Balance Sheet

Exiting 1Q11, cash, cash equivalents, and short-term marketable debt securities were $2.79 billion versus $2.88 billion in 4Q10. Accounts receivable were $932.9 million versus $1,028.9 million in 4Q10. Yahoo does not have any debt.

Long-term deferred revenue was $247.0 million versus $56.4 million in 4Q10.

Cash Flow

In 1Q11, cash flow from operating activities was $143.6 million versus $403.0 million in 4Q10. Capital expenditure was $112.5 million versus $247.4 million in 4Q10. Free cash flow was $31.1 million versus $155.7 million in 4Q10.

Share Repurchase Program

During 1Q11, the company repurchased 8.4 million shares for $137.4 million.

Update on Search Transition

Yahoo acknowledged that the revenue per search (RPS) lift expected from combining the YHOO and MSFT search marketplaces is yet to materialize. The original expectation had been for neutral RPS by the mid-point of 2011, but YHOO now hopes for neutral RPS by the end of 2011. As a result of “technical limitations” of the adCenter platform related to its ability to predict key variables, YHOO will now hold off on transitioning future paid search markets (Europe and Asia) this year.

The analysts believe that YHOO still sounds hopeful about the ability of the combined marketplace to lift RPS over the long term, and YHOO’s U.S. search revenues have downside protection from contractually required RPS guarantees through 1Q12. However, they remain concerned about YHOO’s search volumes as the company loses share to mobile devices.

Yahoo completed the transition of its paid search to MSFT in North America in 4Q10. For other major markets, YHOO expects the transition of algorithmic search to be completed by mid-2011, with paid search moved over by the end of 2011.

In February 2010, Yahoo and Microsoft had announced that they have received clearance from the U.S. Department of Justice and the European Commission for their Search and Advertising Services and Sales Agreement and License Agreement. The agreement was announced on July 29, 2009, and finalized on December 4, 2009.

Microsoft and Yahoo believe that this deal will create a sustainable and more compelling alternative in search that can provide consumers, advertisers, and publishers more innovation and choice as well as better value.

The key terms of the agreement are as follows:

• The term of the agreement is 10 years.

• Microsoft will acquire an exclusive 10-year license to Yahoo's core search technologies, and will have the ability to integrate Yahoo search technologies into its existing Web search platforms.

• Microsoft's Bing will be the exclusive algorithmic search and paid search platform for Yahoo sites. Yahoo will continue to use its technology and data in other areas of its business such as enhancing display-advertising technology.

• Yahoo will become the exclusive worldwide relationship sales force for both companies' premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft's AdCenter platform, and prices for all search ads will continue to be set by AdCenter's automated auction process.

• Each company will maintain its own separate display advertising business and sales force.

• Yahoo will innovate and "own" the user experience on Yahoo properties, including the user experience for search, even though it will be powered by Microsoft technology.

• Microsoft will compensate Yahoo through a revenue sharing agreement on traffic generated on Yahoo's network of both owned and operated (O&O) and affiliate sites.

• Microsoft will pay traffic acquisition costs (TAC) to Yahoo at an initial rate of 88% of search revenue generated on Yahoo's O&O sites during the first five years of the agreement. After 5 years, MSFT can terminate YHOO’s sales exclusivity, if TAC moves to 93% for the remaining 5 years. Yahoo can veto Microsoft’s right to terminate the exclusivity, if TAC moves to 83%. If neither company does anything, TAC will move to 90% after 5 years.

• Yahoo will continue to syndicate its existing search affiliate partnerships.

• Microsoft will guarantee Yahoo's O&O revenue per search (RPS) in each country for the first 18 months following its initial implementation in that country.

• At full implementation (expected to occur within 24 months following regulatory approval), Yahoo estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500.0 million and capital expenditure savings of approximately $200.0 million. Further, this agreement will provide a benefit to annual operating cash flow of approximately $275.0 million.

• Microsoft will pay Yahoo $50.0 million annually during the first three years of the search agreement to cover certain expenses not otherwise reimbursable by Microsoft. Microsoft will also reimburse Yahoo for the costs of running its algorithmic and paid search services until the services are fully transitioned.

• Microsoft will hire no less than 400 Yahoo employees to assist in the transition.

• The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows.

The agreement does not cover each company's Web properties and products, email, instant messaging, display advertising, or any other aspect of the companies' businesses. In these areas, the companies will continue to compete vigorously.