Yahoo 1997 Annual Report Download - page 17

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As of December 31, 1997, the Company had an accumula t e d d e ficit of $27,971,000. Th e lim it e d op e ra t -
ing history of the Company and the uncertain nature of the markets a d d re s s e d b y t h e Com p a n y m a ke t h e
prediction of future results of operations difficult or impossible and, the re fore , t h e re ce n t re ve n u e g row t h
experienced by the Company should not be take n a s in d ica t ive of t h e ra t e of re ve n u e g row t h , if a n y, t h a t
can be expected in the future. The Compa n y b e lie ve s t h a t p e riod -t o-p e riod com p a ris on s of it s op e ra t in g
results are not meaningful and that the re s u lt s for a n y p e riod s h ou ld n ot b e re lie d u p on a s a n in d ica t ion
of future performance. The Company currently expe ct s t o con t in u e t o s ig n ifica n t ly in cre a s e it s op e ra t in g
expenses to expand its sales a n d m a rke t in g op e ra t ion s , t o con t in u e t o d e ve lop a n d e xt e n d t h e “Ya h oo!”
brand, to fund greater levels of product deve lop m e n t , t o d e ve lop a n d com m e rcia lize a d d it ion a l m e d ia
propert ie s , a n d t o a cquire complementary businesses and te ch n olog ie s . Th e Com p a n y d e rive s t h e m a jori-
ty of its revenues from the sale of adve rtisements unde r s h ort-term contracts, w hich are difficult to fore-
cast accurately. Th e Com p a n y’s e xp e n s e le vels are based in part on its expectations conce rn in g fu t u re
revenue and, to a large e xt e n t , a re fixe d . Th e Com p a n y a ls o h a s fixe d e xp e n s e s in t h e form of a d ve rtising
revenue guarantees of up to $18,500,000 ove r t h e n e xt 15 m on t h s re la t in g t o t h e Ne t s ca p e Gu id e By
Yahoo!, w h ich s u b je ct t h e Com p a n y t o a d d it ion a l ris k in t h e e vent that advertising revenues from this
propert y a re n ot s u fficie nt to offset guaranteed payments a n d re la t e d op e ra t in g e xp e n s e s . Qu a rterly re v-
enues and operating results depe n d s u b s t a n t ia lly u p on t h e a d ve rtising re ve n u e s re ce ive d w it h in t h e
quart e r, w h ich a re d ifficu lt t o fore ca s t a ccurately. Accord in g ly, t h e ca n ce lla t ion or d e fe rral of a small num-
ber of advert is in g or s p on s ors h ip con t ra cts could have a material adve rs e e ffe ct on t h e Com p a n y’s b u s i-
ness, results of operations, and financial condition. The Compa n y m a y b e u n a b le t o a d ju s t s p e n d in g in a
timely manner to compensate for any une xp e ct e d re ve n u e s h ortfall, a n d a n y s ig n ifica n t s h ortfall in re v-
enue in relation to the Company’s e xp e ct a t ion s w ou ld h a ve a n im m e d ia t e a d ve rs e e ffe ct on t h e
Com p a ny’s b u s in e s s , op e ra t in g re s u lt s , a n d fin a n cia l con d it ion . In a d d it ion , t h e Com p a n y p la n s t o con t in -
ue to significantly increase its operating e xp e n s e s t o e xp a n d it s s a le s a n d m a rke t in g op e ra t ion s , t o con -
tinue to develop and extend the “Yahoo!” brand, to fund grea t e r le ve ls of p rod u ct d e ve lop m e n t , a n d t o
develop and commercialize additiona l m e d ia p rop e rties. To t h e e xt e n t t h a t s u ch e xp e n s e s p re ce de or are
not subsequently follow ed b y in cre ased revenues, the Company’s b u s in e s s , op e ra t in g re s u lt s , a n d fin a n -
cial condition w ill b e m a t e rially and adversely affecte d . As a re s u lt of t h e s e fa ct ors , t h e re ca n b e n o a s s u r-
ance that the Company w ill not incur significant losses on a quarterly and annual basis in the future .
The Company’s op e ra t in g re s u lt s m a y flu ct u a t e s ig n ifica n t ly in t h e fu t u re a s a re s u lt of a va rie t y of fa c-
tors, many of w hich a re ou t s id e the Company’s con t rol. Th e s e fa ct ors in clu d e t h e le ve l of u s a g e of t h e
Internet, demand for Internet adve rtising, the addition or loss of a d ve rtisers, the le ve l of u s e r t ra ffic on
Yahoo! a n d t h e Com p a ny’s ot h e r on lin e m e d ia p rop e rties, t h e a d ve rtising b u d g e t in g cycle s of in d ivid u a l
advert is e rs , t h e amount and timing of capital expenditures a n d ot h e r cos t s re la t in g t o t h e e xp a n s ion of
the Company’s op e ra t ion s , t h e in t rod u ct ion of n e w p rod u ct s or s e rvice s b y t h e Com p a n y or it s com p e t i-
tors, pricing changes for We b -b a s e d a d ve rtising, t h e t im in g of in it ia l s e t -u p , e n g in e e rin g or d e ve lop m e n t
fees that may be paid in connection w ith larger advertising and distribution arrange m e n t s , t e ch n ica l d iffi-
culties w ith re s p e ct t o t h e use of Yahoo! or ot h e r media propert ie s developed by the Company, in cu rre n ce
of costs relating to future acquisitions, general e con om ic con d it ion s , a n d e con om ic con d it ion s s p e cific t o
the Internet and online media. As a s t ra t e g ic re s p on s e t o ch a n g e s in t h e com p e t it ive e n viron m e n t , t h e
Com p a ny may from time to time make certain pricing, service or marke t in g d e cis ion s , or b u s in e s s com b i-
nations that could have a materia l a d ve rs e e ffe ct on t h e Com p a n y’s b u s in e s s , re s u lt s of op e ra t ion s , a n d
financial condition. The Company also has experie n ce d , a n d e xp e ct s t o con t in u e t o e xp e rie n ce , s e a s on a li-
ty in its business, w ith u s e r t ra ffic on Ya h oo! a n d t h e Com p a n y’s othe r on lin e m e d ia p rop e rties b e in g
low er d u rin g t h e s u m m e r a nd year-e n d va ca t ion a n d h olid a y p e riod s , w h e n u s a g e of t h e We b a n d t h e
Com p a ny’s s e rvice s t yp ica lly e xp e rie n ce s low e r g row t h or d e clin e . Ad d it ion a lly, s e a s on a lit y m a y a ls o
affect the amount of customer advertising dollars placed w ith the Company in the first and third cale n d a r
quart e rs a s a dvert is e rs h is t orica lly s p e nd less during these quarters.
A key element of the Company’s s t ra t e g y is t o g e n e ra t e a d d it ion a l a dvert is in g re ve n u e s through sponsored
services and placements by third parties in Yahoo! online properties in addition to banner adve rtising. In con-
nection w ith t h e s e a rrangements, the Company may receive s p on s ors h ip fe e s a s w e ll a s a p ortion of tra n s a c-
tion revenues received by the third-pa rty sponsor from users originate d t h rou g h t h e Yahoo! pla ce m e n t , in
return for minimum levels of user impressions to be provided by the Compa n y. To the extent implemented,
these arrangements expose t h e Com p a n y t o p ot e n t ia lly s ig n ifica n t fin a n cia l ris ks , in clu d in g t h e ris k t h a t t h e
Com p a ny fails to deliver required minimum levels of use r im p re s s ion s a n d t h a t t h ird p a rty s p on s ors d o n ot
renew t h e a greements at the end of their te rm . In a d d it ion , b e ca u s e t h e Com p a n y h a s lim it e d e xp e rie n ce
w ith t h e s e a rra ngements, the Company is unable to determine w hat effect such a rra n g e m e n t s w ill ha ve on
gross margins and results of operations. Although transaction-ba s e d fe e s h a ve n ot t o d a t e re p re s e n t e d a
significant port ion of t h e Com p a n y’s n e t re ve n u e s , if a n d t o t h e extent such revenues become s ig n ifica n t ,
the foregoing factors could result in greater va ria t ion s in t h e Com p a n y’s qua rterly opera t in g re s u lt s a n d
could have a material adve rs e e ffe ct on t h e Com p a n y’s b u s in e s s , re sults of operations, and financial condition.
The market for Internet products and service s is h ig h ly com p e t it ive , a n d com p e t it ion is e xp e ct e d t o
continue to increase significantly. In a d d it ion , t h e Com p a n y e xp e ct s t h e m a rke t for We b -b a s e d a d ve rtis-
ing, to the extent it continues to develop, to be inte n s e ly com p e t it ive . Th e re a re n o s u b s t a n t ia l b a rrie rs t o
entry in these markets, and the Company e xp e ct s t h a t com p e t it ion w ill continue t o in t e n s ify. Alt h ou g h
the Company currently believes that the dive rs e s e g m e n t s of t h e In t e rn e t m a rke t w ill p rovid e op p ortuni-
ties for more than one supplier of products and service s s im ila r t o t h os e of t h e Com p a n y, it is p os s ib le
that a single supplier may dominate one or m ore m a rke t s e g m e n t s , in clu d in g w e ll-e s t a b lis h e d com p a n ie s
such as Microsoft. The Company competes w ith m a ny other providers of online navigation, information
and community services. The Company also competes w ith online services and othe r We b s it e op e ra t ors ,
as w ell a s t ra ditional offline media such as television, ra d io, a n d p rin t for a s h a re of a d ve rtisers ’ t ot a l
advert is in g b u d g e t s . Th e Com p a ny believes that the number of companie s s e llin g We b -b a s e d a d ve rt is in g