Yahoo 2012 Annual Report Download - page 89

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The Company recognizes revenue from search advertising on Yahoo! Properties and Affiliate sites. Search
revenue is recognized based on Paid Clicks. A Paid Click occurs when a user clicks on a sponsored listing on
Yahoo! Properties and Affiliate sites for which an advertiser pays on a per click basis. The Company’s Search
Agreement with Microsoft provides for Microsoft to be the exclusive algorithmic and paid search services
provider on Yahoo! Properties and non-exclusive provider of such services on Affiliate sites. In transitioned
markets, the Company reports as revenue the 88 percent share of revenue generated from Microsoft’s services on
Yahoo! Properties and Affiliate sites, as the Company is not the primary obligor in the arrangement with the
advertisers. See Note 18—“Search Agreement with Microsoft Corporation” for a description of the Search
Agreement with Microsoft.
In non-transitioned markets, the Company pays Affiliates TAC for the revenue generated from the search
advertisements on the Affiliates’ Websites. The revenue derived from these arrangements is reported on a gross
basis including TAC paid to Affiliates, as the Company continues to be the primary obligor to the advertisers.
The Company also generates search revenue from a revenue sharing arrangement with Yahoo Japan for search
technology and services and records the related revenue as it is earned.
Other revenue includes listings-based services revenue, transaction revenue, royalties, and fees revenue. Listings-
based services revenue is generated from a variety of consumer and business listings-based services, including
classified advertising such as Yahoo! Autos and other services. The Company recognizes listings-based services
revenue when the services are performed. Transaction revenue is generated from facilitating commercial
transactions through Yahoo! Properties, principally from Yahoo! Small Business, Yahoo! Travel, and Yahoo!
Shopping. The Company recognizes transaction revenue when there is evidence that qualifying transactions have
occurred. We also receive royalties from joint venture partners that are recognized when earned. Fees revenue
consists of revenue generated from a variety of consumer and business fee-based services as well as services for
small businesses. The Company recognizes fees revenue when the services are performed.
In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an
arrangement exists, the service is performed, and collectability of the related fee is reasonably assured. The
Company’s arrangements generally do not include a provision for cancellation, termination, or refunds that
would significantly impact revenue recognition.
The Company accounts for cash consideration given to customers, for which it does not receive a separately
identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue rather than as an expense.
Cash consideration received in an arrangement with a provider may require consideration of classification of
amounts received as revenue or a reimbursement of costs incurred.
Current deferred revenue is comprised of contractual billings in excess of recognized revenue and payments
received in advance of revenue recognition. Long-term deferred revenue includes amounts received from
customers for which services will not be delivered within the next 12 months.
TAC. TAC consists of payments made to third-party entities that have integrated the Company’s advertising
offerings into their Websites or other offerings and payments made to companies that direct consumer and
business traffic to Yahoo! Properties. The Company enters into agreements of varying duration that involve
TAC. There are generally two 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; or variable payments based on a percentage of the Company’s revenue or based on a certain metric,
such as the number of searches or paid clicks. The Company expenses, as cost of revenue, TAC under two
different methods. Agreements with fixed payments are expensed ratably over the term the fixed payment covers.
Agreements based on a percentage of revenue, 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.
Product Development. Product development expenses consist primarily of compensation related expenses
(including stock-based compensation expense) incurred for research and development, the development of,
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