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LIVEPERSON INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which are prepared in
conformity with accounting principles generally accepted in the United States of
America. As such, we are required to make certain estimates, judgments and
assumptions that management believes are reasonable based upon the information
available. We base these estimates on our historical experience, future
expectations and various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for our judgments
that may not be readily apparent from other sources. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting periods. These estimates and assumptions relate to estimates of the
carrying amount of goodwill, intangibles, stock based-compensation, valuation
allowances for deferred income taxes, accounts receivable, the expected term of
a customer relationship, accruals and other factors. We evaluate these estimates
on an ongoing basis. Actual results could differ from those estimates under
different assumptions or conditions, and any differences could be material.
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OVERVIEW
LivePerson provides online engagement solutions offering a cloud-based platform
which enables businesses to pro-actively connect with consumers and an online
marketplace providing information and knowledge. We are organized into two
operating segments: Business and Consumer. The Business segment facilitates
real-time online interactions - chat, voice, and content delivery, across
multiple channels and screens for global corporations of all sizes. The Consumer
segment facilitates online transactions between independent service providers
("Experts") and individual consumers ("Users") seeking information and knowledge
for a fee via real-time chat. We were incorporated in the State of Delaware in
November 1995 and the LivePerson service was introduced initially in November
1998.
.
In order to sustain growth in these segments, our strategy is to expand our
position as the leading provider of online engagement solutions that facilitate
real-time assistance and expert advice. To accomplish this, we are focused on
the following current initiatives:
• Expanding Business with Existing Customers and Adding New Customers. We are
expanding our sales capacity by adding enterprise and midmarket sales agents.
We have also expanded our efforts to retain existing SMB customers through
increased interaction with them during the early stages of their usage of our
services.
• Introducing New Products and Capabilities. We continue to invest in product
marketing, research and development and executive personnel to support our
expanding efforts to build and launch new products and capabilities to support
existing customer deployments, and to further penetrate our total addressable
market. These investments have initially been focused in the areas of online
marketing engagement and chat transcript text analysis. Over time, we expect
to develop and launch additional capabilities that leverage our existing
market position as a leader in proactive, intelligence-driven online
engagement.
• Expanding our international presence. We continue to increase our investment
in sales and support personnel in the United Kingdom, Latin America and
Western Europe, particularly France and Germany. We are also working with
sales and support partners as we expand our investment in the Asia-Pacific
region. We continue to improve the multi-language and translation capabilities
within our hosted solutions to further support international expansion.
THIRD QUARTER 2012
Financial overview of the three months ended September 30, 2012 compared to the
three months ended September 2011:
• Total revenue increased 16% to $39.7 million from $34.3 million.
• Revenue from our Business segment increased 17% to $36.1 million from $30.8
million.
• Gross profit margin increased to 77% from 76%.
• Operating expenses increased 27% to $37.1 million from $29.2 million.
• Net income decreased 41% to $1.6 million from $2.7 million.
The significant accounting policies which we believe are the most critical to
aid in fully understanding and evaluating the reported consolidated financial
results include the following:
REVENUE RECOGNITION
The majority of our revenue is generated from monthly service revenues and
related professional services from the sale of the LivePerson services. Because
we provide our application as a service, we follow the provisions of ASC
605-10-S99, "Revenue Recognition" and ASC 605-25, "Revenue Recognition with
Multiple-Element Arrangements." We charge a monthly fee, which varies by type of
service, the level of customer usage and website traffic, and in some cases, the
number of orders placed via our online engagement solutions.
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For certain of our larger customers, we may provide call center labor through an
arrangement with one or more of several qualified vendors. For most of these
customers, we pass the fee we incur with the labor provider and our fee for the
hosted services through to our customers in the form of a fixed fee for each
order placed via our online engagement solutions. For these Pay for Performance
("PFP") arrangements, we recognize revenue net of the labor provider's fee in
accordance with ASC 605-45, "Principal Agent Considerations," due primarily to
the fact that the call center labor vendor is the primary obligor with respect
to the labor services provided. Additionally, we perform as an agent without
risk of loss for collection and do not bear inventory risk with respect to the
outsourced labor services. Finally, we do not provide any part of the labor
services, have no latitude in establishing prices for the labor services and
generally do not have discretion in selecting the vendor.
The majority of our larger customers also pay a professional services fee
related to implementation. We defer these implementation fees and associated
direct costs and recognize them ratably over the expected term of the customer
relationship upon commencement of the hosting services. We may also charge
professional service fees related to additional training, business consulting
and analysis in support of the LivePerson services.
We also sell certain of the LivePerson services directly via Internet download.
These services are marketed as LivePerson Pro and LivePerson Contact Center for
small and mid-sized businesses ("SMBs"), and are paid for almost exclusively by
credit card. Credit card payments accelerate cash flow and reduce our collection
risk, subject to the merchant bank's right to hold back cash pending settlement
of the transactions. Sales of LivePerson Pro and LivePerson Contact Center may
occur with or without the assistance of an online sales representative, rather
than through face-to-face or telephone contact that is typically required for
traditional direct sales.
We recognize monthly service revenue based upon the fee charged for the
LivePerson services, provided that there is persuasive evidence of an
arrangement, no significant Company obligations remain, collection of the
resulting receivable is probable and the amount of fees to be paid is fixed and
determinable. Our service agreements typically have twelve month terms and are
terminable or may terminate upon 30 to 90 days' notice without penalty. When
professional service fees add value to the customer on a standalone basis, we
recognize professional service fees upon completion and customer acceptance in
accordance with FASB Accounting Standards Update 2009-13. This guidance
establishes a selling price hierarchy for determining the selling price of a
deliverable, which is based on: (a) vendor-specific objective evidence; (b)
third-party evidence; or (c) estimates. If a professional services arrangement
does not qualify for separate accounting, we recognize the fees, and the related
labor costs, ratably over a period of 48 months, representing our current
estimate of the term of the customer relationship.
For revenue generated from online transactions between Experts and Users, we
recognize revenue net of Expert fees in accordance with ASC 605-45, "Principal
Agent Considerations," due primarily to the fact that the Expert is the primary
obligor. Additionally, we perform as an agent without any risk of loss for
collection, and are not involved in selecting the Expert or establishing the
Expert's fee. We collect a fee from the consumer and retain a portion of the
fee, and then remit the balance to the Expert. Revenue from these transactions
is recognized when there is persuasive evidence of an arrangement, no
significant Company obligations remain, collection of the resulting receivable
is probable and the amount of fees to be paid is fixed or determinable.
STOCK-BASED COMPENSATION
We follow ASC 718-10, "Stock Compensation," which addresses the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services, with a primary focus on transactions in which an entity obtains
employee services in share-based payment transactions. ASC 718-10 requires
measurement of the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award (with
limited exceptions). Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized.
As of September 30, 2012, there was approximately $42.2 million of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements. That cost is expected to be recognized over a weighted average
period of approximately 2.2 years.
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ACCOUNTS RECEIVABLE
Our customers are located primarily in the United States. We perform ongoing
credit evaluations of our customers' financial condition (except for customers
who purchase the LivePerson services by credit card via Internet download) and
have established an allowance for doubtful accounts based upon factors
surrounding the credit risk of customers, historical trends and other
information that we believe to be reasonable, although they may change in the
future. If there is a deterioration of a customer's credit worthiness or actual
write-offs are higher than our historical experience, our estimates of
recoverability for these receivables could be adversely affected.Although our
large number of customers limits our concentration of credit risk, we do have
several large customers. If we experience a significant write-off from one of
these large customers, it could have a material adverse impact on our
consolidated financial statements. No single customer accounted for or exceeded
10% of our total revenue in the three and nine months ended September 30, 2012
and 2011. One customer accounted for approximately 16% and 18% of accounts
receivable as of September 30, 2012 and December 31, 2011, respectively. During
the nine months ended September 30, 2012, we increased our allowance for
doubtful accounts by $20,000 to approximately $708,000, principally due to an
increase in the proportion of our receivables due from customers with greater
credit risk. A larger proportion of receivables are due from larger corporate
customers that typically have longer payment cycles.
GOODWILL
In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill and
indefinite-lived intangible assets are not amortized, but reviewed for
impairment upon the occurrence of events or changes in circumstances that would
reduce the fair value below its carrying amount. Goodwill is required to be
tested for impairment at least annually. In September 2011, the FASB issued ASU
No. 2011-08, Intangibles - Goodwill and Other (Topic 350). ASU 2011-08 permits
an entity to first assess qualitative factors to determine whether it is "more
likely than not" that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary to perform
the two-step goodwill impairment test described in Topic 350. The
more-likely-than-not threshold is defined as having a likelihood of more than
50%. If it is determined that the fair value of a reporting unit is more likely
than not to be less than its carrying value (including unrecognized intangible
assets) than it is necessary to perform the second step of the goodwill
impairment test. The second step of the goodwill impairment test is judgmental
in nature and often involves the use of significant estimates and assumptions.
Similarly, estimates and assumptions are used in determining the fair value of
other intangible assets. These estimates and assumptions could have a
significant impact on whether or not an impairment charge is recognized and also
the magnitude of any such charge. We perform internal valuation analyses and
consider other market information that is publicly available. Estimates of fair
value are primarily determined using discounted cash flows and market
comparisons. These approaches use significant estimates and assumptions
including projected future cash flows (including timing), discount rates
reflecting the risk inherent in future cash flows, perpetual growth rates,
determination of appropriate market comparables and the determination of whether
a premium or discount should be applied to comparables.
In the third quarter of 2012, we determined that it is not more-likely that the
fair value of the reporting units are less than their carrying amount.
Accordingly, we did not perform the two-step goodwill impairment test.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC 360-10, "Accounting for the Impairment or Disposal of
Long-lived Assets," long-lived assets, such as property, plant and equipment and
purchased intangibles subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. In July 2012, the FASB issued ASU No. 2012-02,
Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment. This ASU states that an entity has the option first to
assess qualitative factors to determine whether the existence of events and
circumstances indicates that it is more likely than not that the
indefinite-lived intangible asset is impaired. If, after assessing the totality
of events and circumstances, an entity concludes that it is not more likely than
not that the indefinite-lived intangible asset is impaired, then the entity is
not required to take further action. However, if an entity concludes otherwise,
then it is required to determine the fair value of the indefinite-lived
intangible asset and perform the quantitative impairment test by comparing the
fair value with the carrying amount in accordance with Codification Subtopic
350-30, Intangibles-Goodwill and Other, General Intangibles Other than Goodwill.
Recoverability of assets to be held and used is measured by a comparison of the
carrying value of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying value of an asset exceeds its
estimated future cash flows, an impairment charge is recognized in the amount by
which the carrying value of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying value or the fair value less costs to
sell, and are no longer depreciated. The assets and liabilities of a disposed
group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
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USE OF ESTIMATES
The preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the U.S. requires our management to
make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the period. Significant items subject to such
estimates and assumptions include the carrying amount of goodwill, intangibles,
stock-based compensation, valuation allowances for deferred income tax assets,
accounts receivable, the expected term of a customer relationship, accruals and
other factors. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other
(Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU
states that an entity has the option first to assess qualitative factors to
determine whether the existence of events and circumstances indicates that it is
more likely than not that the indefinite-lived intangible asset is impaired. If,
after assessing the totality of events and circumstances, an entity concludes
that it is not more likely than not that the indefinite-lived intangible asset
is impaired, then the entity is not required to take further action. However, if
an entity concludes otherwise, then it is required to determine the fair value
of the indefinite-lived intangible asset and perform the quantitative impairment
test by comparing the fair value with the carrying amount in accordance with
Codification Subtopic 350-30, Intangibles-Goodwill and Other, General
Intangibles Other than Goodwill. The amendments in this ASU are effective for
annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012. Early adoption is permitted, including for annual and
interim impairment tests performed as of a date before July 27, 2012, if a
public entity's financial statements for the most recent annual or interim
period have not yet been issued. We elected early adoption of this update and it
had no impact on our consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities. This ASU is intended to
provide enhanced disclosures that will enable users of its financial statements
to evaluate the effect or potential effect of netting arrangements on an
entity's financial position. This includes the effect or potential effect of
rights of setoff associated with an entity's recognized assets and recognized
liabilities within the scope of this update. The amendments require enhanced
disclosures by requiring improved information about financial instruments and
derivative instruments that are either (1) offset in accordance with either
Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master
netting arrangement or similar agreement, irrespective of whether they are
offset in accordance with either Section 210-20-45 or Section 815-10-45. An
entity is required to apply this amendment for annual reporting periods
beginning on or after January 1, 2013, and interim periods within those annual
periods. An entity should provide the disclosures required by those amendments
retrospectively for all comparative periods presented. ASU No. 2011-11 relates
specifically to disclosures, it will not have an impact on our consolidated
financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance
of the FASB and the IASB (the Boards) on fair value measurement. The collective
efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted
in common requirements for measuring fair value and for disclosing information
about fair value measurements, including a consistent meaning of the term "fair
value." The Boards have concluded the common requirements will result in greater
comparability of fair value measurements presented and disclosed in financial
statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to
the FASB Accounting Standards Codification (Codification) in this ASU are to be
applied prospectively. For public entities, the amendments are effective during
interim and annual periods beginning after December 15, 2011. This update did
not have an impact on our consolidated financial statements.
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REVENUE
The majority of our revenue is generated from monthly service revenues and
related professional services from the sale of the LivePerson services. We
charge a monthly fee, which varies by service and customer usage. The majority
of our larger customers also pay a professional services fee related to
implementation. A large proportion of our revenue from new customers comes from
large corporations. These companies typically have more significant
implementation requirements and more stringent data security standards. Such
customers also have more sophisticated data analysis and performance reporting
requirements, and are likely to engage our professional services organization to
provide such analysis and reporting on a recurring basis.
Revenue from our Business segment accounted for 91% and 90% of total revenue for
the three and nine months ended September 30, 2012, respectively. Revenue
attributable to our monthly hosted Business services accounted for 92% and 93%
of total Business revenue for the three and nine months ended September 30,
2012, respectively. Revenue from our Business segment accounted for 90% and 89%
of total revenue for the three and nine months ended September 30, 2011,
respectively. Revenue attributable to our monthly hosted Business services
accounted for 95% of total Business revenue for the three and nine months ended
September 30, 2011, respectively. Our service agreements typically have twelve
month terms and, in some cases, are terminable or may terminate upon 30 to 90
days' notice without penalty. Given the time required to schedule training for
our customers' operators and our customers' resource constraints, we have
historically experienced a lag between signing a customer contract and
recognizing revenue from that customer. This lag has recently ranged from 30 to
90 days.
Revenue from our Consumer segment is generated from online transactions between
Experts and Users and is recognized net of Expert fees and accounted for
approximately 9% and 10% of total revenue for the three and nine months ended
September 30, 2012, respectively. Revenue generated from online transactions
between Experts and Users accounted for approximately 10% and 11% of total
revenue for the three and nine months ended September 30, 2011, respectively.
We also have entered into contractual arrangements that complement our direct
sales force and online sales efforts. These are primarily with call center
service companies, pursuant to which LivePerson is paid a commission based on
revenue generated by these service companies from our referrals. To date,
revenue from such commissions has not been material.
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OPERATING EXPENSES
Our cost of revenue consists of:
• compensation costs relating to employees who provide customer support and
implementation services to our customers;
• compensation costs relating to our network support staff;
• depreciation of certain hardware and software;
• allocated occupancy costs and related overhead;
• the cost of supporting our infrastructure, including expenses related to
server leases, infrastructure support costs and Internet connectivity;
• the credit card fees and related payment processing costs associated with the
consumer and SMB services; and
• amortization of certain intangibles.
Our product development expenses consist primarily of compensation and related
expenses for product development personnel, allocated occupancy costs and
related overhead, outsourced labor and expenses for testing new versions of our
software. Product development expenses are charged to operations as incurred.
Our sales and marketing expenses consist of compensation and related expenses
for sales personnel and marketing personnel, online marketing, allocated
occupancy costs and related overhead, advertising, sales commissions, public
relations, promotional materials, travel expenses and trade show exhibit
expenses.
Our general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, legal and human resources personnel,
allocated occupancy costs and related overhead, professional fees, provision for
doubtful accounts and other general corporate expenses.
During the nine months ended September 30, 2012, we increased our allowance for
doubtful accounts by $20,000 to $708,000, principally due to an increase in the
proportion of receivables due from customers with greater credit risk. A larger
proportion of receivables are due from larger corporate customers that typically
have longer payment cycles. During 2011, we increased our allowance for doubtful
accounts by $290,000 to approximately $851,000, principally due to an increase
in accounts receivable as a result of increased sales and, to a lesser extent,
to an increase in the proportion of receivables due from customers with greater
credit risk. We wrote off approximately $163,000 of previously reserved
accounts, leaving a net allowance for doubtful accounts of approximately
$688,000. A larger proportion of receivables are due from larger corporate
customers that typically have longer payment cycles. We base our allowance for
doubtful accounts on specifically identified credit risks of customers,
historical trends and other information that we believe to be reasonable. We
adjust our allowance for doubtful accounts when accounts previously reserved
have been collected.
NON-CASH COMPENSATION EXPENSE
The net non-cash compensation amounts for the three and nine months ended
September 30, 2012 and 2011 consist of:
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Stock-based compensation expense
related to ASC 718-10 $ 2,852 $ 1,736 $ 7,646 $ 4,951
Total $ 2,852 $ 1,736 $ 7,646 $ 4,951
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RESULTS OF OPERATIONS
The Company is organized into two operating segments: Business and Consumer. The
Business segment facilitates real-time online interactions - chat, voice, and
content delivery, across multiple channels and screens for global corporations
of all sizes. The Consumer segment facilitates online transactions between
Experts and Users seeking information and knowledge for a fee via real-time
chat.
Comparison of Three and Nine Months Ended September 30, 2012 and 2011
Revenue - Business. Revenue increased by 17% and 21% to $36.1 million and $103.5
million in the three and nine months ended September 30, 2012, respectively,
from $30.8 million and $85.6 million in the comparable periods in 2011. This
increase is primarily attributable to increased revenue from existing customers
in the amount of approximately $2.6 million and $9.4 million, respectively, net
of cancellations and, to a lesser extent, to new customers in the amount of
approximately $1.6 million and $6.1 million, respectively, and an increase in
professional services revenue of approximately $1.2 million and $2.7 million,
respectively. Our revenue growth has typically been driven by a mix of revenue
from new customers as well as expansion of existing customers.
Revenue - Consumer. Revenue remained flat at $3.6 million in the three months
ended September 30, 2012 as compared to the comparable period in 2011. Revenue
increased by 4% to $11.4 million in the nine months ended September 30, 2012,
from $11.0 million in the comparable period in 2011. This increase is primarily
attributable to an increase in gross revenue as a result of increased chat
minutes.
Cost of Revenue - Business. Cost of revenue consists of compensation costs
relating to employees who provide customer service to our customers,
compensation costs relating to our network support staff, the cost of supporting
our server and network infrastructure and allocated occupancy costs and related
overhead. Cost of revenue increased by 15% and 7% to $8.5 million and $23.8
million in the three and nine months ended September 30, 2012, respectively,
from $7.4 million and $22.3 million in the comparable periods in 2011. The
increase is primarily attributable to an increase in compensation and related
costs for additional and existing customer service and network operations
personnel in the amount of approximately $860,000 and $1.4 million,
respectively, and an increase for primary and backup server facilities and
allocated overhead related costs of supporting our server and network
infrastructure of approximately $275,000 and $196,000, respectively.
Cost of Revenue - Consumer. Cost of revenue consists of compensation costs
relating to employees who provide customer service to Experts and Users,
compensation costs relating to our network support staff, the cost of supporting
our server and network infrastructure, credit card and transaction processing
fees and related costs, and allocated occupancy costs and related overhead. Cost
of revenue decreased by 31% and 43% to $497,000 and 1.6 million in the three and
nine months ended September 30, 2012, respectively from $921,000 and $2.8
million in the comparable periods in 2011. This decrease is attributable to the
fact that the intangible assets related to the Kasamba acquisition were fully
amortized in 2011.
Product Development. Our product development expenses consist primarily of
compensation and related expenses for product development personnel as well as
allocated occupancy costs and related overhead and outsourced labor and expenses
for testing new versions of our software. Product development costs increased by
52% and 49% to $8.0 million and $21.9 million in the three and nine months ended
September 30, 2012, respectively, from $5.3 million and $14.7 million in the
comparable periods in 2011. This increase is primarily attributable to an
increase in compensation and related costs for additional and existing product
development personnel of approximately $2.5 million and $6.3 million,
respectively and to a lesser extent an increase in outsourced labor expense of
approximately $243,000 and $811,000, respectively as a result of testing new
versions of our software. The increase relates to our continued efforts to
expand future product offerings. We are also investing in partner programs that
enable third-parties to develop value-added software applications for our
existing and future customers.
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Sales and Marketing - Business. Our sales and marketing expenses consist of
compensation and related expenses for sales and marketing personnel, as well as
advertising, public relations, trade show exhibit expenses and allocated
occupancy costs and related overhead. Sales and marketing expenses increased by
37% to $11.5 million in the three months ended September 30, 2012, from $8.4
million in the comparable period in 2011. This increase is primarily
attributable to an increase in compensation and related costs for additional and
existing sales and marketing personnel of approximately $3.1 million. Sales and
marketing expenses increased by 39% to $32.6 million in the nine months ended
September 30, 2012, from $23.5 million in the comparable period in 2011. This
increase is primarily attributable to an increase in compensation and related
costs for additional and existing sales and marketing personnel of approximately
$7.6 million and an increase in advertising and public relations expenses in the
amount of approximately $1.4 million. This increase relates to our continued
efforts to enhance our brand recognition and increase sales lead activity.
Sales and Marketing - Consumer. Our sales and marketing expenses consist of
compensation and related expenses for marketing personnel, as well as online
promotion, public relations and allocated occupancy costs and related overhead.
Sales and marketing expenses decreased by 20% and 9% to $1.2 million and $4.2
million in the three and nine months ended September 30, 2012, respectively,
from $1.5 million and $4.6 million in the comparable periods in 2011. This
decrease is primarily attributable to a decrease in compensation and related
costs and allocated overhead for marketing personnel in the amount of
approximately $306,000 and $460,000 respectively.
General and Administrative.Our general and administrative expenses consist
primarily of compensation and related expenses for executive, accounting, legal,
human resources and administrative personnel. General and administrative
expenses increased by 29% to $7.3 million in the three months ended September
30, 2012 from $5.7 million in the comparable period in 2011. This increase is
primarily attributable to an increase in compensation and related expenses for
additional and existing personnel in the amount of approximately $926,000, and
an increase in legal, recruiting and related costs, other professional fees and
rent in the amount of approximately $693,000. General and administrative
expenses increased by 52% to $22.8 million in the nine months ended September
30, 2012 from $15.0 million in the comparable period in 2011. This increase is
primarily attributable to increases in accounting and legal costs related to
acquisitions and litigation in the amount of approximately $2.9 million,
increases in other professional fees in the amount of approximately $1.3 million
and increases in costs related to additional and existing personnel in the
amount of approximately $3.3 million.
Amortization of Intangibles. Amortization expense was $11,000 in the three
months ended September 30, 2012 and relates to the purchase of patents in August
2009. Amortization expense was $98,000 in the nine months ended September 30,
2012 and relates primarily to acquisition costs recorded as a result of our
acquisition of NuConomy in April 2010 and to the purchase of patents in August
2009. Amortization expense was $11,000 and $32,000 in the three and nine months
ended September 30, 2011, respectively, and relates to the purchase of patents
in August 2009. The increase is attributable to the acquisition costs recorded
as a result of our acquisition of NuConomy in April 2010. Additional
amortization expense in the amount of $195,000 and $921,000 are included in cost
of revenue for the nine months ended September 30, 2012 and the comparable
period 2011, respectively. Amortization expense is expected to be approximately
$600,000 in the year ended December 31, 2012.
Other Income (Expense).Financial income was $22,000 and $99,000 in the three and
nine months ended September 30, 2012, respectively. Financial expense was
$780,000 and $418,000 in the three and nine months ended September 30, 2011,
respectively. Financial income and expense is the result of currency rate
fluctuations associated with the exchange rate movement of the U.S. dollar
against the New Israeli Shekel. Interest income was $19,000 and $56,000 in the
three and nine months ended September 30, 2012, compared to $18,000 and $48,000
in the comparable periods in 2011, respectively, and consists of interest earned
on cash and cash equivalents.
Provision for Income Taxes. Our effective tax rate was 39.2% and 39.6% for the
three and nine months ended September 30, 2012, respectively, resulting in a
provision for income taxes of $1.0 million and $3.2 million in the three and
nine months ended September 30, 2012, respectively. Our effective tax rate was
37% and 38% for the three and nine months ended September 30, 2011,
respectively, resulting in a provision for income taxes of $1.6 million and $5.0
million in the comparable periods in 2011, respectively.
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Net Income. We had net income of $1.6 million in the three months ended
September 30, 2012, as compared to net income of $2.7 million in the comparable
period in 2011. Revenue increased by $5.3 million, while operating expenses
increased by $7.8 million, other expense decreased $803,000, and provision for
income taxes decreased $579,000, contributing to a net decrease in net income of
approximately $1.1 million. We had net income of $4.9 million in the nine months
ended September 30, 2012, as compared to net income of $8.2 million in the
comparable period in 2011. Revenue increased by $18.3 million, while operating
expenses increased by $24.0 million, other expense decreased $524,000, and
provision for income taxes decreased $1.8 million, contributing to a net
decrease in net income of approximately $3.3 million.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2012, we had approximately $103.3 million in cash and cash
equivalents, an increase of approximately $10.0 million from December 31, 2011.
This increase is primarily attributable to net cash provided by operating
activities and, to a lesser extent, proceeds from the issuance of common stock
in connection with the exercise of stock options by employees and the excess tax
benefit from the exercise of employee stock options, partially offset by the
acquisitions of Look.io and Amadesa and the purchases of fixed assets related to
the build-out of our co-location facility. We invest our cash in short-term
money market funds.
Net cash provided by operating activities was $17.7 million for the nine months
ended September 30, 2012 and consisted primarily of net income, non-cash
expenses related to ASC 718-10, amortization of intangibles and depreciation,
and to increases in accounts payable, accrued expenses and deferred revenue,
partially offset by an increase in accounts receivable and prepaid expenses. Net
cash provided by operating activities was $17.4 million for the nine months
ended September 30, 2011 and consisted primarily of net income, non-cash
expenses related to ASC 718-10, amortization of intangibles and depreciation,
and to decreases in prepaid expenses and other current assets and an increase in
deferred revenue, partially offset by an increase in accounts receivable and a
decrease in accrued expenses.
Net cash used in investing activities was $18.7 million in the nine months ended
September 30, 2012, and was due primarily to our purchase of technology assets
from Amadesa, our acquisition of Look.io, and the purchase of fixed assets for
our co-location facilities. Net cash used in investing activities was $6.2
million in the nine months ended September 30, 2011, and was due primarily to
the build-out of new office space in New York and Israel, and to a lesser
extent, to purchases of fixed assets for our co-location facilities.
Net cash provided by financing activities was $11.2 million for the nine months
ended September 30, 2012 and consisted primarily of the proceeds from the
issuance of common stock in connection with the exercise of stock options by
employees, and, to a lesser extent the excess tax benefit from the exercise of
employee stock options. Net cash provided by financing activities was $8.3
million for the nine months ended September 30, 2011 and consisted primarily of
the proceeds from the issuance of common stock in connection with the exercise
of stock options by employees and, to a lesser extent the excess tax benefit
from the exercise of employee stock options.
We have incurred significant expenses to develop our technology and services, to
hire employees in our customer service, sales, marketing and administration
departments, and for the amortization of intangible assets, as well as non-cash
compensation costs. Historically, we incurred significant quarterly net losses
from inception through June 30, 2003, significant negative cash flows from
operations in our quarterly periods from inception through December 31, 2002. As
of September 30, 2012, we had an accumulated deficit of approximately $83.3
million. These losses have been funded primarily through the issuance of common
stock in our initial public offering and, prior to the initial public offering,
the issuance of convertible preferred stock.
We anticipate that our current cash and cash equivalents will be sufficient to
satisfy our working capital and capital requirements for at least the next 12
months. However, we cannot assure you that we will not require additional funds
prior to such time, and we would then seek to sell additional equity or debt
securities through public financings, or seek alternative sources of financing.
We cannot assure you that additional funding will be available on favorable
terms, when needed, if at all. If we are unable to obtain any necessary
additional financing, we may be required to further reduce the scope of our
planned sales and marketing and product development efforts, which could
materially adversely affect our business, financial condition and operating
results. In addition, we may require additional funds in order to fund more
rapid expansion, to develop new or enhanced services or products or to invest in
complementary businesses, technologies, services or products.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
We do not have any special purposes entities, and other than operating leases,
which are described below, we do not engage in off-balance sheet financing
arrangements.
We lease facilities and certain equipment under agreements accounted for as
operating leases. These leases generally require us to pay all executory costs
such as maintenance and insurance. Rental expense for operating leases for the
three and nine months ended September 30, 2012 was approximately $2.0 million
and $5.3 million, respectively, and approximately $1.6 million and $5.1 million
for the three and nine months ended September 30, 2011, respectively.
28
As of September 30, 2012, our principal commitments were approximately $21.0
million under various operating leases, of which approximately $2.2 million is
due in 2012. We currently expect that our principal commitments for the year
ending December 31, 2012 will not exceed $8.0 million in the aggregate.
Our contractual obligations at September 30, 2012 are summarized as follows:
Payments due by period
(in thousands)
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
Operating leases $ 21,012 $ 2,235 $ 12,927 $ 4,115 $ 1,735
Total $ 21,012 $ 2,235 $ 12,927 $ 4,115 $ 1,735
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