Yahoo 1997 Annual Report Download - page 18

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million per day in December 1996. The Company anticipa t e s t h a t it s con t e n t a n d In t e rn e t con n e ct ion
expenses w ill con t in u e to increase in absolute dollars for the fore s e e a b le fu t u re . Th e Com p a n y cu rre n t ly
anticipates 1998 cost of revenues to be in the ra n g e of 12% t o 16% of re ve n u e s .
Sale s an d Marke tin g. Sa le s a n d m a rke t in g e xp e n s e s w e re $43,930,000 for t h e ye a r e n d e d December 31,
1997, or 65% of net revenues. For the years ende d De ce m b e r 31, 1996 a n d 1995, s a le s a n d m a rke t in g
expenses w ere $15,106,000 and $815,000, or 77% and 58% of net revenues, re s p e ct ive ly. Sa le s a n d m a rke t -
ing expenses consist primarily of advertising and other marketing re la t e d e xp e n s e s (w h ich in clu d e Ne t s ca p e
Pre mier Provider costs), compensation, sales commissions, and trave l cos t s . Th e ye a r-to-year increase s in
absolute dollars are primarily attributa b le t o in cre a s e s in com p e n s a t ion e xp e n s e a s s ocia t e d w it h a n in cre a s e
in sales and marketing personnel re la t e d t o t h e a d d it ion of a d ire ct s a le s force w h ich t h e Com p a n y b e g a n
building in the fourt h q u a rter of 1996; a n in cre a s e in advert is in g cos t s a s s ocia ted w ith t h e Com p a n y’s
aggressive brand building strategy; an incre a s e in t h e t ot a l cos t s in cu rre d from t h e Ne t s ca p e s e a rch p ro-
grams; the addition of and grow th in the various international subsidiaries including France , Ge rm a n y, a n d
the United Kin g d om d u rin g 1996 a n d Sin g a p ore , Au s t ra lia , Kore a , Sw e d e n , De n m a rk, a n d Norw a y d u rin g
1997; and an increase in sales commissions a s s ocia t e d w ith the incre a s e in re ve n u e s . Th e Com p a n y a n t ici-
pates that sales and marke t in g e xp e n s e s in a b s olu t e d olla rs w ill in cre a s e in fu t u re p e riod s a s it con t in u e s t o
pursue an aggressive brand building strate g y a n d con t in u e s t o b u ild it s d ire ct s a le s org a n iza t ion . As a p e r-
centage of net revenues, the Compa n y cu rre n t ly a n t icip a t e s t h a t s a le s a n d m a rke t in g e xp e n s e s w ill a p p roxi-
mate 60% in the first quarter of 1998 and w ill t re nd low er ove r t h e re mainder of 1998.
Product De velopm ent. Prod u ct d e velopment expenses w ere $11,138,000, or 17% of net revenues for the
year ended December 31, 1997 compa re d t o $5,150,000 a n d $303,000, or 26% a n d 21% of n e t re ve n u e s for
the years ended Decembe r 31, 1996 a n d 1995, re s p e ct ive ly. Prod u ct d e ve lop m e n t e xp e n s e s con s is t p rim a -
rily of employee compensation relating to de ve lop in g a n d e n h a n cin g t h e fe a t u re s a n d fu n ct ion a lit y of
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. Th e ye a r-to-yea r in cre a s e s in a b s olu t e d olla rs
are primarily attributable to increa s e s in t h e n u m b e r of e n g in e e rs t h a t d e ve lop a n d e n h a n ce Ya h oo! a n d
the Company’s ot h e r on lin e m e d ia p rop e rties. To d a t e , a ll in t e rn a l product development costs have been
expensed as incurred. Acquired technology for w hich technological feasibility ha s b e e n e s t a b lis h e d ,
including the technology purchased in the Company’s 1997 a cq u is it ion of Ne t Con t rols for $1,400,000, is
capitalized and amortized over its useful life. The Company be lie ve s t h a t s ig n ifica n t in ve s t m e n t s in p rod -
uct development are required to re m a in com p e t it ive . As a con s e q u e n ce , t h e Com p a n y in t e n d s t o in cu r
increased product development expe n d it u re s in a b s olu t e d olla rs in fu t u re p e riod s . As a p e rce n t a g e of n e t
revenues, the Company currently anticipate s t h a t p rod u ct d e ve lop m e n t e xp e n s e s w ill a p p roxim a t e cu r-
rent levels during 1998.
General an d Adm in is trativ e . Ge n e ra l a n d a d m in is t ra t ive e xp e n s e s w e re $6,472,000, or 10% of n e t re v-
enues for the year ended De ce m b e r 31, 1997 com p a re d t o $4,878,000 a n d $972,000, or 25% a n d 69% of n e t
revenues for the years ende d De ce m b e r 31, 1996 a n d 1995, re s p e ct ive ly. Ge n e ra l and administrative
and the available inventory of a d ve rtising space h a ve in cre a s e d s u b s t a n t ia lly d u rin g re ce n t p e riod s .
Accordingly, t h e Com p a n y m a y fa ce in cre a s e d p ricin g p re s s u re for t h e s a le of a d ve rtisements. Th e re ca n
be no assurance that the Company w ill be able to compete succe s s fu lly a g a in s t it s cu rre n t or fu t u re com -
petitors or that competition w ill n ot h a ve a material adverse e ffe ct on t h e Com p a n y’s b u s in e s s , op e ra t in g
results, and financial condition.
Due to all of the foregoing factors, in some future qua rter the Company’s operating results may fall
below t h e e xp e ctations of securities analysts and investors. In such a n e ve n t , t h e t ra d in g p rice of t h e
Com p a ny’s Com m on St ock w ou ld like ly b e m a t e ria lly a n d a d ve rs e ly affected.
Results of Ope ration s
Ne t Re ven ue s. Ne t re ve n u e s w e re $67,411,000, $19,697,000, a n d $1,410,000 for t h e ye a rs e n d e d
December 31, 1997, 1996, and 1995, respectively. Th e in cre a s e s from ye a r t o ye a r a re d u e primarily to the
increasing number of advertisers purchasing space on Yahoo! and the Company’s other online media
propert ie s . Ap p roxim a t e ly 2,600 customers advert is e d on Yahoo! a n d t h e Com p a ny’s ot h e r on lin e m e d ia
propert ie s d u rin g 1997 a s com p a red to approximately 700 in 1996. Additionally, t h e Com p a n y b e g a n s e llin g
sponsorship contracts during 1997 w hich a ls o con t rib u t e d t o t h e increase in net revenues. Inte rn a t ion a l
revenues have accounted for le s s t h a n 10% of n e t re ve n u e s in t h e ye a rs e n d e d De ce m b e r 31, 1997, 1996,
and 1995. Bart e r t ra nsactions have also accounted for less tha n 10% of n e t re ve n u e s in t h e ye a rs e n d e d
December 31, 1997, 1996, and 1995. There can be n o a s s u ra n ce t h a t cu s t om e rs w ill con t in u e t o p u rch a s e
advert is in g on t h e Com p a n y' s Web pages or that market price s for We b -b a s e d a d ve rtising w ill n ot d e cre a s e
due to competitive or other factors.
Cos t of Re v enue s . Cos t of re venues consists of the expenses associa t e d w ith the production and usa g e of
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. Th e s e cos t s p rim a rily con s is t of fe e s p a id t o
third part ie s for con t e n t in clu d e d on the Company’s p rop e rties, In t e rn e t con n e ct ion ch a rg e s , e q u ip m e n t
depreciation, and compensation. Cost of revenue s w as $9,372,000 for the yea r e n d e d De ce m b e r 31, 1997,
or 14% of net revenues as compared to $3,316,000, or 17% of ne t re ve n u e s a n d $198,000, or 14% of n e t
revenues for the years ende d De ce m b e r 31, 1996 a n d 1995, re s p e ct ive ly. Th e a b s olu t e dollar increases in
cost of revenues from year to year a re p rim a rily a t t rib u t a b le t o a n in cre a s e in t h e q u a n t it y of con t e n t
available on Yahoo! and the Company’s ot h e r on lin e m e d ia p rop e rties, a n d t h e in cre a s e d u s a g e of t h e s e
propert ie s . Th e Com p a n y a nticipates that its content and Internet conne ct ion e xp e n s e s w ill incre a s e w ith
the quantity and quality of content availa b le on Yahoo! a n d t h e Com p a n y’s ot h e r on lin e m e d ia p rop e rties,
and incre a s e d u s a g e of these p rop e rties. As m e a s u re d in p a g e vie w s (d e fin e d a s e le ct ron ic p a g e d is p la ys ),
the Company delivered an avera g e of a p p roxim a t e ly 65 m illion p a g e vie w s p e r d a y in De ce m b e r 1997 com -
pared w ith a n a verage of approximately 20 million page vie w s per day in De ce m b e r 1996 a n d a n a ve ra g e of
approximately 6 million page view s per day in February 1996. Yahoo! Japan, an unconsolidate d join t ve n t u re
of the Company w hich b e g a n op e rations in April 1996, is included in these page view s figures and account-
ed for an average of approxima t e ly 5 m illion p e r d a y in De ce m b e r 1997 a n d a n a ve ra g e of a p p roxim a t e ly 1.4