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Presented to
Dr. Kamal Hingorani
Alabama State University
College of Business and Administration
In partial fulfillment of requirements
for
Advanced Accounting Information Systems
ACT 516
by Margie Toney
April 5, 2004
YAHOO!
Executive Summary
Founded in 1994 by two graduate students at Stanford University, Yahoo! Inc. is today
the leading global Internet communications, commerce and media company. The company’s
properties and services for consumers and businesses reside in five vertical areas: Search and
Marketplace, Information and Content, Network and Platform Services, Enterprise Solutions and
Consumer Services.
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Corporate History and Background Information
The name Yahoo! is an acronym for “Yet Another Hierarchical Officious Oracle.”
Founders David Filo and Jerry Yang, Ph.D., selected the name because they liked the general
definition of a yahoo: “rude, unsophisticated, uncouth.” Filo and Yang, candidates in Electrical
Engineering at Stanford University, launched Yahoo! in February of 1994. Originally, it was
just a student hobby, started by Filo and Yang as a way to keep track of their personal interests
on the Internet. Eventually, their home-brewed lists of favorite links became too long and
unwieldy, so they divided the links into categories. When the categories became too full, they
broke them out further into subcategories. This was the core concept behind Yahoo! It was the
first online navigational guide to the Web. In 1995, the pair incorporated the business and met
with dozens of Silicon Valley venture capitalists. Sequoia Capital agreed to fund Yahoo! in
April of 1995 with an initial investment of nearly $2 million. Later that year, the company
secured a second round of funding from Reuters Ltd. and Softbank. In 1996, Yahoo! launched a
highly-successful IPO with a total of 49 employees. The opening price of Yahoo!’s stock on the
day of the IPO was $13.00 per share. The closing price was $33.00 per share.
Today, Yahoo! is the Internet’s leading global consumer and business services company,
offering a comprehensive network of essential services for Web users around the globe as well as
businesses of all sizes. By March 2003, traffic on the Yahoo! global network of properties had
increased to an average of 1.9 billion page views per day.
Yahoo! offers communication services that include Yahoo! Mail, Yahoo! Messenger,
Yahoo! Calendar, Yahoo! Chat, Yahoo! Greetings, Yahoo! Clubs and Yahoo! Photos. The
company also offers commerce services such as Yahoo! Shopping, Yahoo! Auctions, Yahoo!
Finance and Yahoo! Travel. In addition to communication and commerce, Yahoo! partners with
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premier content providers to offer content and media programming including Yahoo! Sports,
Yahoo! Music, Yahoo! Movies, Yahoo! News and Yahoo! Games. To accommodate the
lifestyles of the mobile consumer, Yahoo offers essential, personalized, localized and timely
information on wireless devices, including wireless phones, two-way pagers and personal digital
assistants. Yahoo! has the largest global mobile audience and the greatest selection of wireless
products and services of any Web content provider.
Yahoo! also offers a range of services for businesses and enterprises of all sizes.
Corporate Yahoo! is an information portal solution that enables companies to communicate and
interact directly with their employees, customers and shareholders over a secure and scalable
platform. Yahoo! Broadcast services is the leading provider of Internet audio and video
streaming solutions for corporate and consumer communications, delivering thousands of live
and on-demand corporate events including: product launches, marketing programs,
training/distance learning, keynote addresses, annual shareholder meetings, and quarterly
earnings calls. Yahoo!’s Small Business Services enable small business and professionals to
establish and grow a business presence with services such as Yahoo! Domains, Yahoo! Website
Services, Yahoo! Servers and Yahoo! Store. An industry leader in online advertising, Yahoo!
offers an integrated set of marketing services through Yahoo! Fusion Marketing that unite
Yahoo’s media, e-commerce, direct marketing, broadcast, and communication tools. Yahoo!
boasts that it is “the only place anyone needs to go to find anything, communicate with anyone,
or buy anything.”
Yahoo!’s mission is “to be the most essential global Internet service for consumers and
businesses.” The company focuses on a set of core values, many of which were put into practice
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by founders Filo and Yang. These values include excellence, innovation, customer fixation,
teamwork, community, and fun. The company strives to achieve these standards every day.
The company is headquartered in Sunnydale, California and has global offices in Europe,
Asia, Latin America, Australia, Canada and the United States. Yahoo! reaches over 237 million
unique users in 25 countries and 13 languages. At last count, the company had 5,500 employees.
Yahoo!’s market capitalization on April 7, 2004 was $32.59B.
Management’s Discussion and Analysis (Form 10-Q filed on 11/07/2003)
The following are some of the salient features discussed by Management:
On October 7, 2003, Yahoo! completed the acquisition of Overture Services, Inc.,
a provider of commercial search services on the Internet. Revenues from the
Company’s agreement with Overture amounted to approximately 20% of total net
revenues for the nine months ended September 30, 2003.
Total net revenues for the three months ended September 30, 2003 were $357
million with Marketing Services contributing 69%, at $245 million. Marketing
services revenues are primarily generated from the sale of banner, sponsorship,
and text-link advertisements, including sponsored search services primarily
provided through the Company’s agreement with Overture. The other
components of net revenues are fees (22% of total net revenues) and listings (9%
of total net revenues). Fees revenues consist of revenues generated from a variety
of consumer and business fee-based services. Listing revenues consist of
revenues generated from a variety of consumer and business listings-based
services. These services primarily include access to the HotJobs database and
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classifieds such as Yahoo! Autos, Yahoo! Real Estate and other Search and
Directory Services.
Primary operating costs and expenses for the three months ending September 30,
2003 were comprised of cost of revenues, sales and marketing, product
development, and general and administrative costs. Cost of revenues (13% of net
revenues) consists of the expense associated with the production and usage of the
Yahoo! network. 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, technology license fees and compensation
related expenses. Sales and marketing expenses amounted to 36% of net
revenues. These expenses consist primarily of advertising and other market
related expenses, compensation related expenses, sales commissions and travel
costs. Product development expenses (13% of net revenues) consist primarily of
compensation related expenses incurred for enhancements to and maintenance of
the Yahoo! network, classification and organization of listings within Yahoo!
properties, research and development expenses, and other operating costs.
General and administrative expenses (11% of net revenues) consist primarily of
compensation related expenses and fees for professional services.
The company adopted the provisions of SFAS 14, “Goodwill and Other Intangible
Assets, effective January 1, 2002. The Company performed a transitional
impairment test of goodwill and intangibles as of the same date. Due to, among
other things, the overall softening of the global economy and the related decline in
international advertising, Yahoo! recorded a transitional goodwill impairment loss
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of approximately $64 million, which was recorded as a cumulative effect of an
accounting change in the Company’s condensed Consolidated Statement of
Operations.
Yahoo! is managed geographically. The principal areas of measurement and
decision-making are the United States and International. Management believes
that segment operating income before depreciation and amortization is an
appropriate measure of evaluating the operating performance of the Company’s
segments. The primary areas of measurement and decision-making are the United
States and International. Revenue is attributed to individual countries according
to the international online property that generated the revenue. No single foreign
country accounted for more than 10% of net revenues during the three months and
nine months ended September 30, 2003. For the three months ended September
30, 2003, the United States segment accounted for 84% of total net revenues, at
approximately $300 million dollars. For the same period, the International
segment accounted for the remaining 16% of total net revenues, at approximately
$57 million. The United States segment reported segment operating income
before depreciation and amortization of $106 million, 35% of total net revenues.
The International segment reported $10 million in segment operating income
before depreciation and amortization.
The company reported goodwill from the $289.6 million purchase of Inktomi
Corporation, a provider of original equipment manufacturer Web search and paid
inclusion services. The acquisition combined Yahoo!’s global audience and
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Inktomi’s search technology to allow a more relevant, comprehensive and higher
quality search offering on the Web.
The company has joint ventures with SOFTBANK in France, Germany, Japan,
Korea and the United Kingdom. In addition, the Company has license agreements
with Yahoo! Japan and Yahoo! Korea, from which, in each case, it received in
excess of $60,000 in royalty payments during the nine months ended September
30, 2003. Pursuant to these license agreements the Company licenses specified
uses of the Yahoo! band and business model to each of Yahoo! Japan and Yahoo!
Korea on an exclusive basis in Japan and Korea, respectively, in exchange for
licensing fees.
YAHOO!’S HOME PAGE
Yahoo’s home page is bright, colorful and user-friendly. In keeping with the Company’s
assertion that Yahoo! is the “only place anyone needs to go find anything, communicate with
anyone, or buy anything,” the home page offers numerous links to everything from travel and
vacation information to finance to job searches. There are major categories labeled according to
what the visitor needs to do: Shop, Find, Connect, Organize, Fun, and Info. Within each major
category are subcategories which lead to more detailed links. There is a Web Site Directory,
organized by subject. The visitor can search the Web, catch up on news, get car insurance
quotes, read or write mail, pay bills, or get a movie review, among many other choices. There
are links to Yahoo! Business Services (Sell Online, Buy Online, Get a Domain, etc…) and
Yahoo! Premium Services, such as Fantasy Baseball and PC Games. The home page includes
links to Yahoo! in foreign countries and guides to Health and Education.
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Yahoo’s Home Page
RECENT PRESS RELEASE
Yahoo! reported its fourth quarter and full year 2003 financial results in a press release
on January 14, 2004. Terry Semel, Chairman and Chief Executive Officer, stated that 2003 was
a year of phenomenal growth for Yahoo! Yahoo!’s fourth quarter performance represented the
most successful quarter in the history of Yahoo! Across the board improvements resulted in
deeper and more profitable relationships with Yahoo!’s customers. Management believes the
key to the company’s long-term growth continues to be building and improving products
essential to its customers’ lives.
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The press release gives selected financial results showing significant increases in
revenues, gross profit, operating income, cash flow from operating activities, and free cash flow.
Chief Financial Officer Susan Decker expressed Management’s pleasure with the strength of the
fourth quarter and year-end results. She stated that the financial results reflect the strength of the
Company’s current fundamentals and represent growth in its key longer-term initiatives.
PRESS COVERAGE
On March 2, 2004, the New York Times reported Yahoo!’s announcement that it would
start charging companies that want to ensure that their Web sites are included in its Web index
from which research results are selected. Paid inclusion, as the practice is called, has been a part
of Microsoft’s and Ask Jeeve’s search engine for a long time.
Yahoo! says it hopes to include every site on the Internet in its index at no charge, but
says that sites that pay for Yahoo!’s new program are guaranteed to be included in the index.
The index of paying clients will be updated every two days, while the other site listing may be
updated only monthly. Also, paying clients will receive detailed reports on when Yahoo! users
click on their sites, which will improve their listings.
Executives at firms who hire companies to tweak their Web pages admit that paying sites
do jump ahead of nonpaying sites. Paying sites can submit additional information to help the
search engine associate their pages with a given topic. Sites will pay from $10 to $49 for each
Web page indexed and from 15 cents to $1 each time a Yahoo! User clicks on a link to their
sites.
YAHOO!’S FINANCIAL STATEMENTS
Yahoo!’s balance sheet for December 31, 2003 reports total current assets of
$1,721,709,000, a 77.5% increase over total current assets at December 31, 2002. Total assets
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amounted to $5,931,654,000, a 113% increase over total assets at December 31, 2002. Total
current liabilities increased by 72% over the December 31, 2002 balance, growing from
$411,814,000 to $707,796,000. Total liabilities increased by 197% during the same period,
growing from $527,911,000 to $1,568,164,000 due in part to increases in accounts payable and
long-term debt. Yahoo!’s current ratio (total current assets/total current liabilities) at December
31, 2003 was 2.43. The debt to equity ratio (total debt/total equity) was .36. The net working
capital ratio (net working capital/total assets) was 17.1%. The accounts receivable turnover ratio
(sales/average accounts receivable) was 8.21%.
Yahoo!’s total revenue for the period ended December 31, 2003 was $1,625,097,000 a
71% increase over the total revenue for the period ended December 31, 2002. Cost of revenue
rose by 119% over 2002 cost, from $162,881,000 to $358,103,000. Gross profit for the 2003
year was $1,266,994, up by 60% over 2002 gross profit (See Revenue and Gross Profit chart
below).
Revenue and Cost of Revenue, Years
Ended 2001, 2002, 2003
(All numbers in thousands)
$2,000,000
Total Revenue
$1,500,000
Cost of
$1,000,000
Revenue
$500,000 Gross Profit
$0
2001 2002 2003
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Yahoo!’s income for 2003 was $237,879,000 an amazing 455% increase over net income
for 2002 (See Chart 2). The net profit margin (net income/total operating revenue) for 2003 was
14.6%. Return on assets (net income/average total assets) was 5.5%. Return on equity (net
income/average stockholder’s equity) was 7.2%. The assets turnover ratio (sales/average total
assets) was 37.3%. Earnings per share at December 31, 2003 were $.37 (See Net Income chart
next page).
Net Income
(All numbers in thousands)
$300,000
$250,000
$200,000
$150,000
$100,000
Net Income
$50,000
$0
-$50,000 2001 2002 2003
-$100,000
-$150,000
Yahoo!’s cash flow statement for the period ended December 31, 2003 reported results of
operating, investing, and financing activities. The total cash flow from operating activities was
$428,144,000. The result of investing activities was a negative cash flow of $1,121,589,000.
Cash flow from financing activities was $1,086,326,000. The change in cash and cash
equivalents for the year was $402, 567, 000, an increase of $464,227,000 over the 2002 negative
cash flow of $61,660,000.
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Yahoo! manages its business geographically. The United States segment accounted for
$1.4 billion dollars in revenues and the International segment accounted for $270 million dollars
in revenues for the year ended December 31, 2003.
YAHOO! Revenues by Segment
Year ended 12/31/2003
16.6%
United States
International
83.4%
From March 2003 to March 2004, Yahoo!’s stock price rose from approximately $24.00 per
share to nearly $50.00 per share (See chart below).
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A share of stock cost $13.00 at YAHOO!’s initial public offering in 1996. Due to stock
splits, that same share of stock would have split to 12 shares by February of 2000. At the April
7, 2004 closing price of $48.35, 12 shares would represent an investment of $580.20.
Yahoo! has come a long way from its almost accidental beginning as a student hobby in
1994. Jerry Yang and David Filo had no way of knowing that their home-brewed list of favorite
links would grow into a leading global Internet communications, commerce, and media
company. The Company now attracts millions of users every day. Its mission is to be the most
essential global Internet service for consumers and businesses. Yahoo! experienced remarkably
profitable growth during 2003. If Yahoo! remains committed to its core values (excellence,
innovation, customer fixation, teamwork, community, and fun) and continues to focus on
building and improving products and services essential to its customers' lives, the Company
should enjoy the fruits of its labor for many years and maintain its dominance in the global
Internet industry.
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