Yahoo! Reports Fourth Quarter and Full Year 2007 Financial Results

Yahoo! Inc. (Nasdaq:YHOO) today reported results for the fourth quarter and full year ended December 31, 2007. "We are executing aggressively against Yahoo!'s three big strategic priorities and that hard work is starting to bear fruit, as evidenced by the 20% year-over-year growth in O&O marketing services we achieved in the fourth quarter. This is a pivotal time for Yahoo!’s business and we have a unique window of opportunity right now to make the necessary, game-changing investments that will help us capture a significant piece of the growing ad market and create substantial long-term value for our shareholders,” said Jerry Yang, co-founder and chief executive officer, Yahoo! Inc. "While we will continue to face headwinds this year, we believe that the moves we are making will help us exit 2008 stronger and more competitive and return to higher levels of operating cash flow growth in 2009.” Fourth Quarter 2007 Financial Results Revenues were $1,832 million for the fourth quarter of 2007, an 8 percent increase compared to $1,702 million for the same period of 2006. Marketing services revenues were $1,590 million for the fourth quarter of 2007, a 7 percent increase compared to $1,490 million for the same period of 2006. Marketing services revenues from Owned and Operated sites were $1,035 million for the fourth quarter of 2007, a 21 percent increase compared to $853 million for the same period of 2006. Marketing services revenues from Affiliate sites were $555 million for the fourth quarter of 2007, a 13 percent decrease compared to $637 million for the same period of 2006. Fees revenues were $242 million for the fourth quarter of 2007, a 14 percent increase compared to $213 million for the same period of 2006. Revenues excluding traffic acquisition costs ("TAC”) were $1,403 million for the fourth quarter of 2007, a 14 percent increase compared to $1,228 million for the same period of 2006. Gross profit for the fourth quarter of 2007 was $1,130 million, a 12 percent increase compared to $1,012 million for the same period of 2006. Operating income for the fourth quarter of 2007 was $191 million, a 38 percent decrease compared to $308 million for the same period of 2006. Operating income before depreciation, amortization, and stock-based compensation expense for the fourth quarter of 2007 was $527 million, a 2 percent decrease compared to $540 million for the same period of 2006. Cash flow from operating activities for the fourth quarter of 2007 was $657 million, a 293 percent increase compared to $167 million for the same period of 2006. Free cash flow for the fourth quarter of 2007 was $330 million, a 19 percent increase compared to $278 million for the same period of 2006. Net income for the fourth quarter of 2007 was $206 million or $0.15 per diluted share compared to $269 million or $0.19 per diluted share for the same period of 2006. Non-GAAP net income for the fourth quarter of 2007 was $280 million or $0.20 per diluted share compared to non-GAAP net income of $297 million or $0.21 per diluted share for the same period of 2006. Fourth Quarter 2007 Segment Financial Results United States segment revenues for the fourth quarter of 2007 were $1,313 million, a 15 percent increase compared to $1,145 million for the same period of 2006. International segment revenues for the fourth quarter of 2007 were $519 million, a 7 percent decrease compared to $558 million for the same period of 2006. United States segment operating income before depreciation, amortization, and stock-based compensation expense for the fourth quarter of 2007 was $391 million, a 5 percent decrease compared to $410 million for the same period of 2006. International segment operating income before depreciation, amortization, and stock-based compensation expense for the fourth quarter of 2007 was $136 million, a 5 percent increase compared to $130 million for the same period of 2006. "The steps we’ve been taking over the course of the past year represent profound, fundamental changes to virtually every aspect of Yahoo!’s business, and we're confident they will help us drive our next leg of growth and gain future ad market share. Even as we increase investment in key areas of our business, we’re making tough but necessary decisions to streamline our organization and redeploy assets to our most promising technology and marketing initiatives,” said Sue Decker, president, Yahoo! Inc. "We still have a tremendous amount of work to do, but we’re confident we can substantially improve our users' experiences and achieve meaningful incremental monetization opportunities for Yahoo!’s own ad inventory and that of our partners.” Full Year 2007 Financial Results Revenues were $6,969 million for 2007, an 8 percent increase compared to $6,426 million for 2006. Marketing services revenues were $6,088 million for 2007, an 8 percent increase compared to $5,627 million for 2006. Marketing services revenues from Owned and Operated sites were $3,671 million for 2007, a 20 percent increase compared to $3,071 million for 2006. Marketing services revenues from Affiliate sites were $2,417 million for 2007, a 5 percent decrease compared to $2,556 million for 2006. Fees revenues were $881 million for 2007, a 10 percent increase compared to $798 million for 2006. Revenues excluding TAC were $5,113 million for 2007, a 12 percent increase compared to $4,560 million for 2006. Gross profit for 2007 was $4,131 million, a 10 percent increase compared to $3,750 million for 2006. Operating income for 2007 was $695 million, a 26 percent decrease compared to $941 million for 2006. Operating income before depreciation, amortization, and stock-based compensation expense for 2007 was $1,927 million, a 1 percent increase compared to $1,906 million for 2006. Cash flow from operating activities for 2007 was $1,954 million, a 42 percent increase compared to $1,372 million for 2006. Free cash flow for 2007 was $1,337 million, a 6 percent increase compared to $1,267 million for 2006. Net income for 2007 was $660 million or $0.47 per diluted share compared to $751 million or $0.52 per diluted share for 2006. Non-GAAP net income for 2007 was $995 million or $0.71 per diluted share compared to non-GAAP net income of $1,011 million or $0.69 per diluted share for 2006. Full Year 2007 Segment Financial Results United States segment revenues for 2007 were $4,727 million, an 8 percent increase compared to $4,366 million for 2006. International segment revenues for 2007 were $2,242 million, a 9 percent increase compared to $2,060 million for 2006. United States segment operating income before depreciation, amortization, and stock-based compensation expense for 2007 was $1,434 million, a 1 percent decrease compared to $1,452 million for 2006. International segment operating income before depreciation, amortization, and stock-based compensation expense for 2007 was $493 million, a 9 percent increase compared to $454 million for 2006. Non-GAAP Financial Measures Explanations of the Company’s non-GAAP financial measures and the related reconciliations to the GAAP financial measures the Company considers most comparable are included in the accompanying "Note to Unaudited Condensed Consolidated Statements of Income,” "Reconciliations to Unaudited Condensed Consolidated Statements of Income,” and "Reconciliation of GAAP Net Income and GAAP Net Income Per Share to Non-GAAP Net Income and Non-GAAP Net Income Per Share.” Cash Flow Information In addition to free cash flow of $330 million for the fourth quarter of 2007, Yahoo! generated $131 million from the issuance of common stock as a result of the exercise of employee stock options. This was offset by $221 million used for direct stock repurchases and $618 million used for acquisitions. Cash, cash equivalents, and investments in marketable debt securities were $2,363 million at December 31, 2007 as compared to $2,763 million at September 30, 2007, a decrease of $400 million. In addition to free cash flow of $1,337 million for the year ended December 31, 2007, Yahoo! generated $375 million from the issuance of common stock as a result of the exercise of employee stock options. This was offset by $1,586 million used for direct stock repurchases, a net $250 million used in structured stock repurchase transactions, and $974 million used for acquisitions. Cash, cash equivalents and investments in marketable debt securities were $2,363 million at December 31, 2007 as compared to $3,537 million at December 31, 2006, a decrease of $1,174 million. "We are pleased with our results this quarter and believe we are prioritizing and investing appropriately to achieve our strategic objectives,” said Blake Jorgensen, chief financial officer, Yahoo! Inc. "As we operationalize our strategy in 2008, we will remain focused on generating long-term shareholder value.” Quarterly Conference Call Yahoo! will host a conference call to discuss fourth quarter results at 5:00 p.m. Eastern Time today. A live webcast of the conference call, together with supplemental financial information, can be accessed through the Company's Investor Relations website at http://yhoo.client.shareholder.com/results.cfm. In addition, an archive of the webcast can be accessed through the same link. An audio replay of the call will be available following the conference call by calling 888-286-8010 or 617-801-6888, reservation number: 53769531. About Yahoo! Yahoo! Inc. is a leading global Internet brand and one of the most trafficked Internet destinations worldwide. Yahoo! is focused on powering its communities of users, advertisers, publishers, and developers by creating indispensable experiences built on trust. Yahoo! is headquartered in Sunnyvale, California. For more information, visit pressroom.yahoo.com or the Company’s blog, Yodel Anecdotal. Owned and Operated sites refer to Yahoo!’s owned and operated online properties and services. Affiliate sites refer to Yahoo!'s distribution network of third-party entities who have integrated Yahoo!'s advertising offerings into their websites or their other offerings. This press release and its attachments include the following financial measures defined as non-GAAP financial measures by the Securities and Exchange Commission ("SEC”): revenues excluding traffic acquisition costs or TAC, operating income before depreciation, amortization, and stock-based compensation expense, free cash flow, and non-GAAP net income and non-GAAP net income per share. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles ("GAAP”). See "Note to Unaudited Condensed Consolidated Statements of Income,” "Reconciliations to Unaudited Condensed Consolidated Statements of Income,” and "Reconciliation of GAAP Net Income and GAAP Net Income Per Share to Non-GAAP Net Income and Non-GAAP Net Income Per Share” included in this press release for further information regarding these non-GAAP financial measures. This press release and its attachments contain forward-looking statements that involve risks and uncertainties concerning Yahoo!'s expected financial performance (including without limitation the statements and information in the Business Outlook section and the quotations from management in this press release), as well as Yahoo!'s strategic and operational plans. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. The potential risks and uncertainties include, among others, the implementation and results of the Company's ongoing strategic initiatives; the Company’s ability to compete with new or existing competitors; reduction in spending by, or loss of, marketing services customers; the demand by customers for Yahoo!'s premium services; acceptance by users of new products and services; risks related to joint ventures and the integration of acquisitions; risks related to the Company’s international operations; failure to manage growth and diversification; adverse results in litigation, including intellectual property infringement claims; the Company’s ability to protect its intellectual property and the value of its brands; dependence on key personnel; dependence on third parties for technology, services, content and distribution; and general economic conditions. All information set forth in this press release and its attachments is as of January 29, 2008. Yahoo! does not intend, and undertakes no duty, to update this information to reflect future events or circumstances. More information about potential factors that could affect the Company's business and financial results is included under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 and the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, which are on file with the SEC and available at the SEC's website at www.sec.gov. Additional information will also be set forth in those sections in Yahoo!’s Annual Report on Form 10-K for the year ended December 31, 2007, which will be filed with the SEC in the first quarter of 2008. Yahoo! and the Yahoo! logos are trademarks and/or registered trademarks of Yahoo! Inc. All other names are trademarks and/or registered trademarks of their respective owners. Yahoo! Inc. Unaudited Condensed Consolidated Statements of Income (in thousands, except per share amounts)               Three Months Ended Year Ended   December 31, December 31,   2006   2007 2006   2007     Revenues $ 1,702,448 $ 1,831,998 $ 6,425,679 $ 6,969,274   Cost of revenues 690,893 701,909 2,675,723 2,838,758         Gross profit 1,011,555 1,130,089 3,749,956 4,130,516   Operating expenses: Sales and marketing 334,229 441,572 1,322,259 1,610,357 Product development 204,748 288,970 833,147 1,084,238 General and administrative 137,600 183,497 528,798 633,431 Amortization of intangibles 27,151   24,813 124,786 107,077 Total operating expenses 703,728 938,852 2,808,990 3,435,103   Income from operations 307,827 191,237 940,966 695,413   Other income, net 35,240 44,076 157,034 154,011   Income before income taxes, earnings in equity interests, and minority interests 343,067 235,313 1,098,000 849,424   Provision for income taxes (108,009) (78,520) (458,011) (337,263) Earnings in equity interests 33,853 52,888 112,114 150,689 Minority interests in operations of consolidated subsidiaries (238) (3,958) (712) (2,850)   Net income $ 268,673 $ 205,723 $ 751,391 $ 660,000     Net income per share - diluted $ 0.19 $ 0.15 $ 0.52 $ 0.47 Shares used in per share calculation - diluted 1,419,143 1,394,656 1,457,686 1,404,654   Stock-based compensation expense was allocated as follows: Cost of revenues $ 1,665 $ 3,709 $ 6,621 $ 10,628 Sales and marketing 35,258 73,741 155,084 246,472 Product development 32,660 53,853 144,807 218,207 General and administrative 25,492 26,799 118,418 97,120 Total stock-based compensation expense $ 95,075 $ 158,102 $ 424,930 $ 572,427       Supplemental Financial Data (See Note) Revenues excluding TAC $ 1,227,935 $ 1,403,129 $ 4,559,755 $ 5,112,573 Operating income before depreciation, amortization, and stock-based compensation expense $ 540,389 $ 527,062 $ 1,905,917 $ 1,927,035 Free cash flow $ 277,959 $ 330,389 $ 1,266,650 $ 1,336,894 Non-GAAP net income per share excluding stock-based compensation expense and other items $ 0.21 $ 0.20 $ 0.69 $ 0.71 Yahoo! Inc. Note to Unaudited Condensed Consolidated Statements of Income   This press release and its attachments include the non-GAAP financial measures of revenues excluding traffic acquisition costs or TAC, operating income before depreciation, amortization, and stock-based compensation expense, free cash flow, non-GAAP net income, and non-GAAP net income per share, which are reconciled to gross profit, income from operations, cash flow from operating activities, net income, and net income per share, respectively, which we believe are the most comparable GAAP measures. We use these non-GAAP financial measures for internal managerial purposes, when publicly providing our business outlook, and to facilitate period-to-period comparisons. We describe limitations specific to each non-GAAP financial measure below. Management generally compensates for limitations in the use of non-GAAP financial measures by relying on comparable GAAP financial measures and providing investors with a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure or measures. Further, management uses non-GAAP financial measures only in addition to and in conjunction with results presented in accordance with GAAP. We believe that these non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, gross profit, income from operations, cash flow from operating activities, net income, and net income per share calculated in accordance with GAAP.   Revenues excluding TAC is defined as gross profit plus other cost of revenues. Under GAAP, both our revenues and cost of revenues include TAC. In defining revenues excluding TAC as our non-GAAP gross profit measure, we have removed TAC from both revenues and cost of revenues. TAC consists of payments made to Affiliate sites and payments made to companies that direct consumer and business traffic to the Yahoo! website. We present revenues excluding TAC: (1) to provide a metric for our investors to analyze and value our Company and (2) to provide investors one of the primary metrics used by the Company for evaluation and decision-making purposes. We provide revenues excluding TAC because we believe it is useful to investors in valuing our Company. One of the ways investors value companies is to apply a multiple to revenues. Since a significant portion of the GAAP revenues associated with our sponsored search offerings is paid to our Affiliate sites, we believe investors find it more meaningful to apply multiples to revenues excluding TAC to assess our value as this avoids "double counting” revenues that are paid to, and being reported by, our Affiliate sites. Further, management uses revenues excluding TAC for evaluating the performance of our business, making operating decisions, budgeting purposes, and as a factor in determining management compensation. A limitation of revenues excluding TAC is that it is a measure which we have defined for internal and investor purposes that may be unique to the Company, and therefore it may not enhance the comparability of our results to other companies in our industry who have similar business arrangements but address the impact of TAC differently. Management compensates for these limitations by also relying on the comparable GAAP financial measures of revenues, cost of revenues, and gross profit, each of which includes the impact of TAC.   Operating income before depreciation, amortization, and stock-based compensation expense is defined as income from operations before depreciation, amortization of intangible assets, and stock-based compensation expense (including the compensation of Terry Semel who served as our chief executive officer through June 18, 2007 and whose compensation after June 1, 2006 consisted almost entirely of stock-based compensation). We consider this measure to be an important indicator of the operational strength of the Company. We exclude depreciation and amortization because while tangible and intangible assets support our businesses, we do not believe the related depreciation and amortization costs are directly attributable to the operating performance of our business. This measure is used by some investors when assessing the performance of our Company. In addition, because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense, and the subjective assumptions involved in those determinations, we believe excluding stock-based compensation enhances the ability of management and investors to understand the impact of stock-based compensation expense on our operating income. We do not include depreciation, amortization, and stock-based compensation expense in our internal measures or in the measures used by the Company to formulate our business outlook presented with our quarterly financial information to investors. A limitation associated with the non-GAAP measure of operating income before depreciation, amortization, and stock-based compensation expense is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures. A further limitation associated with this measure is that it does not include stock-based compensation expense related to the Company’s workforce. Management compensates for these limitations by also relying on the comparable GAAP financial measure of income from operations, which includes depreciation, amortization, and stock-based compensation expense.   Free Cash Flow is a non-GAAP measure defined as cash flow from operating activities (adjusted to include excess tax benefits from stock-based compensation), less net capital expenditures and dividends received. We consider free cash flow to be a liquidity measure which provides useful information to management and investors about the amount of cash generated by the business after the acquisition of property and equipment, which can then be used for strategic opportunities including, among others, investing in the Company's business, making strategic acquisitions, strengthening the balance sheet, and repurchasing stock. A limitation of free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. Management compensates for this limitation by also relying on the net change in cash and cash equivalents as presented in the Company’s unaudited condensed consolidated statements of cash flows prepared in accordance with GAAP which incorporates all cash movements during the period.   Non-GAAP net income is defined as net income excluding certain gains, losses, expenses, and their related tax effects that we do not believe are indicative of our ongoing operating results and further adjusted for stock-based compensation expense. Effective January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123 (revised 2004), "Share-Based Payment” ("SFAS 123R”). In our calculation of non-GAAP net income and non-GAAP net income per share, we have excluded stock-based compensation expense calculated in accordance with SFAS 123R and its related tax effects. We consider non-GAAP net income and non-GAAP net income per share to be profitability measures which facilitate the forecasting of our operating results for future periods and allow for the comparison of our results to historical periods. A limitation of non-GAAP net income and non-GAAP net income per share is that they do not include all items that impact our net income and net income per share for the period. Management compensates for this limitation by also relying on the comparable GAAP financial measures of net income and net income per share, both of which include the gains, losses, expenses and related tax effects that are excluded from non-GAAP net income and non-GAAP net income per share. Yahoo! Inc. Reconciliations to Unaudited Condensed Consolidated Statements of Income (in thousands)                 Three Months Ended Year Ended   December 31,   December 31,   2006   2007   2006   2007 Revenues for groups of similar services: Marketing services: Owned and Operated sites $ 853,175 $ 1,035,407 $ 3,070,715 $ 3,670,830 Affiliate sites 636,559 554,580 2,556,492 2,417,409 Marketing services 1,489,734 1,589,987 5,627,207 6,088,239 Fees 212,714 242,011 798,472 881,035 Total revenues $ 1,702,448 $ 1,831,998 $ 6,425,679 $ 6,969,274   Revenues by segment: United States $ 1,144,702 $ 1,312,941 $ 4,365,922 $ 4,727,123 International 557,746 519,057 2,059,757 2,242,151 Total revenues $ 1,702,448 $ 1,831,998 $ 6,425,679 $ 6,969,274   Cost of revenues: Traffic acquisition costs ("TAC") $ 474,513 $ 428,869 $ 1,865,924 $ 1,856,701 Other cost of revenues 216,380 273,040 809,799 982,057 Total cost of revenues $ 690,893 $ 701,909 $ 2,675,723 $ 2,838,758   Revenues excluding TAC: Gross profit $ 1,011,555 $ 1,130,089 $ 3,749,956 $ 4,130,516 Other cost of revenues 216,380 273,040 809,799 982,057 Revenues excluding TAC $ 1,227,935 $ 1,403,129 $ 4,559,755 $ 5,112,573   Revenues excluding TAC by segment: United States: Gross profit $ 746,119 $ 836,420 $ 2,761,829 $ 3,043,311 Other cost of revenues 175,786 221,362 659,841 795,191 Revenues excluding TAC $ 921,905 $ 1,057,782 $ 3,421,670 $ 3,838,502   International: Gross profit $ 265,436 $ 293,669 $ 988,127 $ 1,087,205 Other cost of revenues 40,594 51,678 149,958 186,866 Revenues excluding TAC $ 306,030 $ 345,347 $ 1,138,085 $ 1,274,071   Operating income before depreciation, amortization, and stock-based compensation expense: Income from operations $ 307,827 $ 191,237 $ 940,966 $ 695,413 Depreciation and amortization 137,487 177,723 540,021 659,195 Stock-based compensation expense 95,075 158,102 424,930 572,427 Operating income before depreciation, amortization, and stock-based compensation expense $ 540,389 $ 527,062 $ 1,905,917 $ 1,927,035   Operating income before depreciation, amortization, and stock-based compensation expense by segment: Operating income before depreciation, amortization, and stock-based compensation expense - United States $ 410,239 $ 391,339 $ 1,451,656 $ 1,433,617 Operating income before depreciation, amortization, and stock-based compensation expense - International 130,150 135,723 454,261 493,418 Operating income before depreciation, amortization, and stock-based compensation expense $ 540,389 $ 527,062 $ 1,905,917 $ 1,927,035   United States: Income from operations $ 215,500 $ 102,445 $ 632,895 $ 380,808 Depreciation and amortization 110,279 144,752 437,080 536,151 Stock-based compensation expense 84,460 144,142 381,681 516,658 Operating income before depreciation, amortization, and stock-based compensation expense - United States $ 410,239 $ 391,339 $ 1,451,656 $ 1,433,617   International: Income from operations $ 92,327 $ 88,792 $ 308,071 $ 314,605 Depreciation and amortization 27,208 32,971 102,941 123,044 Stock-based compensation expense 10,615 13,960 43,249 55,769 Operating income before depreciation, amortization, and stock-based compensation expense - International $ 130,150 $ 135,723 $ 454,261 $ 493,418   Free cash flow: Cash flow from operating activities $ 167,357 $ 657,311 $ 1,371,576 $ 1,954,326 Acquisition of property and equipment, net (131,550) (192,431) (689,136) (602,276) Dividends received - - (12,908) (15,156) Excess tax benefits from stock-based awards 242,152 (134,491) 597,118 - Free cash flow $ 277,959 $ 330,389 $ 1,266,650 $ 1,336,894 Yahoo! Inc. Reconciliation of GAAP Net Income and GAAP Net Income Per Share to Non-GAAP Net Income and Non-GAAP Net Income Per Share (in thousands, except per share amounts)     Three Months Ended December 31,   2006   2007   GAAP Net income $ 268,673 $ 205,723   (a) Stock-based compensation as measured using the fair value method under SFAS 123R 95,075 158,102   (b) Non-cash gain arising from increased dilution of our ownership in Alibaba, resulting in the recognition of a further gain on the sale of Yahoo! China - (6,842)   (c) To adjust the provision for income taxes to eliminate tax charges and credits related to tax adjustments recorded in the current period (28,690) (37,298)   (d) To adjust the provision for income taxes to reflect an effective tax rate of 40% in both the three month periods ended December 31, 2006 and 2007 and to reflect the tax impact of items (a) and (b) in both periods (38,558) (39,198)     Non-GAAP Net income excluding stock-based compensation expense and other items $ 296,500 $ 280,487   GAAP Net income per share - diluted $ 0.19 $ 0.15   Non-GAAP Net income excluding stock-based compensation expense and other items per share - diluted $ 0.21 $ 0.20   Shares used in per share calculations - diluted 1,419,143 1,394,656     Year Ended December 31,   2006   2007   GAAP Net income $ 751,391 $ 660,000   (a) Stock-based compensation as measured using the fair value method under SFAS 123R 424,930 572,427   (b) Reversal of an earn-out accrual (10,000) -   (c) Non-cash gain arising from increased dilution of our ownership in Alibaba, resulting in the recognition of a further gain on the sale of Yahoo! China (14,316) (8,066)   (d) To adjust the provision for income taxes to eliminate tax charges and credits related to tax adjustments recorded in the current period (11,341) (50,592)   (e) To adjust the provision for income taxes to reflect an effective tax rate of 40% in both the years ended December 31, 2006 and 2007 and to reflect the tax impact of items (a) through (c) in both periods (130,094) (179,072)     Non-GAAP Net income excluding stock-based compensation expense and other items $ 1,010,570 $ 994,697   GAAP Net income per share - diluted $ 0.52 $ 0.47   Non-GAAP Net income excluding stock-based compensation expense and other items per share - diluted $ 0.69 $ 0.71   Shares used in per share calculations - diluted 1,457,686 1,404,654 Yahoo! Inc. Business Outlook                             The following business outlook is based on current information and expectations as of January 29, 2008. Yahoo!'s business outlook as of today is expected to be available on the Company's Investor Relations website throughout the current quarter. Yahoo! does not expect, and undertakes no obligation, to update the business outlook prior to the release of the Company's next quarterly earnings announcement, notwithstanding subsequent developments; however, Yahoo! may update the business outlook or any portion thereof at any time at its discretion.   Three Months Year Ending Ending March 31, December 31, 2008 2008   Revenues $1,680 - $1,840 $7,200 - $8,000   Revenues excluding TAC(1) outlook (in millions): Gross profit $1,030 - $1,100 $4,320 - $4,800 Other cost of revenues 250 - 280 1,030 - 1,150 Revenues excluding TAC $1,280 - $1,380 $5,350 - $5,950   Operating income before depreciation, amortization, and stock-based compensation expense (1) outlook (in millions): Income from operations $100 - $110 $545 - $655 Depreciation and Amortization 160 - 180 670 - 750 Stock-based compensation expense 140 - 160 510 - 570 Operating income before depreciation, amortization, and stock-based compensation expense $400 - $450 $1,725 - $1,975   (1) Refer to Note to Unaudited Condensed Consolidated Statements of Income. Yahoo! Inc. Unaudited Condensed Consolidated Statements of Cash Flows (in thousands)                     Three Months Ended Year Ended   December 31,     December 31,   2006     2007     2006     2007   CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 268,673 $ 205,723 $ 751,391 $ 660,000 Adjustments to reconcile net income to net cash provided by operating activities:   Depreciation 84,431 109,433 302,161 409,366 Amortization of intangible assets 53,056 68,290 237,860 249,829 Stock-based compensation expense 95,075 158,102 424,930 572,427 Tax benefits from stock-based awards 255,460 (94,545) 626,009 76,138 Excess tax benefits from stock-based awards (242,152) 134,491 (597,118) - Deferred income taxes (178,977) (78,157) (274,433) (212,742) Earnings in equity interests (33,853) (52,888) (112,114) (150,689) Dividends received - - 12,908 15,156 Minority interests in operations of consolidated subsidiaries 238 3,958 712 2,850 Gains from sale of investments, assets and other, net 686 (15,132) (15,125) (27,928) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable, net (138,416) (82,357) (185,196) (88,738) Prepaid expenses and other 18,685 72,126 (9,567) 133,185 Accounts payable (36,572) 33,028 30,413 45,101 Accrued expenses and other liabilities 35,779 133,996 174,566 184,805 Deferred revenue (14,756) 61,243 4,179 85,566 Net cash provided by operating activities 167,357 657,311 1,371,576 1,954,326   CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment, net (131,550) (192,431) (689,136) (602,276) Purchases of marketable debt securities (439,492) - (1,328,515) (1,105,043) Proceeds from sales and maturities of marketable debt securities 520,117 388,281 1,951,323 2,243,720 Acquisitions, net of cash acquired (80,972) (618,063) (142,272) (973,577) Purchase of intangible assets (5,810) (35,003) (5,810) (110,378) Other investing activities, net 2,253 5,421 20,729 (24,948) Net cash used in investing activities (135,454) (451,795) (193,681) (572,502)   CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net 86,652 131,177 318,103 375,066 Repurchases of common stock - (220,684) (1,782,140) (1,585,910) Structured stock repurchases, net - - (227,705) (250,000) Excess tax benefits from stock-based awards 242,152 (134,491) 597,118 - Other financing activities, net - (2,706) - (16,591) Net cash provided by (used in) financing activities 328,804 (226,704) (1,094,624) (1,477,435)   Effect of exchange rate changes on cash and cash equivalents 23,905 7,168 56,907 39,670   Net change in cash and cash equivalents 384,612 (14,020) 140,178 (55,941) Cash and cash equivalents, beginning of period 1,185,259 1,527,950 1,429,693 1,569,871   Cash and cash equivalents, end of period $ 1,569,871 $ 1,513,930 $ 1,569,871 $ 1,513,930   Supplemental schedule of acquisition-related activities:   Cash paid for acquisitions $ 81,882 $ 639,078 $ 150,859 $ 1,019,755 Cash acquired in acquisitions (910) (21,015) (8,587) (46,178)         $ 80,972 $ 618,063 $ 142,272 $ 973,577   Common stock, restricted stock and stock options issued in connection with acquisitions $ 3,256 $ 104,212 $ 3,256 $ 572,221 Yahoo! Inc. Unaudited Condensed Consolidated Balance Sheets (in thousands)             December 31, December 31, 2006 2007   ASSETS Current assets: Cash and cash equivalents $ 1,569,871 $ 1,513,930 Short-term marketable debt securities 1,031,528 487,544 Accounts receivable, net 930,964 1,055,532 Prepaid expenses and other current assets 217,779 180,716 Total current assets 3,750,142 3,237,722   Long-term marketable debt securities 935,886 361,998 Property and equipment, net 1,101,379 1,331,632 Goodwill 2,968,557 4,002,030 Intangible assets, net 405,822 611,497 Other long-term assets 459,988 503,945 Investments in equity interests 1,891,834 2,180,917   Total assets $ 11,513,608 $ 12,229,741     LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 109,130 $ 176,162 Accrued expenses and other current liabilities 1,046,882 1,006,188 Deferred revenue 317,982 368,470 Short-term debt - 749,628 Total current liabilities 1,473,994 2,300,448   Long-term deferred revenue 64,939 95,129 Long-term debt 749,915 - Other long-term liabilities 36,890 28,086 Deferred and other tax liabilities, net 19,204 260,993 Minority interests in consolidated subsidiaries 8,056 12,254 Stockholders' equity 9,160,610 9,532,831   Total liabilities and stockholders' equity $ 11,513,608 $ 12,229,741