Yahoo 2004 Annual Report Download - page 49

We invest excess cash predominantly in marketable debt securities that are highly liquid, of high-quality investment
grade, and predominantly have effective maturities of less than two years. We also invest excess cash to expand our
operations and for potential acquisitions, share repurchase activities or other transactions. As of December 31, 2004,
certain of our marketable debt securities have a fair value below cost due to the changes in market rates of interest and
yields on these securities. We evaluate these investments periodically for possible impairment and review factors such as
the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and our
ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market
value. We have the intent and ability to hold these securities for a reasonable period of time sufficient for a forecasted
recovery of fair value up to (or beyond) the initial cost of the investment and expect to realize the full value of all of
these investments upon maturity or sale.
We expect to continue to generate positive cash flow from operations in 2005. Management believes existing cash, cash
equivalents and investments in marketable debt securities, together with any cash generated from operations will be
sufficient to meet normal operating requirements including capital expenditures for the next twelve months. However, we
may sell additional equity or debt securities or obtain credit facilities to further enhance our liquidity position, and the
sale of additional equity securities could result in additional dilution to our stockholders.
Cash flow changes
Cash provided by operating activities has been greater than net income in all three years presented mainly due to the net
impact of non cash adjustments to income. Non cash adjustments include depreciation and amortization, tax benefits
from stock options, cumulative effect of accounting change, earnings in equity interests, stock compensation expense, as
well adjustments for gains and losses from the sale of investments. In 2003 and 2004, operating cash flows were reduced
by cash used for working capital needs while in 2002, operating cash flows were positively impacted by changes in
working capital balances. In all years, the most significant working capital change was the increase in our accounts
receivable balance reflecting increases in revenues and accounts receivable related to both our organic business and to
acquisitions. The days sales outstanding metric increased slightly from 2003 to 2004 but remained relatively flat from
2002 to 2003. In 2004, there was also a significant increase in accrued expenses and other current liabilities that
provided a positive working capital change. This increase was mainly due to a higher accrual balance for TAC payments
to affiliates arising from increased sponsored search revenue in 2004.
Cash used in investing activities is primarily attributable to net purchases of marketable debt securities, capital expendi-
tures and cash consideration used in acquisitions. We reinvested our cash into marketable debt securities in net amounts
of $157 million, $848 million and $807 million in 2002, 2003 and 2004, respectively. Our capital expenditures totaled
$52 million, $117 million and $246 million in 2002, 2003 and 2004, respectively. In each year our capital expenditures
were primarily for purchases of information technology assets to support our expanding offerings, our increased number
of users and our international growth. Cash used as consideration for acquisitions, net of cash acquired was $189 million,
$376 million and $756 million in 2002, 2003 and 2004, respectively. In 2004 our net cash consideration was primarily
expended on the acquisitions of Kelkoo, 3721 and Musicmatch. The acquisitions of HotJobs in 2002 and Inktomi and
Overture in 2003 were the main uses of the net cash consideration in these years, although these acquisitions were also
partially funded with our stock. In 2004, we generated $503 million of cash from the sale of marketable equity securities,
for which there was no comparable transaction in either 2003 or 2002.
Cash provided by (used in) financing activities is driven by our financing activities relating to employee option exercises,
stock repurchases and debt financing. Cash proceeds from employee option exercises have increased from $78 million in
2002 to $353 million in 2003 and $651 million in 2004 as our employee numbers and stock price have risen in each
successive year. During the year ended December 31, 2004, we entered into two structured stock repurchase transactions
which settle in cash or stock depending on the market price of our common stock on the date of maturity. In
February 2004, we entered into a six month structured stock repurchase transaction in the amount of $50 million which
matured in August 2004 resulting in us receiving a cash settlement of $54 million. In August 2004, we entered into a
43