Yahoo!’s results for the three months ended September 30, 2010 also reflect transitioncost reimbursements from Microsoft under the Search Agreement, which were equal tothe transition costs of $18 million incurred by Yahoo! related to the Search Agreement inthe third quarter. Therefore, the net impact of the transition costs and reimbursementswere neutral to total operating expenses in the third quarter, as expected. In the future,quarterly transition cost reimbursements are expected to continue to be roughly equal toquarterly transition costs.
Third Quarter 2010 Revenue Results
Marketing services revenue increased four percent and fees revenue decreased15 percent, compared to the third quarter of 2009.
Marketing services revenue from Owned and Operated sites of $877 millionincreased three percent compared to $851 million for the same period of 2009.This was primarily driven by a 17 percent increase in display advertising revenue,partially offset by a seven percent decline in search advertising revenue.
Marketing services revenue from Affiliate sites was $557 million, a six percentincrease compared to $526 million for the same period of 2009.
Third Quarter 2010 Cash Flow and Cash Balance
Cash flow from operating activities was $346 million, a two percent decreasecompared to $355 million for the same period of 2009.
Free cash flow was $250 million, a three percent decrease compared to $258million for the same period of 2009.
Cash, cash equivalents, and investments in marketable debt securities were$3,455 million at September 30, 2010 compared to $4,518 million at December31, 2009, a decline of $1,063 million. During the third quarter of 2010, Yahoo!repurchased 62.5 million shares for $868 million. During the nine months endedSeptember 30, 2010, Yahoo! repurchased 119.2 million shares for $1,749 million.
Revenue excluding traffic acquisition costs (Revenue ex-TAC) for the fourth quarter of2010 is expected to be in the range of $1,125 million to $1,225 million. This businessoutlook assumes the paid search transition to Microsoft’s adCenter platform in the U.S.and Canada will be completed by the end of October. Based on the terms of the SearchAgreement with Microsoft, Microsoft is entitled to a revenue share of 12 percent of thenet (after TAC) search revenue generated on Yahoo!’s Owned and Operated andAffiliate sites in transitioned markets. As required under GAAP, Yahoo! will report thenet revenue it receives under the Search Agreement as GAAP revenue and will nolonger present associated TAC as part of our financial results. Accordingly, fortransitioned markets Yahoo! will report GAAP revenue associated with the SearchAgreement on a net (after TAC) basis rather than a gross basis. Microsoft’s revenueshare in the fourth quarter of 2010 is expected to be approximately $30 million. GAAPrevenue for the fourth quarter of 2010 is expected to be in the range of $1,400 million to$1,530 million. Total expenses (cost of revenue plus total operating expenses) for thefourth quarter of 2010 is expected to be in the range of $1,200 million to $1,250 million.Total expenses less TAC for the fourth quarter of 2010 is expected to be in the range of$925 million to $945 million. Income from operations for the fourth quarter of 2010 isexpected to be in the range of $200 million to $280 million.