Yahoo 2015 Annual Report Download - page 50

For the year ended December 31, 2015, free cash flow decreased $3.6 billion, compared to 2014,
primarily due to satisfaction of the $3.3 billion income tax liability related to the sale of Alibaba Group
ADSs in September 2014 and an increase in the acquisition of property and equipment to support our
product investment initiatives in our Mail, Search, and Mavens offerings.
For the year ended December 31, 2014, free cash flow decreased $200 million, compared to 2013,
primarily due to a decline in adjusted EBITDA and an increase in the acquisition of property and
equipment to support our growth initiatives.
Recent Developments
On February 2, 2016, we announced a strategic plan to simplify Yahoo, narrowing our focus on areas
of strength to fuel growth, drive revenue, and increase efficiency in 2016 and beyond. We will simplify
our product portfolio to emphasize the products that distinguish us competitively and drive the most
substantial portion of users, revenue and market opportunity. As part of this plan, we also announced
plans to reduce costs, including reducing our work force by approximately 15 percent by the end of
2016 and closing five offices, and to explore divesting non-core assets.
In parallel with executing our strategic plan, we are also exploring strategic alternatives, including
transactions to separate our remaining stake in Alibaba Group from our operating business focusing
on a reverse spin transaction, as well as exploring strategic proposals for the operating business. Our
Board has formed a Strategic Review Committee of independent directors to lead this process. The
Strategic Review Committee has engaged advisors and is establishing a process for engaging with
interested parties regarding strategic alternatives.
Significant Transactions
Search Agreement with Microsoft Corporation
The term of the Search Agreement is 10 years from its commencement date, February 23, 2010,
subject to earlier termination as provided in the Search Agreement. Under the current terms of the
Search Agreement, as amended on April 15, 2015 by the Eleventh Amendment to the Search
Agreement (the “Eleventh Amendment”), we are entitled to receive a percentage of the revenue (the
“Revenue Share Rate”) generated from Microsoft’s services on Yahoo Properties and on Affiliate sites
equal to 93 percent. Microsoft receives its 7 percent revenue share before deduction of the Affiliate
site’s share of revenue. The Affiliate site’s share of revenue is deducted from our 93 percent Revenue
Share Rate. Pursuant to the Eleventh Amendment, commencing on May 1, 2015, we also agreed to
request paid search results from Microsoft for 51 percent of our search queries originating from
personal computers accessing Yahoo Properties and our Affiliate sites and will display only
Microsoft’s paid search results on such search result pages.
Previously under the Search Agreement, Yahoo had sales exclusivity for both Yahoo’s and Microsoft’s
premium advertisers. Pursuant to the Eleventh Amendment to the Search Agreement, this sales
exclusivity terminated on July 1, 2015. Yahoo and Microsoft have been transitioning premium
advertisers for Microsoft’s paid search services to Microsoft on a market-by-market basis. As of
February 26, 2016, such transition was substantially complete for most markets in North America and
Europe, and the parties are cooperating on transitioning the remaining markets.
Revenue under the Search Agreement represented approximately 31 percent, 35 percent, and 35
percent of our revenue for the years ended December 31, 2013, 2014, and 2015, respectively.
See Note 19—“Search Agreement with Microsoft Corporation” in the Notes to our consolidated
financial statements for additional information.
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