-for-one stock split approved by the Company's Board of Directors on July 7,
1998.
Class Outstanding at June 30, 1998
-------------------------------- ----------------------------
Common Stock, $0.00067 par value 46,841,560
YAHOO! INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 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 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Changes in Securities 37
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 39
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YAHOO! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------- -------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 89,278,000 $ 62,538,000
Short-term investments in marketable securities 53,852,000 27,772,000
Accounts receivable, net 16,795,000 10,986,000
Prepaid expenses 4,211,000 5,893,000
------------- -------------
Total current assets 164,136,000 107,189,000
Long-term investments in marketable securities 4,106,000 16,702,000
Property and equipment, net 8,987,000 7,035,000
Investment in Yahoo! Japan 2,864,000 2,828,000
Other assets 11,525,000 8,130,000
------------- -------------
$ 191,618,000 $ 141,884,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,483,000 $ 4,711,000
Accrued expenses and other current liabilities 19,490,000 12,481,000
Deferred revenue 18,533,000 4,852,000
Due to related parties 1,517,000 1,412,000
------------- -------------
Total current liabilities 44,023,000 23,456,000
------------- -------------
Minority interests in consolidated subsidiaries 961,000 716,000
Shareholders' equity:
Common Stock 21,000 20,000
Additional paid-in capital 206,636,000 146,106,000
Accumulated deficit (59,677,000) (27,971,000)
Cumulative translation adjustment (346,000) (443,000)
------------- -------------
Total shareholders' equity 146,634,000 117,712,000
------------- -------------
$ 191,618,000 $ 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 Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net revenues $ 41,210,000 $ 14,107,000 $ 71,416,000 $ 24,172,000
Cost of revenues 4,720,000 2,318,000 8,637,000 3,755,000
------------ ------------ ------------ ------------
Gross profit 36,490,000 11,789,000 62,779,000 20,417,000
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 20,044,000 9,448,000 36,140,000 16,863,000
Product development 5,010,000 2,444,000 9,544,000 4,693,000
General and administrative 2,227,000 1,613,000 4,219,000 2,910,000
Other - nonrecurring costs 44,100,000 21,245,000 44,100,000 21,245,000
------------ ------------ ------------ ------------
Total operating expenses 71,381,000 34,750,000 94,003,000 45,711,000
------------ ------------ ------------ ------------
Loss from operations (34,891,000) (22,961,000) (31,224,000) (25,294,000)
Investment income, net 1,848,000 1,227,000 3,294,000 2,618,000
Minority interests in operations
of consolidated subsidiaries 112,000 182,000 355,000 384,000
------------ ------------ ------------ ------------
Loss before income taxes (32,931,000) (21,552,000) (27,575,000) (22,292,000)
Provision for income taxes 3,060,000 - 4,131,000 -
------------ ------------ ------------ ------------
Net loss $(35,991,000) $(21,552,000) $(31,706,000) $(22,292,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share - basic and diluted $ (0.81) $ (0.50) $ (0.72) $ (0.52)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common shares and equivalents
used in per share calculation - basic and diluted 44,504,000 43,146,000 43,778,000 42,689,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma net loss per share - basic and diluted
reflecting 2-for-1 stock split (Note 7) $ (0.40) $ (0.25) $ (0.36) $ (0.26)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma weighted average common shares - basic
and diluted reflecting 2-for-1 stock split (Note 7) 89,008,000 86,292,000 87,556,000 85,378,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
YAHOO! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
---------------------------
June 30, June 30,
1998 1997
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(31,706,000) $(22,292,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,240,000 862,000
Compensation expense on stock option grants 314,000 173,000
Minority interests in operations of consolidated subsidiaries (355,000) (384,000)
Nonrecurring costs 44,100,000 21,245,000
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable, net (5,757,000) (2,140,000)
Prepaid expenses and other assets 2,340,000 (5,826,000)
Accounts payable (440,000) (140,000)
Accrued expenses and other current liabilities 5,133,000 2,109,000
Deferred revenue 13,675,000 519,000
Due to related parties 105,000 (33,000)
------------ -------------
Net cash provided by (used in) operating activities 29,649,000 (5,907,000)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (3,556,000) (2,289,000)
Cash acquired in acquisition of Viaweb Inc. (Note 4) 26,000 -
Purchases of investments in marketable securities (60,726,000) (17,425,000)
Sales and maturities of investments in marketable securities 47,242,000 50,594,000
------------ -------------
Net cash provided by (used in) investing activities (17,014,000) 30,880,000
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 13,408,000 2,113,000
Proceeds from minority investors 600,000 600,000
Proceeds from lease obligations - 1,151,000
------------ -------------
Net cash provided by financing activities 14,008,000 3,864,000
------------ -------------
Effect of exchange rate changes on cash and cash equivalents 97,000 (24,000)
------------ -------------
Net change in cash and cash equivalents 26,740,000 28,813,000
Cash and cash equivalents at beginning of period 62,538,000 33,547,000
------------ -------------
Cash and cash equivalents at end of period $ 89,278,000 $ 62,360,000
------------ -------------
------------ -------------
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 serving millions of users daily. The Company was
incorporated in California on March 5, 1995 and commenced operations on that
date. The Company conducts its business within one industry segment.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments that, in the opinion of management, are necessary for a
fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for a full year or for any future period.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes incorporated by reference in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Certain prior period balances have been reclassified to conform to current
period presentation. The condensed consolidated financial statements for the
periods ended June 30, 1997 have been restated to reflect the October 1997
acquisition of Four11 Corporation which was accounted for as a pooling of
interests. Unless otherwise indicated, all share numbers in this Report do not
reflect the two-for-one stock split to be effected on August 3, 1998.
NOTE 2 - COMMITMENTS
During March 1997, the Company entered into the Co-Marketing and Trademark
License agreements with Netscape Communications Corporation ("Netscape") under
which the Company co-developed and operated an Internet information navigation
service called "Netscape Guide by Yahoo!" (the "Guide"). The Co-Marketing
agreement provided that revenue from advertising on the Guide, which was managed
by the Company, was to be shared between the Company and Netscape. Under the
terms of the Trademark License agreement, the Company made a one-time, non-
refundable trademark license fee payment of $5,000,000 in March 1997 which was
being amortized over the initial two-year term. On May 21, 1998, the Company
and Netscape terminated these agreements effective July 1, 1998. Pursuant to
the termination of these agreements, Netscape agreed to forego revenue sharing
on the Guide for the three months prior to the termination date. The Company
entered into a new agreement with Netscape to include the Yahoo! brand in the
Netscape Distinguished Provider Program (a promotional program on the Netscape
website), which began on June 1, 1998, for which the Company was provided a
$1,584,000 credit as part of the termination agreement. Unamortized
6
trademark license costs in excess of the advertising credit were charged to
operations in the quarter ended June 30, 1998.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustment and
unrealized gain/loss on available for sale securities. For the three and six
month periods ended June 30, 1998 and 1997, the difference between net loss, as
reported, and comprehensive income relates solely to the change in the
cumulative translation adjustment for the respective periods which was not
material to these financial statements.
NOTE 4 - ACQUISITION OF VIAWEB INC.
On June 10, 1998, the Company completed the acquisition of all outstanding
shares of Viaweb Inc. ("Viaweb"), a provider of software and services for
hosting online stores, through the issuance of 393,591 pre-split shares of
Yahoo! Common Stock. All outstanding options to purchase Viaweb common stock
were converted into options to purchase 61,126 pre-split shares of Yahoo! Common
Stock. The acquisition was accounted for as a purchase in accordance with APB
Opinion No. 16. Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition. Results of operations for
Viaweb have been included with those of the Company for periods subsequent to
the date of acquisition. Pro forma net revenues, net loss, and net loss per
share for the three and six months ended June 30, 1998 and 1997, giving effect
to Viaweb's historical results of operations, were not materially different from
the Company's results, as reported.
The total purchase price of the acquisition was $48,559,000 including
acquisition expenses of $1,750,000. The purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair values as
follows:
In-process research and development $44,100,000
Technology and other intangible assets 4,232,000
Tangible assets acquired 571,000
Liabilities assumed (344,000)
-----------
$48,559,000
-----------
-----------
Based on a third-party appraisal, management determined that $44,100,000 of
the purchase price represented acquired in-process research and development that
had not yet
7
reached technological feasibility and had no alternative future use. This
amount was expensed during the quarter ended June 30, 1998 as a nonrecurring
charge upon consummation of the acquisition. Beginning in June 1998, the
Company is amortizing the purchased technology and other intangible assets
over an estimated useful life of three years. Amortization expense of
purchased technology and other intangible assets was $117,000 during the
quarter ended June 30, 1998.
NOTE 5 - YAHOO! MARKETPLACE
On August 26, 1996, the Company entered into agreements with Visa
International Service Association ("VISA") and another party (together, the
"Visa Group") to establish a limited liability company, Yahoo! Marketplace
L.L.C., to develop and operate a navigational service focused on information and
resources for the purchase of consumer products and services over the Internet.
During July 1997, prior to the completion of significant business activities and
public launch of the property, the Company and VISA entered into an agreement
under which the Visa Group released the Company from certain obligations and
claims. In connection with this agreement, the Company issued 699,481 shares of
Yahoo! Common Stock to the Visa Group, for which the Company recorded a one-
time, non-cash, pre-tax charge of $21,245,000 in the second quarter ended June
30, 1997.
NOTE 6 - LEGAL PROCEEDINGS
As previously reported, in July and October 1997, GTE New Media Services
Incorporated ("GTE New Media") filed lawsuits in state court in Dallas, Texas
and in federal court in the District of Columbia, against Netscape and the
Company, which lawsuits relate to certain Yellow Pages services offered in the
Netscape Guide By Yahoo!. In June 1998, the Company entered into agreements
with GTE New Media that provide for the dismissal of, and mutual release with
respect to, both lawsuits without any payment or consideration by the Company,
and, with respect to the Texas case, subject only to certain conditions that the
Company anticipates will be fulfilled by October 1998. Satisfaction of these
conditions is not expected to have a material effect on the Company's
financial position or results of operations.
NOTE 7 - SUBSEQUENT EVENTS
STOCK SPLIT
During July 1998, the Company's Board of Directors approved a two-for-one
Common Stock split. Shareholders of record on July 17, 1998 (the record date)
will be entitled to one additional share for every share held on that date. The
Company has presented pro forma earnings per share and pro forma weighted
average shares in the statement of operations for all periods presented
reflecting the effect of the stock split.
8
PRIVATE PLACEMENT
During July 1998, the Company entered into an agreement for a private
placement of Common Stock to SOFTBANK Holdings, Inc., a 29% shareholder of
the Company at June 30, 1998. On July 14, 1998, the Company received
proceeds of $250,000,000 in exchange for 1,363,440 newly issued, pre-split
shares of Yahoo! Common Stock, bringing SOFTBANK's total ownership to
approximately 31%. In connection with the transaction, the Company also
agreed to provide registration rights comparable to the registration rights
provided on the shares acquired by SOFTBANK prior to the Company's April 1996
initial public offering. The shares purchased by SOFTBANK are subject to a
pre-existing agreement, entered into in 1996, that prohibits SOFTBANK from
purchasing additional shares of the Company's capital stock if such purchase
would result in SOFTBANK owning more than 35% of the Company's capital stock
(assuming the exercise of all outstanding options and warrants to purchase
capital stock). These restrictions terminate on the earlier of March 12,
2001, or in the event that the Company's founders, David Filo and Jerry Yang,
own beneficially less than 3,750,000 shares of the Company's Common Stock, in
the aggregate (prior to giving effect to the two-for-one stock split approved
by the Company's Board of Directors on July 7, 1998). Also, SOFTBANK's
maximum permitted percentage ownership increases to 49.5% of the Company's
capital stock (excluding options and warrants to purchase capital stock) in
the event that Messrs. Filo and Yang beneficially own in the aggregate less
than 6,000,000 shares of Common Stock (prior to giving effect to the
two-for-one stock split approved by the Company's Board of Directors on July
7, 1998). The agreements also prohibit SOFTBANK from disposing of shares
representing more than 5% of the Company's capital stock without approval of
the Company's Board of Directors (other than in public market sales under
Rule 144 or pursuant to a registration statement filed by the Company).
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR
SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE
CAPTION "RISK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN.
THE COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE
SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES.
OVERVIEW
Yahoo! Inc. is a global Internet media company that offers a network of
branded World Wide Web programming that serves millions of users daily. As the
first online navigational guide to the Web, www.yahoo.com is the single largest
guide in terms of traffic, advertising, household and business user reach, and
is one of the most recognized brands associated with the Internet. Yahoo! Inc.
provides targeted Internet resources and communications services for a broad
range of audiences, based on demographic, key-subject and geographic interests.
The Company was incorporated in California on March 5, 1995 and commenced
operations on that date. In August 1995, the Company commenced selling
advertisements on its Web pages and recognized its initial revenues. In April
1996, the Company completed its initial public offering. In October 1997, the
Company acquired Four11 Corporation, a privately-held online communications and
Internet directory company. The acquisition was accounted for as a pooling of
interests. The condensed consolidated financial statements for the period ended
June 30, 1997 have been restated to reflect the acquisition. In June 1998, the
Company acquired Viaweb Inc., a provider of software and services for hosting
online stores. The acquisition was accounted for as a purchase.
The Company's revenues are derived principally from the sale of banner
advertisements on short-term contracts. The Company's standard rates for
advertising currently range from approximately $6.00 per thousand impressions
for run of network to approximately $90.00 per thousand impressions for highly
targeted audiences and properties. To date, the duration of the Company's
advertising commitments has ranged from one week to two years. During 1997, the
Company also began selling a combination of sponsorship and banner advertising
contracts. In general, these sponsorship advertising contracts have longer
terms (ranging from three months to two years) than standard banner advertising
contracts and also involve more integration with Yahoo! services, such as the
placement of buttons that provide users with direct links to the advertiser's
Web site. Advertising revenues on both banner and sponsorship contracts are
recognized ratably over the period in which the advertisement is displayed,
provided that no significant
10
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 media
properties. These development fees are recognized as revenue once the
related activities have been performed and the customer's web links are
available on Yahoo! online media properties. A number of the Company's
agreements provide that Yahoo! receive revenues from electronic commerce
transactions. Currently, these revenues are recognized by the Company upon
notification from the advertiser of revenues earned by Yahoo! and, to date,
have not been significant.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $41,210,000 and $71,416,000 for the second quarter and
first half of 1998, respectively, which represent increases of 192% and 195%
when compared with the corresponding periods in 1997. The increases are due
primarily to the increasing number of advertisers purchasing space on Yahoo!
online media properties and the trend towards larger purchases and for a longer
duration. Approximately 1,800 customers advertised on Yahoo! online media
properties during the quarter ended June 30, 1998 as compared to approximately
900 during the second quarter of 1997. No one customer accounted for 10% or
more of revenues during the three or six month periods ended June 30, 1998 and
1997. International revenues have accounted for less than 10% of net revenues
during the three and six month periods ended June 30, 1998 and 1997. Barter
revenues also represented less than 10% of net revenues during those periods.
Advertising purchases by SOFTBANK, a 29% shareholder of the Company at June 30,
1998, and its related companies accounted for approximately 1% of net revenues
in the second quarter and first half of fiscal 1998 as compared to 5% and 7% in
the corresponding periods in fiscal 1997. Contracted prices on these orders are
comparable to those given to other major customers of the Company. There can be
no assurance that customers will continue to purchase advertising on the
Company's Web pages or that market prices for Web-based advertising will not
decrease due to competitive or other factors. Additionally, while the Company
has experienced strong revenue growth during the first half of 1998, management
does not believe that this level of revenue growth will be sustained in future
periods.
COST OF REVENUES
Cost of revenues consist of the expenses associated with the production and
usage of Yahoo! online media properties. These costs primarily consist of fees
paid to third parties for content included on the Company's online media
properties, Internet connection charges, equipment depreciation, and
compensation. Cost of revenues were
11
$4,720,000 and $8,637,000 for the second quarter and first half of 1998,
respectively, or 11% and 12% of net revenues, as compared to $2,318,000 and
$3,755,000, or 16% of net revenues, in the corresponding periods in fiscal
1997. The absolute dollar increase in cost of revenues is primarily
attributable to an increase in the quantity of content available on Yahoo!
online media properties, 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! online
media properties, and increased usage of these properties. As measured in
page views (defined as electronic page displays), the Company delivered an
average of 115 million page views per day in June 1998 compared with an
average of over 38 million page views per day in June 1997. Yahoo! Japan, an
unconsolidated joint venture of the Company which began operations in April
1996, is included in these page views figures and accounted for an average of
approximately 8 million page views per day in June 1998 and an average of
over 3 million page views per day in June 1997. The Company anticipates that
its content and Internet connection expenses will continue to increase in
absolute dollars for the foreseeable future. The Company currently
anticipates cost of revenues will be in the range of 10% to 13% of net
revenues for the remainder of 1998.
SALES AND MARKETING
Sales and marketing expenses were $20,044,000 for the quarter ended June
30, 1998, or 49% of net revenues as compared to $9,448,000, or 67% of net
revenues for the quarter ended June 30, 1997. For the six months ended June 30,
1998, sales and marketing expenses were $36,140,000, or 51% of net revenues as
compared to $16,863,000, or 70% of net revenues for the six months ended June
30, 1997. Sales and marketing expenses consist primarily of advertising and
other marketing related expenses (which include Netscape Premier
Provider/Distinguished Provider and Netscape Guide amortization costs),
compensation and employee-related expenses, and sales commissions. The increase
in absolute dollars from the year ago periods is primarily attributable to an
increase in advertising and distribution costs associated with the Company's
aggressive brand-building strategy, increases in compensation expense associated
with growth in sales and marketing personnel, and expansion in the international
subsidiaries with the addition of subsidiaries subsequent to June 30, 1997 in
Australia, Denmark, Italy, Korea, Norway, Singapore, and Sweden. The Company
also added Yahoo! guides in Spanish and Mandarin Chinese languages during the
quarter ended June 30, 1998. The Company anticipates that sales and marketing
expenses in absolute dollars will increase in future periods as it continues to
pursue an aggressive brand building strategy and continues to build its direct
sales organization. As a percentage of net revenues, the Company currently
anticipates that sales and marketing expenses may trend somewhat lower over the
remainder of 1998.
PRODUCT DEVELOPMENT
Product development expenses were $5,010,000 for the quarter ended June 30,
1998, or 12% of net revenues as compared to $2,444,000, or 17% of net revenues
for the quarter ended June 30, 1997. For the six months ended June 30, 1998,
product development expenses were $9,544,000, or 13% of net revenues as compared
to
12
$4,693,000, or 19% of net revenues for the six months ended June 30, 1997.
Product development expenses consist primarily of employee compensation
relating to developing and enhancing the features and functionality of Yahoo!
online media properties. The increase in absolute dollars is primarily
attributable to increases in the number of engineers that develop and enhance
Yahoo! online media properties. To date, all internal product development
costs have been expensed as incurred. The Company believes that significant
investments in product development are required to remain competitive.
Consequently, the Company expects to incur increased product development
expenditures in absolute dollars in future periods. As a percentage of net
revenues, the Company currently anticipates that product development expenses
will approximate current levels during the remainder of 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,227,000 for the quarter ended
June 30, 1998, or 5% of net revenues as compared to $1,613,000, or 11% of net
revenues for the quarter ended June 30, 1997. For the six months ended June 30,
1998, general and administrative expenses were $4,219,000, or 6% of net revenues
as compared to $2,910,000, or 12% of net revenues for the six months ended June
30, 1997. General and administrative expenses consist primarily of fees for
professional services and compensation. The increase in absolute dollars is
primarily attributable to increases in personnel and usage of professional
services. The Company believes that the absolute dollar level of general and
administrative expenses will increase in future periods, as a result of
increased fees for professional services and an increase in personnel. As a
percentage of net revenues, the Company currently anticipates that general and
administrative expenses will approximate current levels during the remainder of
1998.
OTHER - NONRECURRING COSTS
On June 10, 1998, the Company completed the acquisition of all outstanding
shares of Viaweb through the issuance of 393,591 pre-split shares of Yahoo!
Common Stock. All outstanding options to purchase Viaweb common stock were
converted into options to purchase 61,126 pre-split shares of Yahoo! Common
Stock. During the quarter ended June 30, 1998, the Company recorded a
nonrecurring charge of $44,100,000 for in-process research and development that
had not yet reached technological feasibility and had no alternative future use.
During July 1997, prior to the completion of significant business
activities and public launch of the Yahoo! Marketplace, the Company and VISA
entered into an agreement under which the Visa Group released the Company from
certain obligations and claims. In connection with this agreement, the Company
issued 699,481 shares of Yahoo! Common Stock to the Visa Group, for which the
Company recorded a one-time, non-cash, pre-tax charge of $21,245,000 in the
second quarter ended June 30, 1997.
13
INVESTMENT INCOME, NET
Investment income, net of investment expense, was $1,848,000 for the
quarter ended June 30, 1998. For the quarter ended June 30, 1997, investment
income was $1,227,000. Investment income for the six months ended June 30, 1998
was $3,294,000 as compared to $2,618,000 for the six months ended June 30, 1997.
The increase in investment income from the year ago periods was primarily
attributable to a higher average investment balance. Investment income for the
remainder of 1998 is expected to increase significantly due to proceeds from a
private placement of $250,000,000 received by the Company on July 14, 1998.
MINORITY INTERESTS IN OPERATIONS OF CONSOLIDATED SUBSIDIARIES
Minority interests in losses from operations of consolidated subsidiaries
were $112,000 for the quarter ended June 30, 1998 as compared to $182,000 for
the same period in 1997. Minority interests for the six months ended June 30,
1998 were $355,000 as compared to $384,000 for the six months ended June 30,
1997. The 1998 minority interest is attributable to operations in the European
and Korean joint ventures. Minority interest from the year ago periods is
attributable to losses in the European and other joint ventures. The Company
expects that minority interests in operations of consolidated subsidiaries in
the aggregate will continue to fluctuate in future periods as a function of the
results from consolidated subsidiaries. When, and if, the consolidated
subsidiaries become profitable, the minority interests elimination on the
statement of operations will reduce the Company's net income by the minority
partner's share of the subsidiaries' net income.
INCOME TAXES
Based on the current estimate of operating results and certain other
factors, the Company expects its effective tax rate, before the effect of the
non-deductible charge of $44,100,000 for acquired in-process research and
development, will approximate 25% for fiscal year 1998. Before the effect of
this charge, the tax rate was approximately 27% for the quarter ended June 30,
1998 and 25% for the six months ended June 30, 1998. These rates are lower
than the statutory U.S. federal rate due primarily to the utilization of net
operating loss carryforwards, the utilization of research and development
credits, and the change in the valuation allowance on temporary differences.
The Company believes sufficient uncertainty exists regarding the
realizability of its remaining deferred tax assets such that a full valuation
allowance continues to be required. The portion of the deferred tax assets
attributable to the exercise of employee stock options is reflected in the
U.S. net operating loss carryforward, the tax benefit of which, when
recognized, will be accounted for as a credit to additional paid-in capital
rather than a reduction of the income tax provision. Deferred tax assets
related to employee stock option exercises are currently expected to increase
through fiscal year 1998.
NET LOSS
The Company recorded a net loss of $35,991,000 or $0.81 per share for the
quarter ended June 30, 1998. Excluding the effect of the nonrecurring charge of
14
$44,100,000 incurred in connection with the acquisition of Viaweb, the Company
earned $8,109,000 or $0.15 per share diluted. The Company recorded a net loss
of $21,552,000 or $0.50 per share for the quarter ended June 30, 1997.
Excluding the effect of the nonrecurring charge of $21,245,000 incurred in
connection with the Visa agreement, the Company recorded a net loss of $307,000
or $0.01 per share.
For the six month period ended June 30, 1998, the Company recorded a net
loss of $31,706,000 or $0.72 per share. Excluding the effect of the
nonrecurring charge of $44,100,000, the Company earned $12,394,000 or $0.23 per
share diluted. For the six month period ended June 30, 1997, the Company
recorded a net loss of $22,292,000 or $0.52 per share. Excluding the effect of
the nonrecurring charge of $21,245,000, the Company recorded a net loss of
$1,047,000 or $0.02 per share.
LIQUIDITY AND CAPITAL RESOURCES
Yahoo! invests predominantly in instruments that are highly liquid, of
high-quality investment grade, and predominantly have maturities of less than
one year with the intent to make such funds readily available for operating
purposes. At June 30, 1998, the Company had cash and cash equivalents and
investments in marketable securities totaling $147,236,000 compared to
$107,012,000 at December 31, 1997.
For the six months ended June 30, 1998, cash provided by operating
activities of $29,649,000 was primarily due to earnings, before the nonrecurring
charge of $44,100,000, and increases in deferred revenue (due to invoicing and
cash receipts in excess of revenue) and accrued liabilities. For the six months
ended June 30, 1997, cash used in operating activities of $5,907,000 was
primarily due to increases in prepaid expenses and other assets, which resulted
primarily from a $5,000,000 one-time non-refundable license payment to Netscape
under the Netscape Guide by Yahoo! agreement and a $1,000,000 payment to
Netscape under the Premier Provider agreement.
Cash used in investing activities was $17,014,000 for the six months June
30, 1998. Purchases (net of sales and maturities) of investments in marketable
securities during the period were $13,484,000 and capital expenditures totaled
$3,556,000. Capital expenditures have generally been comprised of purchases of
computer hardware and software as well as leasehold improvements related to
leased facilities, and are expected to increase in future periods. Cash
provided by investing activities was $30,880,000 for the six months ended June
30, 1997. Sales and maturities (net of purchases) of investments in marketable
securities during the period were $33,169,000 and capital expenditures totaled
$2,289,000.
For the six months ended June 30, 1998, cash provided by financing
activities of $14,008,000 was due primarily to the issuance of Common Stock
pursuant to the exercise of stock options. For the six months ended June 30,
1997, cash provided by financing activities of $3,864,000 was due primarily to
the issuance of Common Stock pursuant to the exercise of stock options and
proceeds received under lease obligations.
15
The Company currently has no material commitments other than those under
operating lease agreements. The Co-Marketing agreement with Netscape was
terminated in May 1998 and the Premier Provider agreements have expired. The
Company has experienced a substantial increase in its capital expenditures and
operating lease arrangements since its inception, which is consistent with
increased staffing, and anticipates that this will continue in the future.
Additionally, the Company will continue to evaluate possible acquisitions of, or
investments in businesses, products, and technologies that are complementary to
those of the Company, which may require the use of cash. Management believes
existing cash and investments will be sufficient to meet the Company's operating
requirements for at least the next twelve months; however, the Company may sell
additional equity or debt securities or obtain credit facilities. The sale of
additional securities could result in additional dilution to the Company's
shareholders. During July 1998, the Company entered into an agreement for a
private placement of Common Stock to SOFTBANK Holdings, Inc. On July 14, 1998,
the Company received proceeds of $250,000,000 in exchange for 1,363,440 newly
issued, pre-split shares of Yahoo! Common Stock.
RISK FACTORS
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES
The Company was incorporated in March 1995 and did not commence generating
advertising revenues until August 1995. Accordingly, the Company has a limited
operating history upon which an evaluation of the Company can be based, and its
prospects are subject to the risks, expenses and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for Internet
products and services, including the Web-based advertising market. Specifically,
such risks include, without limitation, the failure to continue to develop and
extend the Yahoo! brand, the failure to develop new media properties, the
inability of the Company to maintain and increase the levels of traffic on
Yahoo! properties, the development or acquisition of equal or superior services
or products by competitors, the failure of the market to adopt the Web as an
advertising medium, the failure to successfully sell Web-based advertising
through the Company's recently developed internal sales force, potential
reductions in market prices for Web-based advertising as a result of competition
or other factors, the failure of the Company to effectively generate
commerce-related revenues through sponsored services and placements in Yahoo!
properties, the inability of the Company to effectively integrate the technology
and operations of any other acquired businesses or technologies with its
operations, such as the recent acquisition of Viaweb Inc., the failure of the
Company to successfully develop and offer personalized Web-based services, such
as e-mail services, to consumers without errors or interruptions in service, and
the inability to continue to identify, attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks.
As of June 30, 1998, the Company had an accumulated deficit of $59,677,000.
The limited operating history of the Company and the uncertain nature of the
markets addressed by the Company make the prediction of future results of
operations difficult or impossible. The Company believes that period-to-period
comparisons of its operating results are not
16
meaningful and that the results for any period should not be relied upon as
an indication of future performance. In particular, although the Company has
experienced strong revenue growth during the first half of 1998, management
does not believe that this level of revenue growth will be sustained in
future periods. In addition, the Company currently expects to continue to
significantly increase its operating expenses to expand its sales and
marketing operations, to continue to develop and extend the Yahoo! brand, to
fund greater levels of product development, to develop and commercialize
additional media properties, and to acquire complementary businesses and
technologies. As a result of these factors, there can be no assurance that
the Company will not incur significant losses on a quarterly and annual basis.
On June 10, 1998, the Company completed the acquisition of Viaweb Inc., a
provider of software and services for hosting online stores, in exchange for
393,591 pre-split shares of the Company's Common Stock and assumption of options
to purchase an aggregate of 61,126 pre-split shares of the Company's Common
Stock. The Company incurred a one-time charge of $44,100,000 in the quarter
ended June 30, 1998 for acquired in-process technology and expenses associated
with the transaction. The remaining purchase price of approximately $4,232,000
has been allocated to acquired technology and other intangible assets and is
being amortized over an estimated useful life of three years. As a result of the
expense incurred in the quarter ended June 30, 1998, the Company reported a net
loss for such quarter and may report a net loss for the year ending December 31,
1998.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
As a result of the Company's limited operating history, the Company does
not have historical financial data for a significant number of periods on which
to base planned operating expenses. The Company derives the majority of its
revenues from the sale of advertisements under short-term contracts, which are
difficult to forecast accurately. The Company's expense levels are based in part
on its expectations concerning future revenue and, to a large extent, are fixed.
Quarterly revenues and operating results depend substantially upon the
advertising revenues received within the quarter, which are difficult to
forecast accurately. Accordingly, the cancellation or deferral of a small number
of advertising or sponsorship contracts could have a material adverse effect on
the Company's business, results of operations, and financial condition. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall, and any significant shortfall in revenue in
relation to the Company's expectations would have an immediate adverse effect on
the Company's business, operating results, and financial condition. In addition,
the Company plans to continue to significantly increase its operating expenses
to expand its sales and marketing operations, to continue to develop and extend
the Yahoo! brand, to fund greater levels of product development, and to develop
and commercialize additional media properties. To the extent that such expenses
precede or are not subsequently followed by increased revenues, the Company's
business, operating results, and financial condition will be materially and
adversely affected. As a result of these factors, there can be no assurance that
the Company will not incur significant losses in the future.
17
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of usage of the Internet, demand for
Internet advertising, the addition or loss of advertisers, the level of user
traffic on Yahoo! online media properties, the advertising budgeting cycles of
individual advertisers, the mix of types of advertising sold by the Company
(such as the amount of targeted advertising, which generally has higher rates),
the amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, the introduction of new products or
services by the Company or its competitors, pricing changes for Web-based
advertising, the timing of initial set-up, engineering or development fees that
may be paid in connection with larger advertising and distribution arrangements,
technical difficulties with respect to the use of Yahoo! or other media
properties developed by the Company, incurrence of costs relating to future
acquisitions, negative general economic conditions (which may be expected to
adversely affect media spending), and economic conditions specific to the
Internet and online media. As a strategic response to changes in the competitive
environment, the Company may from time to time make certain pricing, service or
marketing decisions, or business combinations that could have a material adverse
effect on the Company's business, results of operations, and financial
condition.
Seasonality may affect the amount of customer advertising dollars placed
with the Company in the first and third calendar quarters as advertisers
historically spend less during these quarters. This seasonality may adversely
affect the Company's operating results for the quarter ending September 30,
1998. The Company also expects to experience seasonality in the level of use of
its online properties, with user traffic on Yahoo! online media properties being
lower during the summer and year-end vacation and holiday periods, when usage of
the Web and the Company's services to date have experienced slower growth or
decline.
A key element of the Company's strategy is to generate advertising revenues
through sponsored services and placements by third parties in the Company's
online media properties in addition to banner advertising. In connection with
these arrangements, the Company may receive sponsorship fees as well as a
portion of transaction revenues received by the third-party sponsor from users
originated through the Yahoo! placement, in return for minimum levels of user
impressions to be provided by the Company. To the extent implemented, these
arrangements expose the Company to potentially significant financial risks,
including the risk that the Company fails to deliver required minimum levels of
user impressions or "click throughs" (in which case, these agreements typically
provide for adjustments to the fees payable thereunder or "make good" periods),
that third-party sponsors do not renew the agreements at the end of their term
or that sponsors renew at lower rates, that the arrangements do not generate
anticipated levels of shared transaction revenue, or that sponsors default in
the payment commitments in such agreements, which could result in the Company
failing to achieve anticipated revenue from the sponsorship arrangements. In
addition, because the Company has limited experience with these arrangements,
the Company is unable to determine what effect such arrangements will have on
gross margins and results of operations. Although transaction-based fees have
not to date represented a material portion of the Company's net revenues, if and
to the extent such revenues become significant, the foregoing factors could
result in greater variations in the
18
Company's quarterly operating results and could have a material adverse
effect on the Company's business, results of operations, and financial
condition.
Due to all of the foregoing factors, in some future quarter the Company's
operating results may fall below the expectations of securities analysts and
investors. In such an event, the trading price of the Company's Common Stock
would likely be materially and adversely affected.
COMPETITION
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. Negative competitive developments could
have a material adverse effect on the Company's business and on the trading
price of the Company's Common Stock.
MULTIPLE PROVIDERS OF COMPETITIVE SERVICES. The Company competes with many
other providers of online navigation, information and community services. As the
Company expands the scope of its Internet services, it will compete directly
with a greater number of Internet sites and other media companies across a wide
range of different online services, including in vertical markets where
competitors may have advantages in expertise, brand recognition and other
factors. Many companies offer competitive products or services addressing Web
navigation services, including, among others, America Online Inc. (NetFind),
C/NET, Inc. (Snap! Online), Digital Equipment Corporation (AltaVista), Excite,
Inc. (including WebCrawler), Infoseek Corporation, Inktomi, Lycos, Inc.
(including Tripod), Microsoft Corporation (Internet Start), Netscape
Communications Corporation (Netcenter), and Wired Ventures, Inc. (hotbot). In
addition, the Company competes with metasearch services and software
applications, such as C/NET's search.com service, that allow a user to search
the databases of several directories and catalogs simultaneously. The Company
also competes indirectly with database vendors that offer information search and
retrieval capabilities with their core database products. In addition, many
large media companies have announced that they are contemplating Internet
navigation services and are attempting to become "gateway" sites for Web users.
For example, both Time-Warner Inc. and CBS have announced initiatives to develop
Web services in order to have their Web sites become the starting point for
users navigating the Web and C/NET recently announced that NBC has purchased an
equity interest in C/NET's Snap! Online navigational service, and that C/NET and
NBC will operate the service as a joint venture. In June 1998 Infoseek and the
Walt Disney Company ("Disney") entered into agreements providing that Disney
will purchase 43% of Infoseek's capital stock and warrants to purchase
sufficient shares to control Infoseek. The parties also announced that they will
be launching a new portal service that combines content for both companies. The
Company also anticipates that Disney will provide significant promotional
support to these online properties, including through Disney's substantial media
resources, which include the ABC television network. These and other competitors
have and are expected to continue to make substantial marketing expenditures to
promote their online properties. To the extent the Company is required to
increase its sales and marketing expenditures in response these efforts, the
Company's operating results could be materially and adversely affected.
19
A large number of Web sites and online services (including, among others,
the Microsoft Network, AOL, Netscape (Netcenter), and other Web navigation
companies such as Excite, Lycos, and Infoseek) also offer informational and
community features, such as news, stock quotes, sports coverage, Yellow
Pages and email listings, weather news, chat services, bulletin board listings
and online store hosting services that are competitive with the services offered
by the Company. For example, Netscape, which experiences high levels of traffic
on its Web sites by virtue of default settings and buttons on its popular Web
browser products, recently significantly enhanced its Netcenter service as a
"gateway" Web site, through commercial relationships between Netscape and
certain of the Company's competitors. A number of companies, including Hotmail
(which was recently acquired by Microsoft) and WhoWhere? Inc., offer Web-based
email service similar to those offered by the Company, and such companies have
and are expected to continue to provide such services in tandem with larger
navigational sites and online services. AOL recently acquired Mirabilis, a
provider of "ICQ" instant Internet messaging software and services that compete
with the Company's Yahoo! Pager offering, and the ICQ user base will provide AOL
with an additional platform for distribution of AOL's other navigation,
information and communications services that compete with those of the Company.
Several companies, including large companies such as Microsoft and AOL and their
affiliates, also are developing or currently offer online information services
for local markets, which compete with the Company's regional Yahoo! online
properties. As a result of the Company's recent acquisition of Viaweb Inc., the
Company also expects to face competition in the market for hosting online
merchant stores. The Company also faces intense competition in international
markets, including competition from several U.S.-based competitors as well as
media and online companies and Internet service providers that are already well
established in those foreign markets.
CONSOLIDATION OF PRODUCTS OFFERED BY WEB BROWSERS AND OTHER INTERNET POINTS
OF ENTRY. The Company also faces competition from providers of software and
other Internet products and services that incorporate search and retrieval
features into their offerings. For example, Web browsers offered by Netscape and
Microsoft, which are the most widely used browsers, increasingly incorporate
prominent search buttons and similar features, such as features based on "push"
technologies, that direct search traffic to competing services, including those
that may be developed or licensed by such parties, that could make it more
difficult for Internet viewers to find and use the Company's products and
services. Netscape recently announced an agreement with Excite under which
Excite will be the most prominent navigational service within the Netcenter
Website. In the future, Netscape and Microsoft and other browser suppliers may
also more tightly integrate products and services similar to the Company's into
their browsers or their browsers' pre-set home pages. In addition, entities that
sponsor or maintain high-traffic Web sites or that provide an initial point of
entry for Internet users, such as the Regional Bell Operating Companies, long-
distance providers, cable companies, or Internet Service Providers ("ISPs") such
as Microsoft and AOL, currently offer and could further develop, acquire or
license Internet search and navigation functions that compete with those offered
by the Company and could take actions that make it more difficult for consumers
to find and use Yahoo! services. For example, Microsoft recently announced that
it will feature and promote Internet search engine services provided by Inktomi
in the Microsoft Network and other Microsoft online
20
properties, and offers personalized Web services through its Internet Start
service. The Company expects that such search services may be tightly
integrated into future versions of the Microsoft operating system, the
Internet Explorer browser and other software applications, and that Microsoft
will promote such services within the Microsoft Network or through other
Microsoft affiliated end-user services such as MSNBC or WebTV Networks, Inc.
Insofar as Microsoft's Internet navigational offerings may be more
conveniently accessed by users than those of the Company, this may provide
Microsoft with significant competitive advantages that could have a material
adverse effect on the Company's business.
COMPETITION FOR ADVERTISING EXPENDITURES. The Company also competes with
online services, other Web site operators and advertising networks, as well as
traditional offline media such as television, radio and print for a share of
advertisers' total advertising budgets. The Company believes that the number of
companies selling Web-based advertising and the available inventory of
advertising space have increased substantially during recent periods.
Accordingly, the Company may face increased pricing pressure for the sale of
advertisements and reductions in the Company's advertising revenues. In
addition, the Company's sales may be adversely affected to the extent that the
Company's competitors offer superior advertising services that better target
users or provide better reporting of advertising results.
PRINCIPAL COMPETITIVE FACTORS. The Company believes that the principal
competitive factors in its markets are brand recognition, ease of use,
comprehensiveness, independence, quality and responsiveness of search results,
the availability of high-quality, targeted content and focused value added
products and services, quality and brand appeal, access to end users, and, with
respect to advertisers and sponsors, the number of users, duration and frequency
of visits, and user demographics. Competition among current and future suppliers
of Internet navigational and informational services, high-traffic Web sites and
ISPs, as well as competition with other media for advertising placements, could
result in significant price competition and reductions in advertising revenues.
Additionally, the Company has faced and expects to continue to face competition
with respect to the acquisition of strategic businesses and technologies. There
can be no assurance that the Company will be able to compete successfully or
that the competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, operating results, and financial
condition.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical,
marketing and distribution resources. In addition, providers of Internet tools
and services may be acquired by, receive investments from, or enter into other
commercial relationships with larger, well-established and well-financed
companies, such as Microsoft or AOL. For example, AOL is a significant
shareholder of Excite, and a version of the Excite service (AOL NetFind) has
been designated as the exclusive Internet search service for use by AOL's
subscribers. In addition, well-established traditional media companies may
acquire, invest or otherwise establish commercial relationships with the
Company's competitors, such as NBC's recent investment in C/NET's Snap! Online
service or Disney's investment in Infoseek, and may use their substantial media
resources to promote and enhance such competitor's services.
21
Greater competition resulting from such relationships could have a material
adverse effect on the Company's business, operating results and financial
condition.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET; TECHNOLOGICAL CHANGE
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the Web in order to support the sale of
advertising on the Company's online media properties. Web-based advertising is
relatively new, and predicting the extent of further growth, if any, in Web
advertising expenditures is difficult. There can be no assurance that
communication or commerce over the Internet will increase or that extensive
content will continue to be provided over the Internet. The Internet may not
prove to be a viable commercial marketplace for a number of reasons, including
lack of acceptable security technologies, potentially inadequate development of
the necessary infrastructure, such as a reliable network backbone, or timely
development and commercialization of performance improvements, including high
speed modems. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and level of use, there can
be no assurance that the Internet infrastructure will continue to be able to
support the demands placed upon it by such potential growth or that the
performance or reliability of the Web will not be adversely affected by this
continued growth. If use of the Internet does not continue to grow, or if the
Internet infrastructure does not effectively support growth that may occur, the
Company's business, operating results, and financial condition would be
materially and adversely affected. The market for Internet products and services
is characterized by rapid technological developments, evolving industry
standards and customer demands, and frequent new product introductions and
enhancements. For example, to the extent that higher bandwidth Internet access
becomes more widely available through cable modems or other technologies, the
Company may be required to make significant changes to the design and content of
its online properties in order to compete effectively. Failure of the Company to
effectively adapt to these or any other technological developments could
adversely affect the Company's business, operating results, and financial
condition.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS AND MEDIA
PROPERTIES
The markets for the Company's products and media properties have only
recently begun to develop, are rapidly evolving, and are characterized by an
increasing number of market entrants who have introduced or developed
information navigation products and services for use on the Internet and the
Web. As is typical in the case of a new and rapidly evolving industry, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty and risk. Because the market for the Company's
products and media properties is new and evolving, it is difficult to predict
the future growth rate, if any, and size of this market. There can be no
assurance either that the market for the Company's products and media properties
will continue to develop or that demand for the Company's products or media
properties will be sustainable. If the market develops more slowly than expected
or becomes saturated with competitors, or if the Company's products and media
properties do not sustain market acceptance, the
22
Company's business, operating results, and financial condition will be
materially and adversely affected.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
The Company believes that establishing and maintaining the Yahoo! brand is
a critical aspect of its efforts to attract and expand its user and advertiser
base and that the importance of brand recognition will increase due to the
growing number of Internet sites and the relatively low barriers to entry.
Promotion and enhancement of the Yahoo! brand will depend largely on the
Company's success in providing high-quality products and services, which success
cannot be assured. In order to attract and retain Internet users and to promote
and maintain the Yahoo! brand in response to competitive pressures, the Company
may find it necessary to increase substantially its financial commitment to
creating and maintaining a distinct brand loyalty among consumers. If the
Company is unable to provide high-quality products and services or otherwise
fails to promote and maintain its brand, or if the Company incurs excessive
expenses in an attempt to improve its products and services or promote and
maintain its brand, the Company's business, operating results, and financial
condition will be materially and adversely affected.
RELIANCE ON ADVERTISING REVENUES AND UNCERTAIN ADOPTION OF THE WEB AS AN
ADVERTISING MEDIUM
The Company derives substantially all of its revenues from the sale of
advertisements on its Web pages under short-term contracts. Most of the
Company's advertising customers have limited experience with the Web as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Web-based advertising, and may not find such advertising to be
effective for promoting their products and services relative to traditional
print and broadcast media. The Company's ability to generate significant
advertising revenues will depend upon, among other things, advertisers'
acceptance of the Web as an effective and sustainable advertising medium, the
development of a large base of users of the Company's services possessing
demographic characteristics attractive to advertisers, and the ability of the
Company to continue to develop and update effective advertising delivery and
measurement systems. No standards have yet been widely accepted for the
measurement of the effectiveness of Web-based advertising, and there can be no
assurance that such standards will develop sufficiently to support Web-based
advertising as a significant advertising medium. In addition, there can be no
assurance that the advertisers will determine that banner advertising, which
comprises the majority of the Company's revenues, is an effective advertising
medium, and there can be no assurance that the Company will effectively
transition to any other forms of Web-based advertising, should they develop.
Certain advertising filter software programs are available that limit or remove
advertising from an Internet user's desktop. Such software, if generally adopted
by users, may have a materially adverse effect upon the viability of advertising
on the Internet. There also can be no assurance that the Company's advertising
customers will accept the internal and third-party measurements of impressions
received by advertisements on Yahoo! online media properties, or that such
measurements will not contain errors. The Company relies primarily on its
internal advertising sales force for domestic advertising sales, which involves
additional risks and uncertainties, including (among others) risks
23
associated with the recruitment, retention, management, training, and
motivation of sales personnel. As a result of these factors, there can be no
assurance that the Company will sustain or increase current advertising sales
levels. Failure to do so will have a material adverse effect on the Company's
business, operating results, and financial position.
SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES
The Company depends substantially upon third parties for several critical
elements of its business including, among others, technology and infrastructure,
content development, and distribution activities.
TECHNOLOGY AND INFRASTRUCTURE. In May 1998, the Company and Inktomi
entered into an agreement under which Inktomi will provide text-based Web search
results to complement the Company's directory and navigational guide. The
Inktomi service was integrated on July 1, 1998. The Company will depend
substantially upon ongoing maintenance and technical support from Inktomi to
ensure accurate and rapid presentation of such search results to the Company's
customers. Any termination of the agreement with Inktomi or Inktomi's failure to
renew such agreement upon expiration could result in substantial additional
costs to the Company in developing or licensing replacement technology, and
could result in a loss of levels of use of the Company's navigational services.
The Company also relies principally on a private third-party provider, Frontier
GlobalCenter, Inc. ("GlobalCenter"), for the Company's principal Internet
connections. Additionally, email and other service Internet connections are
provided by GTE. Any disruption in the Internet access provided by these
third-party providers or any failure of these third-party providers to handle
current or higher volumes of use could have a material adverse effect on the
Company's business, operating results, and financial condition. The Company also
licenses technology and related databases from third parties for certain
elements of Yahoo! properties, including, among others, technology underlying
the delivery of news, stock quotes and current financial information, chat
services, street mapping, telephone listings, and similar services. The Company
has experienced and expects to continue to experience interruptions and delays
in service and availability for such elements, such as recent interruptions in
the Company's stock quote services. Any errors, failures, or delays experienced
in connection with these third-party technologies and information services could
negatively impact the Company's relationship with users and adversely affect the
Company's brand and its business, and could expose the Company to liabilities to
third parties.
CONTENT DEVELOPMENT. A key element of the Company's strategy involves the
implementation of Yahoo!-branded media properties targeted for interest areas,
demographic groups, and geographic areas. In these efforts, the Company has
relied and will continue to rely substantially on content development and
localization efforts of third parties. For example, the Company has entered into
an agreement with Ziff-Davis pursuant to which Ziff-Davis publishes an online
publication and a print magazine under the Yahoo! brand. The Company also
expects to rely substantially on third-party affiliates, including SOFTBANK in
Japan and Korea, and Rogers Communications ("Rogers") in Canada, to localize,
maintain, and promote these services and to sell advertising in local markets.
There can be no assurance that the Company's current or future third-party
affiliates will
24
effectively implement these properties, or that their efforts will result in
significant revenue to the Company. Any failure of these parties to develop
and maintain high-quality and successful media properties also could result
in unfavorable dilution to the Yahoo! brand. Certain of these arrangements
also require the Company to integrate third parties' content with the
Company's services, which can require the dedication of resources and
significant programming and design efforts to accomplish. In addition, the
Company has granted exclusivity provisions to certain third parties, and may
in the future grant additional exclusivity provisions. Such exclusivity
provisions may have the effect of preventing the Company, for the duration of
such exclusivity arrangements, from accepting advertising or sponsorship
arrangements within a particular subject matter with respect to portions of
the Company's network of media properties, which could have an adverse effect
on the Company.
DISTRIBUTION RELATIONSHIPS. In order to create traffic for the Company's
online properties and make them more attractive to advertisers and consumers,
the Company has entered into certain distribution agreements and informal
relationships with leading Web browser providers (Microsoft and Netscape),
operators of online networks and leading Web sites, and computer manufacturers,
such as Compaq Computer and Gateway 2000. The Company believes these
arrangements are important to the promotion of the Company's online media
properties, particularly among new Web users who may first access the Web
through these browsers, services, Web sites, or computers. The Company's
business relationships with these companies consist of arrangements for the
positioning of access to Yahoo! properties on Web browsers and cooperative
marketing programs and licenses to include Yahoo! in online networks or services
offered by these parties, which are intended to increase the use and visibility
of Yahoo!. These distribution arrangements typically are not exclusive, and may
be terminated upon little or no notice. Third parties that provide distribution
channels for the Company may also assess fees or otherwise impose additional
conditions on the listing of Yahoo! or other online properties of the Company.
Any such event could have a material adverse effect on the Company's business,
results of operations, and financial condition.
The Company recently announced a co-branding and distribution arrangement
with MCI under which the Company will provide a Web-based online service in
conjunction with dial-up Internet access provided by MCI. In this arrangement,
the Company will depend substantially upon MCI for, among other things,
effective marketing and promotion efforts and the provision of competitive
Internet access service to customers. Any failure by MCI in these respects could
materially impair the benefits received by the Company from this arrangement,
and could negatively affect the Yahoo! brand.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been and may continue
to be subject to wide fluctuations. During the six months ended June 30, 1998,
the highest and lowest reported closing sale prices of the Company's Common
Stock on the NASDAQ Stock Market were $157.50 and $58.06, respectively. Trading
prices of the Common Stock may fluctuate in response to a number of events and
factors, such as quarterly variations in operating results, announcements of
technological innovations or new products and media
25
properties by the Company or its competitors, changes in financial estimates
and recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and news reports relating to trends in the Company's markets. In
addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the trading
price of the Company's Common Stock, regardless of the Company's operating
performance.
ENHANCEMENT OF YAHOO! PROPERTIES AND DEVELOPMENT OF NEW PROPERTIES
To remain competitive, the Company must continue to enhance and improve the
functionality, features, and content of the Yahoo! main site, as well as the
Company's other branded media properties. There can be no assurance that the
Company will be able to successfully maintain competitive user response times or
implement new features and functions, such as new search capabilities, greater
levels of user personalization, simplified searching from the Web browser,
real-time chat and Internet paging, localized content filter and information
delivery through "push" or other methods, which will involve the development of
increasingly complex technologies. The Company also expects that personalized
information services, such as the Company's recently launched Web-based email
service, will require significantly greater expenses associated with, among
other things, increased server capacity and equipment and requirements for
additional customer support personnel and systems. To the extent such additional
expenses are not offset by additional revenues from such personalized services,
the Company's financial results will be adversely affected.
The Company's future success also depends in part upon the timely
processing of Web site listings submitted by users and Web content providers,
which have increased substantially in recent periods. The Company has from time
to time experienced significant delays in the processing of submissions, and
further delays could have a material adverse effect on the Company's goodwill
among Web users and content providers, and on the Company's business.
A key element of the Company's business strategy is the development and
introduction of new Yahoo!-branded online properties targeted for specific
interest areas, user groups with particular demographic characteristics, and
geographic areas. There can be no assurance that the Company will be successful
in developing, introducing, and marketing such products or media properties or
that such products and media properties will achieve market acceptance, enhance
the Company's brand name recognition, or increase traffic on Yahoo!'s online
properties. Furthermore, enhancements of or improvements to Yahoo! or new media
properties may contain undetected errors that require significant design
modifications, resulting in a loss of customer confidence and user support and a
decrease in the value of the Company's brand name recognition. The Company's
ability to successfully develop additional targeted media properties depends
substantially on use of Yahoo! to promote such properties. If use of Yahoo!
fails to continue to grow, the Company's ability to establish other targeted
properties would be adversely affected. Any failure of the Company to
effectively develop and introduce these properties, or failure of such
properties
26
to achieve market acceptance, could adversely affect the Company's business,
results of operations, and financial condition.
INVESTMENTS IN AFFILIATES
The Company has made equity investments in affiliated companies that are
involved in the commercialization of Yahoo!-branded online properties, such as
versions of Yahoo! localized for foreign markets. The Company currently intends
to continue to make significant additional investments in such companies from
time to time in the future, as well as other companies involved in the
development of technologies or services that are complementary or related to the
Company's business, such as the December 1997 investments in GeoCities and
broadcast.com (formerly AudioNet). These affiliated companies typically are in
an early stage of development and may be expected to incur substantial losses.
As a result, the Company has recorded and expects to continue to record a share
of the losses in such affiliates attributable to the Company's ownership, which
losses have had and will continue to have an adverse effect on the Company's
results of operations. Furthermore, there can be no assurance that any
investments in such companies will result in any return, nor can there be any
assurance as to the timing of any such return, or that the Company will not lose
its entire investment. Any such investment losses could have a material adverse
effect on the Company's operating results.
MANAGEMENT OF POTENTIAL GROWTH AND INTEGRATION OF ACQUISITIONS
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational, and financial
resources. To manage its potential growth, the Company must continue to
implement and improve its operational and financial systems and to expand,
train, and manage its employee base. The process of managing advertising within
large, high traffic Web sites such as those in the Yahoo! network is an
increasingly important and complex task. The Company relies on both internal and
licensed third-party advertising inventory management and analysis systems. To
the extent that any extended failure of the Company's advertising management
system results in incorrect advertising insertions, the Company may be exposed
to "make good" obligations with its advertising customers, which, by displacing
advertising inventory, could defer advertising revenues and thereby have a
material adverse effect on the Company's business, operating results, and
financial condition. Failure of the Company's advertising management systems to
effectively scale to higher levels of use or to effectively track and provide
accurate and timely reports on advertising results also could negatively affect
the Company's relationships with advertisers and thereby have an adverse effect
on the Company's business. There can be no assurance that the Company's systems,
procedures, or controls will be adequate to support the Company's operations or
that Company management will be able to achieve the rapid execution necessary to
fully exploit the Company's market opportunity. Any inability to effectively
manage growth, if any, could have a material adverse effect on the Company's
business, operating results, and financial condition.
As part of its business strategy, the Company has completed and expects to
enter into additional business combinations and acquisitions, such as the
October 1997
27
acquisition of Four11 and the June 1998 acquisition of Viaweb. Acquisition
transactions are accompanied by a number of risks, including, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing
business, the inability of management to maximize the financial and strategic
position of the Company through the successful incorporation of acquired
technology or content and rights into the Company's products and media
properties, expenses associated with the transactions, additional expenses
associated with amortization of acquired intangible assets, the maintenance
of uniform standards, controls, procedures and policies, the impairment of
relationships with employees and customers as a result of any integration of
new management personnel, and the potential unknown liabilities associated
with acquired businesses. There can be no assurance that the Company would be
successful in addressing these risks or any other problems encountered in
connection with such acquisitions.
RISK OF CAPACITY CONSTRAINTS AND SYSTEMS FAILURES
The Company is dependent on its ability to effectively serve a high volume
of use of its online media properties. Accordingly, the performance of the
Company's online media properties is critical to the Company's reputation, its
ability to attract advertisers to the Company's Web sites, and to achieve market
acceptance of these products and media properties. Any system failure that
causes an interruption or an increase in response time of the Company's products
and media properties could result in less traffic to the Company's Web sites
and, if sustained or repeated, could reduce the attractiveness of the Company's
products and media properties to advertisers and licensees. An increase in the
volume of queries conducted through the Company's products and media properties
could strain the capacity of the software or hardware deployed by the Company,
which could lead to slower response time or system failures, and adversely
affect the number of impressions received by advertisers and thus the Company's
advertising revenues. In addition, as the number of Web pages and users
increase, there can be no assurance that the Company's products and media
properties and infrastructure will be able to scale accordingly. The Company
also faces technical challenges associated with higher levels of personalization
and localization of content delivered to users of its services, which adds
strain to the Company's development and operational resources. For example,
personalized information services, such as Web-based email services, involve
increasingly complex technical and operational challenges, and there can be no
assurance that the Company will successfully implement and scale such services
to the extent required by any growth in the number of users of such services, or
that the failure to do so will not materially and adversely affect the goodwill
of users of these services, or negatively affect the Company's brand and
reputation. The Company is also dependent upon Web browsers and Internet and
online service providers for access to its products and media properties. In
particular, a private third-party provider, GlobalCenter, provides the Company's
principal Internet connections. In the past, users have occasionally experienced
difficulties due to system failures, including failures unrelated to the
Company's systems. Additionally, Internet connections for the Company's
Web-based email services are provided by GTE. Any disruption in the Internet
access provided by these third-party providers or any failure of these
third-party providers to handle higher volumes of user traffic could have a
material adverse effect on the Company's business, operating results, and
financial condition. Furthermore, the Company
28
is dependent on hardware suppliers for prompt delivery, installation, and
service of servers and other equipment used to deliver the Company's products
and services.
The Company's operations are susceptible to outages due to fire, floods,
power loss, telecommunications failures, break-ins, and similar events. In
addition, substantially all of the Company's network infrastructure is located
in Northern California, an area susceptible to earthquakes, which also could
cause system outages or failures. The Company does not presently have multiple
site capacity in the event of any such occurrence. Despite the implementation of
network security measures by the Company, its servers are vulnerable to computer
viruses, break-ins, and similar disruptions from unauthorized tampering with the
Company's computer systems. The Company does not carry sufficient business
interruption insurance to compensate the Company for losses that may occur as a
result of any of these events. Such events could have a material adverse effect
on the Company's business, operating results, and financial condition.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade dress, trade secrets,
and similar intellectual property as critical to its success, and the Company
relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States and internationally, and has
applied for and obtained the registration for certain of its trademarks,
including "Yahoo!" and "Yahooligans!". Effective trademark, copyright, and trade
secret protection may not be available in every country in which the Company's
products and media properties are distributed or made available through the
Internet. The Company has licensed in the past, and it expects that it may
license in the future, elements of its distinctive trademarks, trade dress, and
similar proprietary rights to third parties, including in connection with
branded mirror sites of Yahoo!, and other media properties and merchandise that
may be controlled operationally by third parties. While the Company attempts to
ensure that the quality of its brand is maintained by such licensees, no
assurances can be given that such licensees will not take actions that could
materially and adversely affect the value of the Company's proprietary rights or
the reputation of its products and media properties, either of which could have
a material adverse effect on the Company's business. Also, the Company is aware
that third parties have from time to time copied significant portions of Yahoo!
directory listings for use in competitive Internet navigational tools and
services, and there can be no assurance that the distinctive elements of Yahoo!
will be protectible under copyright law. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate or
that third parties will not infringe or misappropriate the Company's copyrights,
trademarks, trade dress, and similar proprietary rights. In addition, there can
be no assurance that other parties will not assert infringement claims against
the Company.
Many parties are actively developing search, indexing, and related Web
technologies at the present time. The Company believes that such parties have
taken and will continue to take steps to protect these technologies, including
seeking patent protection. As a result, the Company believes that disputes
regarding the ownership of such
29
technologies are likely to arise in the future. For example, the Company is
aware that a number of patents have been issued in the areas of electronic
commerce and Web-based information indexing and retrieval (including patents
recently issued to one of the Company's direct competitors), and the Company
anticipates that additional third-party patents will be issued in the future.
There can be no assurance that the technology recently acquired through the
Viaweb acquisition, or any other technology relating to the Company's
business that has been or may be developed by the Company or licensed from
third parties, will not be determined to infringe one or more third-party
patents. In the event of such infringement, there can be no assurance that
the Company will be able to license such patents on reasonable terms, if any,
or that such infringement will not result in substantial monetary liability
to the Company, including substantial expenses that may be incurred in
defending against third-party patent claims regardless of the merit of such
claims.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its senior management and key technical personnel. In particular, the Company's
success depends substantially on the continued efforts of its senior management
team. The Company does not carry key person life insurance on any of its senior
management personnel. The loss of the services of any of its executive officers
or other key employees could have a material adverse effect on the business,
operating results, and financial condition of the Company.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material and adverse
effect upon the Company's business, operating results, and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
There are currently few laws or regulations directly applicable to access
to or commerce on the Internet. Due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, defamation,
pricing, taxation, content regulation, quality of products and services, and
intellectual property ownership and infringement. For example, although the
Communications Decency Act was held to be unconstitutional, there can be no
assurance that similar legislation will not be enacted in the future, and it is
possible that such legislation could expose the Company to substantial
liability. Such legislation could also dampen the growth in use of the Web
generally, decrease the acceptance of the Web as a communications and commercial
medium and require the Company to incur expense in complying with any new
regulations, and could, thereby, have a material adverse effect on the Company's
business, results of operations, and financial condition. Other nations,
including Germany, have taken actions to restrict the free flow of
30
material deemed to be objectionable on the Web, and the European Union has
recently adopted privacy and copyright directives that may impose additional
burdens and costs on the Company's international operations. In addition,
several telecommunications carriers are seeking to have telecommunications
over the Web regulated by the Federal Communications Commission (the "FCC")
in the same manner as other telecommunications services. For example,
America's Carriers Telecommunications Association ("ACTA") has filed a
petition with the FCC for this purpose. In addition, because the growing
popularity and use of the Web has burdened the existing telecommunications
infrastructure and many areas with high Web use have begun to experience
interruptions in phone service, local telephone carriers, such as Pacific
Bell, have petitioned the FCC to regulate ISPs and OSPs in a manner similar
to long distance telephone carriers and to impose access fees on the ISPs and
OSPs. If either of these petitions is granted, or the relief sought therein
is otherwise granted, the costs of communicating on the Web could increase
substantially, potentially slowing the growth in use of the Web, which could
in turn decrease the demand for the Company's products and media properties.
A number of proposals have been made at the federal, state and local level
that would impose additional taxes on the sale of goods and services through
the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce, and could adversely affect the Company's
opportunity to derive financial benefit from such activities. Also,
legislation is pending in Congress that would impose liability on online
service providers such as the Company for listing or linking to third-party
Web sites or hosting third-party Web sites that include materials that
infringe copyrights or other rights of others. In addition, a number of other
countries have announced or are considering additional regulation in many of
the foregoing areas. Such laws and regulations if enacted in the United
States or abroad could fundamentally impair the Company's ability to provide
Internet navigation services, or substantially increase the cost of doing so,
which would have a material adverse effect on the Company's business,
operating results, and financial condition. Moreover, the applicability to
the Internet of the existing laws governing issues such as property
ownership, copyright, defamation, obscenity, and personal privacy is
uncertain, and the Company may be subject to claims that its services violate
such laws. Any such new legislation or regulation in the United States or
abroad or the application of existing laws and regulations to the Internet
could have a material adverse effect on the Company's business, operating
results, and financial condition.
Due to the global nature of the Web, it is possible that, although
transmissions by the Company over the Internet originate primarily in the State
of California, the governments of other states and foreign countries might
attempt to regulate the Company's transmissions or prosecute the Company for
violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that the
Company might not unintentionally violate such law or that such laws will not be
modified, or new laws enacted, in the future. Any of the foregoing developments
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
31
LIABILITY FOR INFORMATION SERVICES
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company and may be subsequently distributed to
others, there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature and content of such materials. Such claims
have been brought, and sometimes successfully pressed, against online service
providers in the past. In addition, the Company could be exposed to liability
with respect to the selection of listings that may be accessible through the
Company's Yahoo!-branded products and media properties, or through content and
materials that may be posted by users in classifieds, message board and chat
room services offered by the Company. Such claims might include, among others,
that by providing hypertext links to Web sites operated by third parties, the
Company is liable for copyright or trademark infringement or other wrongful
actions by such third parties through such Web sites, or that the Company is
responsible for legal injury caused by statements made for or actions taken by
participants in the Company's message board services. It is also possible that
if any information provided through the Company's services, such as stock
quotes, analyst estimates or other trading information, contains errors, third
parties could make claims against the Company for losses incurred in reliance on
such information. The Company offers Web-based email services, which expose the
Company to potential risks, such as liabilities or claims resulting from
unsolicited email (spamming), lost or misdirected messages, illegal or
fraudulent use of email or interruptions or delays in email service. Even to the
extent such claims do not result in liability to the Company, the Company
expects to incur significant costs in investigating and defending such claims.
The Company also from time to time enters into arrangements to offer
third-party products and services under the Yahoo! brand or via distribution on
Yahoo! properties. For example, the Company recently announced an agreement with
GeoCities under which GeoCities will offer free home page services and certain
related products to Yahoo! users. The Company also recently announced an
arrangement with broadcast.com, an Internet-based broadcast network, whereby
links to broadcast.com's site and content will be distributed via Yahoo!
properties. These business arrangements involve additional legal risks, such as
potential liabilities for content posted by free home page users or made
available by other third-party providers. The Company may be subject to claims
concerning such services or content by virtue of the Company's involvement in
marketing, branding or providing access to such services, even if the Company
does not itself host, operate, or provide such services. While the Company's
agreements with these parties often provide that the Company will be indemnified
against such liabilities, there can be no assurance that such indemnification,
if available, will be adequate.
POTENTIAL COMMERCE-RELATED LIABILITIES AND EXPENSES
As part of its business, the Company enters into agreements with sponsors,
content providers, service providers, and merchants under which the Company is
entitled to receive a share of revenue from the purchase of goods and services
by users of the Company's online properties. Such arrangements may expose the
Company to additional legal risks and uncertainties, including (without
limitation) potential liabilities to consumers of such
32
products and services. Although the Company carries general liability
insurance, the Company's insurance may not cover potential claims of this
type or may not be adequate to indemnify the Company for all liability that
may be imposed.
The Company recently began offering a Yahoo!-branded VISA credit card,
which includes a "rewards" program entitling card users to receive points that
may be redeemed for merchandise, such as books or music. This arrangement
exposes the Company to certain additional risks and expenses, including, without
limitation, those relating to compliance with consumer protection laws, loss of
customer data, disputes over redemption procedures and rules, products
liability, sales taxation and liabilities associated with any failure in
performance by participating merchants.
In June 1998, the Company completed the acquisition of Viaweb, a provider
of software and reporting tools for the operation of online commerce Web sites.
The Company intends to use the Viaweb technology to host and promote online
stores on behalf of third-party merchants, the operation and maintenance of
which will be largely under the independent control of such merchants. These
activities expose the Company to a number of additional risks and uncertainties,
including (without limitation) potential liabilities for illegal activities that
may be conducted by participating merchants; products liability or other tort
claims relating to goods or services sold through hosted commerce sites;
consumer fraud and false or deceptive advertising or sales practices; breach of
contract claims relating to merchant transactions; claims that materials
included in merchant sites or sold by merchants through these sites infringe
third-party patents, copyrights, trademarks or other intellectual property
rights, or are libelous, defamatory or in breach of third-party confidentiality
or privacy rights; claims relating to any failure of merchants to appropriately
collect and remit sales or other taxes arising from e-commerce transactions; and
claims that may be brought by merchants as a result of their exclusion from the
Company's commerce services or losses resulting from any downtime or other
performance failures in the Company's hosting services. Although the Company
maintains liability insurance, there can be no assurance that insurance will
cover these claims or that such coverage, if available, will be adequate. Even
to the extent such claims do not result in material liability to the Company,
the Company expects to incur significant costs in investigating and defending
such claims.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. Although the Company
believes that its systems are Year 2000 compliant in all material respects,
there can be no assurances that the Company's current systems and products do
not contain undetected errors or defects with Year 2000 date functions that may
result in material costs to the Company. Although the Company is not aware of
any material operational issues or costs associated with preparing its internal
systems for the Year 2000, there can be no assurances that the Company will not
experience serious
33
unanticipated negative consequences (such as significant downtime for one or
more Yahoo! media properties) and/or material costs caused by undetected
errors or defects in the technology used in its internal systems. In
addition, the Company utilizes third-party equipment, software and content
that may not be Year 2000 compliant. Failure of such third-party equipment,
software or content to operate properly with regard to the year 2000 and
thereafter could require the Company to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Furthermore, the purchasing patterns of advertisers may be affected by Year
2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available for Web advertising or sponsorship of Web services,
which could have a material adverse effect on the Company's business, results
of operations and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
A key part of the Company's strategy is to develop Yahoo!-branded online
properties in international markets. The Company has developed and operates,
through joint ventures with SOFTBANK and related entities, versions of Yahoo!
localized for Japan, Germany, France, the United Kingdom, and Korea. The Company
offers a version of Yahoo! localized for Canada under an agreement with Rogers
Communications, and the Company operates localized or mirror versions of Yahoo!
through wholly-owned subsidiaries in Australia, Denmark, Italy, Norway, Sweden,
and Singapore. The Company also offers Yahoo! guides in Spanish and Mandarin
Chinese languages.
To date, the Company has only limited experience in developing localized
versions of its products and marketing and operating its products and services
internationally, and the Company relies substantially on the efforts and
abilities of its foreign business partners in such activities. The Company also
believes that in light of substantial anticipated competition, it will be
necessary to move quickly into international markets in order to effectively
obtain market share, and there can be no assurance that the Company will be able
to do so. The Company has experienced and expects to continue to experience
higher costs as a percentage of revenues in connection with international online
properties than domestic online properties. There can be no assurance that the
international markets addressed by the Company will develop at a rate that
supports the Company's level of investment. If revenues from these markets are
not adequate to offset investments in such activities, the Company's business,
operating results, and financial condition could be materially adversely
affected. The Company may experience difficulty in managing international
operations as a result of distance as well as language and cultural differences,
and there can be no assurance that the Company or its partners will be able to
successfully market and operate its products and services in foreign markets. In
addition, in a number of international markets the Company faces substantial
competition from ISPs, some of which have a dominant market share in their
territories, that offer or may offer their own navigational service.
In addition to the uncertainty as to the Company's ability to continue to
generate revenues from its foreign operations and expand its international
presence, there are certain risks inherent in doing business on an international
level, such as unexpected changes in
34
regulatory requirements, trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political instability, export restrictions, export
controls relating to encryption technology, seasonal reductions in business
activity in certain other parts of the world, and potentially adverse tax
consequences. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, operating results,
and financial condition.
CONCENTRATION OF STOCK OWNERSHIP
As of July 15, 1998, the present directors, executive officers, and their
respective affiliates beneficially owned approximately 59% of the outstanding
Common Stock of the Company. As of July 15, 1998, SOFTBANK owned approximately
31% of the outstanding Common Stock. As a result of their ownership, the
directors, executive officers, greater than 5% shareholders and their respective
affiliates (including SOFTBANK) collectively are able to control all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of the Company.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors has the authority to issue up to 10,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the shareholders. The rights of the holders of Common Stock
may be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company without further action by the shareholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The Company has no present plans to issue shares of Preferred Stock. Further,
certain provisions of the Company's charter documents, including provisions
eliminating the ability of shareholders to take action by written consent and
limiting the ability of shareholders to raise matters at a meeting of
shareholders without giving advance notice, may have the effect of delaying or
preventing changes in control or management of the Company, which could have an
adverse effect on the market price of the Company's Common Stock. In addition,
the Company's charter documents do not permit cumulative voting and provide
that, at such time as the Company has at least six directors, the Company's
Board of Directors will be divided into two classes, each of which serves for a
staggered two-year term, which may make it more difficult for a third-party to
gain control of the Company's Board of Directors.
35
SHARES ELIGIBLE FOR FUTURE SALE
As of June 30, 1998, the Company had outstanding 46,841,560 pre-split
shares of Common Stock, and options to purchase a total of 11,570,692 pre-split
shares of the Company's Common Stock under the Company's stock option plans,
including shares issued and options assumed in the recent acquisition of Viaweb.
Of these shares, an estimated number of 3,186,132 pre-split shares recently
issued in connection with acquisitions and investments have been or will be
available for resale pursuant to registration statements filed by the Company
with the SEC. Sales of substantial amounts of such shares in the public market
or the prospect of such sales could adversely affect the market price of the
Company's Common Stock.
36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, in July and October 1997, GTE New Media Services
Incorporated ("GTE New Media") filed lawsuits in state court in Dallas, Texas
and in federal court in the District of Columbia, against Netscape and the
Company, which lawsuits relate to certain Yellow Pages services offered in the
Netscape Guide By Yahoo!. In June 1998, the Company entered into agreements
with GTE New Media that provide for the dismissal of, and mutual release with
respect to, both lawsuits without any payment or consideration by the Company,
and, with respect to the Texas case, subject only to certain conditions that the
Company anticipates will be fulfilled by October 1998.
From time to time the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks, copyrights and other intellectual property rights,
and a variety of claims arising in connection with the Company's email, message
boards, and other communications and community features, such as claims alleging
defamation and invasion of privacy. The Company is not currently aware of any
legal proceedings or claims that the Company believes will have, individually or
in the aggregate, a material adverse effect on the Company's financial position
or results of operations.
ITEM 2. CHANGES IN SECURITIES
Yahoo! Inc. made the following unregistered sales of the Company's Common
Stock in the quarter ended June 30, 1998:
PERSONS OR CLASS
NAME OF OF PERSONS TO EXEMPTION
UNDERWRITER OR WHOM THE FROM
TRANSACTION AMOUNT OF PLACEMENT CONSIDERATION SECURITIES WERE REGISTRATION
DATE SECURITIES SOLD AGENT RECEIVED SOLD CLAIMED
- ----------- ------------------- -------------- ------------- ---------------- ---------------
6/10/98 393,591 Shares (1) None (1) Stockholders of Section 4(2) of
Viaweb Inc. the Securities
Act of 1933, as
amended
(1) Pursuant to an Agreement and Plan of Merger dated June 4, 1998, by and
among Yahoo!, XY Acquisition Corporation, a wholly-owned subsidiary of
Yahoo!, and Viaweb Inc. ("Viaweb"), on June 10, 1998 (the effective date of
the acquisition), all outstanding shares of Viaweb capital stock were
converted into 393,591 pre-split shares of Yahoo! Common Stock. The resale
of these shares has been registered on a Registration Statement on Form S-3
filed with the Securities and Exchange Commission on June 12, 1998.
37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The exhibits listed in the accompanying Index to Exhibits are filed as
part of this Report on Form 10-Q.
b. Reports on Form 8-K:
1) On June 8, 1998, the Company filed a report on Form 8-K, pursuant
to Item 5 of such Form, announcing that it had entered into an
Agreement and Plan of Merger to acquire Viaweb Inc.
2) On June 12, 1998, the Company filed a report on Form 8-K (as
amended by Form 8-K/A filed on June 18, 1998), pursuant to Items 2
and 7 of such Form, regarding its acquisition of Viaweb Inc.
38
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: July 17, 1998 By: /s/ Gary Valenzuela
-------------------------
Gary Valenzuela
Senior Vice President, Finance
and Administration, and Chief
Financial Officer
(Principal Financial Officer)
Dated: July 17, 1998 By: /s/ James J. Nelson
-------------------------
James J. Nelson
Vice President, Finance
(Principal Accounting Officer)
39
YAHOO! INC.
INDEX TO EXHIBITS
Exhibit
Title No.
- ----- -------
Stock Purchase Agreement dated as of July 7, 1998, between Yahoo!
and SOFTBANK Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . 10.1
Amendment to Second Amended and Restated Investor Rights Agreement
dated July 7, 1998 among Yahoo!, SOFTBANK Holdings Inc., Sequoia
Capital VI and Sequioia Technology Partners VI . . . . . . . . . . . . 10.2
Content License Agreement dated January 8, 1998 between Yahoo! and
ZDNet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . 27