Yahoo 2012 Annual Report Download - page 125

During the first five years of the term of the Search Agreement, in the transitioned markets the Company is
entitled to receive 88 percent of the revenue generated from Microsoft’s services on Yahoo! Properties (the
“Revenue Share Rate”) and the Company is also entitled to receive 88 percent of the revenue generated from
Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue. For new Affiliates during the term of
the Search Agreement, and for all Affiliates after the first five years of such term, the Company will receive 88
percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue
and certain Microsoft costs are deducted. On the fifth anniversary of the date of implementation of the Search
Agreement, Microsoft will have the option to terminate the Company’s sales exclusivity for premium search
advertisers. If Microsoft exercises its option, the Revenue Share Rate will increase to 93 percent for the
remainder of the term of the Search Agreement, unless the Company exercises its option to retain the Company’s
sales exclusivity, in which case the Revenue Share Rate would be reduced to 83 percent for the remainder of the
term. If Microsoft does not exercise such option, the Revenue Share Rate will be 90 percent for the remainder of
the term of the Search Agreement. In the transitioned markets, the Company reports as revenue the 88 percent
revenue share as the Company is not the primary obligor in the arrangement with the advertisers and
publishers. The underlying search advertising services are provided by Microsoft.
As of December 31, 2011 and December 31, 2012, the Company had collected a total amount of $66 million and
nil, respectively, on behalf of Microsoft and Affiliates, which was included in cash and cash equivalents as of
December 31, 2011 and December 31, 2012, respectively, with a corresponding liability in accrued expenses and
other current liabilities. The Company’s uncollected 88 percent share in connection with the Search Agreement
was $203 million and $258 million, which is included in accounts receivable, net, as of December 31, 2011 and
December 31, 2012, respectively.
Under the Search Agreement, for each market, Microsoft generally guarantees Yahoo!’s revenue per search
(“RPS Guarantee”) on Yahoo! Properties only for 18 months after the transition of paid search services to
Microsoft’s platform in that market. In the fourth quarter of 2011, Microsoft agreed to extend the RPS Guarantee
in the U.S. and Canada through March 2013. The RPS Guarantee is calculated based on the difference in revenue
per search between the pre-transition and post-transition periods and certain other factors. The Company records
the RPS Guarantee as search revenue in the quarter the amount becomes fixed, which would typically be the
quarter in which the associated shortfall in revenue per search occurred.
The Company completed the transition of its algorithmic and paid search platforms to the Microsoft platform in
the U.S. and Canada in the fourth quarter of 2010. In 2011, the Company completed the transition of algorithmic
search in all other markets and the transition of paid search in India. In 2012, the Company completed the
transition of paid search in most EMEA markets as well as six markets in Latin America. We are continuing to
work with Microsoft on transitioning paid search in the remaining markets. The market-by-market transition of
the Company’s paid search platform to Microsoft’s platform and the migration of paid search advertisers and
publishers to Microsoft’s platform are expected to continue through 2013, and possibly into 2014.
From February 23, 2010 until the applicable services are fully transitioned to Microsoft in all markets, Microsoft
will also reimburse the Company for the costs of operating algorithmic and paid search services subject to
specified exclusions and limitations. The Company’s results for the years ended December 31, 2010, 2011 and
2012 reflect $268 million, $212 million, and $67 million, respectively, in search operating cost reimbursements
from Microsoft under the Search Agreement. Search operating cost reimbursements began during the quarter
ended March 31, 2010 and will, subject to specified exclusions and limitations, continue until the Company has
fully transitioned to Microsoft’s platform.
The Company’s results for the year ended December 31, 2010 also reflect transition cost reimbursements from
Microsoft under the Search Agreement, which were equal to the transition costs of $81 million incurred by
Yahoo! related to the Search Agreement in the year ended December 31, 2010. In addition, in the year ended
December 31, 2010, $43 million was recorded for reimbursement of transition costs incurred in 2009. The 2009
transition cost reimbursements were recorded in 2010 after regulatory clearance in the U.S. and Europe was
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