Yahoo 2004 Annual Report Download - page 40

Costs and Expenses: Primary operating costs and expenses were as follows (dollars in thousands):
Years Ended December 31, 2002-2003 2003-2004
2002 (1) 2003 (1) 2004 (1) % Change % Change
Cost of revenues $162,881 17% $358,103 22% $1,298,559 36% 120% 263%
Sales and marketing 429,968 45% 530,613 33% 778,029 22% 23% 47%
Product development 141,766 15% 207,285 13% 368,760 11% 46% 78%
General and administrative 100,676 11% 157,027 10% 262,602 7% 56% 67%
Stock compensation expense 8,402 1% 22,029 1% 32,290 1% 162% 47%
Amortization of intangibles 21,186 2% 54,374 3% 145,696 4% 157% 168%
(1) Percent of total revenues.
Cost of Revenues. Cost of revenues consists of traffic acquisition costs and other expenses associated with the production and
usage of the Yahoo! Network.
Traffic Acquisition Costs (‘‘TAC’’). TAC consists of payments made to affiliates that have integrated our sponsored search
offerings into their websites and payments made to companies that direct consumer and business traffic to the Yahoo!
website. TAC payments commenced following our acquisition of Overture in October 2003 when we began offering
sponsored search services. We enter into agreements of varying duration that involve TAC. There are generally three
economic structures of the affiliate agreements: fixed payments based on a guaranteed minimum amount of traffic
delivered, which often carry reciprocal performance guarantees from the affiliate; variable payments based on a percentage
of our revenue or based on a certain metric, such as number of searches or paid clicks; or a combination of the two. We
expense TAC under two methods. Agreements with fixed payments are expensed ratably over the term the fixed payment
covers, and agreements based on a percentage of revenue, number of paid introductions, number of searches, or other
metrics are expensed based on the volume of the underlying activity or revenue multiplied by the agreed-upon price or
rate.
Other cost of revenues. Other cost of revenues consists of fees paid to third parties for content included on our online media
properties, Internet connection charges, server equipment depreciation, technology license fees and compensation related
expenses.
Cost of revenues for the year ended December 31, 2004 increased approximately $940 million, or 263 percent, as
compared to 2003. This reflects approximately $769 million of incremental cost of revenue related to acquisitions of
which, approximately $703 million related to TAC associated with the Overture acquisition. The remainder of the
increase represented increased costs for search serving, royalties and content, as well as increased costs for growing
network usage and premium services. Cost of revenues for the year ended December 31, 2003 increased approximately
$195 million, or 120 percent, as compared to 2002 of which $182 million was due to acquisitions, including $153 mil-
lion associated with TAC.
Cost of revenues was 36 percent, 22 percent, and 17 percent of revenues in 2004, 2003, and 2002, respectively. The year
over year increases mainly relate to the additional TAC described above.
We currently anticipate that cost of revenues will continue to increase in absolute dollars in 2005 compared to 2004.
TAC, which is the largest component of our cost of revenues, increases as our sponsored search revenues increase.
Additionally, we expect increased network usage which will drive higher internet connection charges and higher costs
relating to the introduction of additional content for new and enhanced services.
Sales and Marketing. Sales and marketing expenses consist primarily of advertising and other marketing related expenses,
compensation related expenses, sales commissions and travel costs.
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