Yahoo 2013 Annual Report Download - page 131

Microsoft. Under the License Agreement, Microsoft acquired an exclusive 10-year license to the Company’s core
search technology and has the ability to integrate this technology into its existing Web search platforms. On
February 18, 2010, the Company received regulatory clearance from both the U.S. Department of Justice and the
European Commission and on February 23, 2010 the Company commenced implementation of the Search
Agreement on a market-by-market basis. Under the Search Agreement, the Company is the exclusive worldwide
relationship sales force for both companies’ premium search advertisers, which include advertisers meeting
certain spending or other criteria, advertising agencies that specialize in or offer search engine marketing services
and their clients, and resellers and their clients seeking assistance with their paid search accounts. The term of the
Search Agreement is 10 years from February 23, 2010, subject to earlier termination as provided in the Search
Agreement. Approximately 20 percent, 25 percent, and 31 percent of the Company’s revenue for the years ended
December 31, 2011, 2012 and, 2013, respectively, was attributable to the Search Agreement.
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 February 23, 2015 (the fifth anniversary of the date that
implementation of the Search Agreement commenced), Microsoft will have the option to terminate the
Company’s sales exclusivity for premium search advertisers. If Microsoft exercises this 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, 2012 and 2013, the Company had collected total amounts of nil and $21 million,
respectively, on behalf of Microsoft and Affiliates, which was included in cash and cash equivalents with a
corresponding liability in accrued expenses and other current liabilities. The Company’s 88 percent share in
connection with the Search Agreement, which is included in accounts receivable, net, was $258 million and $305
million as of December 31, 2012 and December 31, 2013, 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 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 is typically the quarter in which the associated shortfall in revenue
per search occurred. In the fourth quarter of 2011, Microsoft agreed to extend the RPS Guarantee in the U.S. and
Canada through March 2013, and in the second quarter of 2013, Microsoft extended the RPS Guarantee in the
U.S. through March 2014. In June 2013, Microsoft and Yahoo agreed upon the RPS Guarantee payment amounts
to be paid to the Company for the quarters ended December 31, 2012, March 31, 2013 and June 30, 2013. The
Company also agreed to fixed quarterly payments in lieu of the RPS Guarantee in the U.S. for the quarters ending
September 30, 2013, December 31, 2013 and March 31, 2014. In addition, the Company agreed to waive its right
to receive any future RPS Guarantee payments in all other markets except Taiwan and Hong Kong.
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. By the end of 2012, the Company completed the transition of paid search in India,
most of the EMEA markets, and six markets in Latin America. By the end of 2013, the Company had substantially
completed the transition of paid search, including the transition of paid search in Taiwan and Hong Kong.
129