Yahoo 2004 Annual Report Download - page 64

payments based on a percentage of the Company’s revenue or based on a certain metric, such as number of searches or
paid clicks; or a combination of the two. The Company expenses, as cost of revenues, traffic acquisition costs associated
with affiliate arrangements under two methods. Agreements with fixed payments are expensed ratably over the term the
fixed payment covers. 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.
Internal Use Software and Website Development Costs. The Company has capitalized certain internal use software and Website
development costs totaling approximately $11 million, $11 million, and $19 million during 2002, 2003, and 2004,
respectively. The estimated useful life of costs capitalized is evaluated for each specific project and ranges from one to
three years. During 2002, 2003 and 2004, the amortization of capitalized costs totaled approximately $9 million,
$9 million and $11 million, respectively. Capitalized internal use software and Website development costs are included in
property and equipment, net.
Product Development. Product development costs consist primarily of payroll and related expenses incurred for enhancements
to and maintenance of the Company’s network, classification and organization of listings within Yahoo! properties,
research and development expenses, amortization of capitalized Website development costs, and other operating costs.
Advertising Costs. Advertising production costs are recorded as expense the first time an advertisement appears. Costs of
communicating advertising are recorded as expense as advertising space or airtime is used. All other advertising costs are
expensed as incurred. Advertising expense totaled approximately $94 million, $115 million, and $160 million for 2002,
2003, and 2004, respectively.
Stock-Based Compensation. The Company measures compensation expense for its stock-based employee compensation plans
using the intrinsic value method. If the fair value based method had been applied in measuring stock compensation
expense, the pro forma effect on net income and net income per share would have been as follows (in thousands, except
per share amounts):
Years Ended December 31,
2002 2003 2004
Net income (loss):
As reported $ 42,815 $ 237,879 $ 839,553
Add: Stock compensation expense included in reported net income, net of
related tax effects 5,041 12,987 19,374
Less: Stock compensation expense determined under fair value based method
for all awards, net of related tax effects (389,045) (183,515) (235,728)
Pro forma net income (loss) $(341,189) $ 67,351 $ 623,199
Net income (loss) per share:
As reported – basic $ 0.04 $ 0.19 $ 0.62
As reported – diluted $ 0.04 $ 0.18 $ 0.58
Pro forma – basic $ (0.29) $ 0.05 $ 0.46
Pro forma – diluted $ (0.29) $ 0.05 $ 0.43
See Note 12 – ‘‘Employee Benefits’’ for the assumptions and methodology used to determine the fair value of stock-based
compensation.
See ‘‘Recent Accounting Pronouncements’’ below regarding the impact of the adoption of Statement of Financial
Accounting Standards (‘‘SFAS’’) No. 123R (‘‘SFAS 123R’’), ‘‘Share-Based Payment.’’
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