Sunnyvale, California – Yahoo! Inc. today reported results for the quarter ended March 31, 2011.

Revenue excluding traffic acquisition costs (“revenue ex-TAC”) was $1,064 million for the first quarter of 2011, a 6 percent decrease from the first quarter of 2010, primarily due to the revenue share related to the Search Agreement with Microsoft. Excluding this item and other special items, revenue ex-TAC for the first quarter of 2011 was flat year over year. Special items include the impact of the divestitures of Zimbra and HotJobs, broadband deferred revenue amortization, and certain fee rate reductions.

GAAP revenue was $1,214 million for the first quarter of 2011, a 24 percent decrease from the first quarter of 2010, primarily due to the required change in revenue presentation related to the Search Agreement and the associated revenue share with Microsoft. For transitioned markets (U.S. and Canada), Yahoo! now reports revenue associated with the Search Agreement on a net (after TAC) basis rather than a gross basis. Excluding the impact of these two items and the impact of the divestitures of Zimbra and HotJobs, broadband deferred revenue amortization, and certain fee rate reductions, revenue for the first quarter of 2011 decreased 8 percent compared to the first quarter of 2010.

Income from operations increased by 1 percent to $190 million in the first quarter of 2011, compared to $188 million in the first quarter of 2010.

Net earnings were $0.17 per diluted share in the first quarter of 2011, compared to $0.22 in the first quarter of 2010, a decrease of 23 percent. Net earnings per diluted share in the first quarter of 2011 included an impairment charge of $0.02 related to an investment held by Yahoo Japan. Net earnings per diluted share in the first quarter of 2010 included benefits of $0.05 related to the sale of Zimbra and $0.02 related to transition cost reimbursements from Microsoft attributable to 2009, reimbursed in 2010. Excluding these items, net earnings per diluted share for the first quarter of 2011 increased 23 percent compared to the first quarter of 2010.

“We are solidly executing toward our plan for returning Yahoo! to sustainable revenue and profit growth,” said Carol Bartz, CEO of Yahoo!. “During the quarter, we beat the midpoint of revenue guidance while continuing to deliver on the bottom line. We continued to extend our lead as the world’s premier digital media company with users to Yahoo! branded properties increasing 15% year over year and minutes spent increasing 17%.”

Business Highlights

- Yahoo! launched Search Direct which delivers answers and direct access to websites before a user completes a query, hits the search button, or goes to a search results page. This search innovation supports Yahoo!’s strategy to fundamentally shift the way people experience the Web – by providing the richest, most integrated content faster and more efficiently.

- Yahoo! previewed Livestand, a digital newsstand that continually offers new content to consumers, based on their interests. Launching first for tablets, Livestand from Yahoo! will enable publishers and advertisers to seamlessly distribute content across tablets and mobile phones in an experience that is elegant and personalized to the individual.

- Yahoo! continued to modernize its technology platforms, with 31 additional sites across the Americas, EMEA and APAC going live on the new global content platform in the quarter.

- Yahoo! continued to drive engagement across its properties, with programming for events including the Super Bowl and the Oscars delivering blockbuster results. The Super Bowl drove more than 37 million clicks, doubling from the prior year; the Oscars drove more than one billion page views, a 23 percent increase over the prior year. Also in the quarter, Yahoo! launched its royal wedding Website, bringing together the best of the Web to celebrate the royal couple.

- Yahoo!’s original video programs increased its audience by 80 percent year over year with time spent doubling. “Primetime in No Time” surpassed 500 million total streams in the quarter making it the most watched online show ever. In just four quarters, the news trivia program “Who Knew” became the number one online show with more than 5 million visitors. In the quarter we also launched new programs including “Breakout” in Yahoo! Finance and “omg Now” in Entertainment.

- Yahoo! introduced the MarketDash app, a newly designed tablet experience for Yahoo! Finance.

- Yahoo! announced AdLabs, a group focused on providing scientific leadership to the industry and accelerating innovation in digital advertising products through Yahoo! Labs, one of the world’s premier industrial research organizations.

- Yahoo! introduced Yahoo! Safely worldwide, a global resource to inform parents, educators, and young people in their own languages about important topics, such as managing digital reputations, avoiding cyber-bullying, and learning how to minimize risks on mobile devices.

- Yahoo! announced a partnership with Omnicom Group, a leading global marketing and communications company, to educate brands about the power of digital storytelling in creating more engaging online experiences.

- Yahoo! appointed David Kenny, president of Akamai Technologies, Inc., to the Board of Directors. Prior to Akamai, he was a managing partner of VivaKi and chief executive officer of Digitas, Inc., where he transformed the company from a direct marketing business to a cutting-edge interactive communications firm.

Search Alliance Costs and Reimbursements

Yahoo!’s results for the first quarter of 2011 reflect $56 million in search operating cost reimbursements and $11 million in transition cost reimbursements from Microsoft under the Search Agreement, which amounts are equal to the search operating costs and the transition costs incurred by Yahoo! in the first quarter. Search operating cost reimbursements are expected to continue to decline as Yahoo! fully transitions all markets to Microsoft’s search platform and the underlying expenses are removed from our cost structure. Our business outlook for total expenses reflects these anticipated savings. The net impact of the transition costs and transition cost reimbursements were neutral to total operating expenses in the first quarter, as expected.

First Quarter 2011 Revenue Results

- Display revenue ex-TAC increased 10 percent to $471 million, compared to $427 million for the first quarter of 2010.
- GAAP display revenue increased 6 percent to $523 million, compared to $491 million for the first quarter of 2010.
- Search revenue ex-TAC was $357 million, a 19 percent decrease compared to $440 million for the first quarter of 2010.
- GAAP search revenue was $455 million, a 46 percent decrease compared to $841 million for the first quarter of 2010.
Cash Flow and Cash Balance
- Cash flow from operating activities for the first quarter of 2011 was $208 million, a 45 percent increase compared to $144 million for the same period of 2010.
- Free cash flow was $59 million for the first quarter of 2011, a 7 percent decrease compared to $64 million for the same period of 2010.
- Cash, cash equivalents, and investments in marketable debt securities were $3,528 million at March 31, 2011 compared to $3,629 million at December 31, 2010, a decrease of $101 million. During the first quarter of 2011, Yahoo! repurchased 8 million shares for $137 million.

Business Outlook

Revenue ex-TAC for the second quarter of 2011 is expected to be in the range of $1,075 million to $1,125 million. Based on the terms of the Search Agreement with Microsoft, Microsoft retains a revenue share of 12 percent of the net (after TAC) search revenue generated on Yahoo! Properties and Affiliate sites in transitioned markets. Yahoo! reports the net revenue it receives under the Search Agreement as revenue and no longer presents the associated TAC within cost of revenue. Accordingly, for transitioned markets Yahoo! reports GAAP revenue associated with the Search Agreement on a net (after TAC) basis rather than a gross basis. For markets that have not yet transitioned, revenue continues to be recorded on a gross basis, and TAC is recorded in cost of revenue. Microsoft’s revenue share in the second quarter of 2011 is expected to be approximately $35 million. GAAP revenue for the second quarter of 2011 is expected to be in the range of $1,230 million to $1,290 million. Total expenses (cost of revenue plus total operating expenses) for the second quarter of 2011 is expected to be in the range of $1,070 million to $1,100 million. Total expenses less TAC for the second quarter of 2011 is expected to be in the range of $915 million to $935 million. Income from operations for the second quarter of 2011 is expected to be in the range of $160 million to $190 million.

Business outlook for revenue ex-TAC is being provided to reflect the underlying dynamics of the business during the Microsoft transition and to facilitate comparisons to prior periods.