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XO GROUP INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. Executive Overview XO Group Inc. is the premier consumer internet and media company devoted to weddings, pregnancy, and everything in between, providing couples and new parents with the trusted information, products, and advice they need to guide them through some of the most transformative events of their lives. Our family of premium brands began with the number one wedding brand, The Knot, and has grown to include The Nest, The Bump, and Ijie.com. XO Group is recognized by the industry for innovation in media - from the web to mobile, magazines, books and video. XO Group generates revenue from online sponsorship and advertising, registry services, e-commerce, and publishing. Our mission is to provide a brand and mobile-driven marketplace that serves young couples as they navigate the most important stages of their lives. Our strategy is to maintain our position as a leading lifestage consumer internet and media company and to grow our market share of advertising, e-commerce, and registry commission dollars in national and local markets in the U.S. and from international markets. Third Quarter 2014 Highlights During the third quarter of 2014, our net revenue increased compared to the same period in 2013. The highlights of the third quarter of 2014 were: • Total net revenue increased 5.6% to $35.9 million. • National online advertising revenue increased 5.7% to $7.3 million. • Local online advertising revenue increased 8.1% to 14.8 million. • Registry services revenue increased by 17.9% to $3.3 million. • Publishing and other revenue increased 10.9% to $5.9 million. • We had operating income of $4.3 million, compared to $5.3 million in the prior year. The year-over-year change was primarily due to an increase in product and content expenses due to initiatives in product and technology development. Also contributing to the change were increased operating expenses related to compensation and promotion costs related to our ecommerce business. Partially offsetting these increased operating expenses was an increase in gross profit of 8.0% due to higher revenue and improved gross margins. • Net income for the three months ended September 30, 2014 was $2.1 million, or $0.08 per diluted share, compared to net income of $3.1 million, or $0.12 per diluted share for the three months ended September 30, 2013. • At September 30, 2014, our total cash and cash equivalents were $85.7 million, which decreased $5.0 million from December 31, 2013. The overall decrease in cash and cash equivalents was primarily driven by cash used in investing activities totaling $13.7 million, primarily related to acquisitions, investments and capital expenditures, as well as cash used in financing activities of $2.8 million, which primarily related to cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards. • At September 30, 2014, we had no debt. 12-------------------------------------------------------------------------------- Table of Contents Key Metrics We evaluate our operating and financial performance using various performance indicators. Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue and gross margin under "Results of Operations", and cash flow results under "Liquidity and Capital Resources". Other measures of our performance, including adjusted EBITDA, adjusted net income, adjusted net income per diluted share and free cash flow are defined and discussed under "Non-GAAP Financial Measures" below. Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 (Dollar Amounts in Thousands) Total net revenue $ 35,858 $ 33,968 $ 106,608 $ 101,229 Total gross margin 86.4 % 84.5 % 85.6 % 83.2 % Adjusted EBITDA $ 7,054 $ 7,992 $ 18,796 $ 22,298 Adjusted net income $ 2,303 $ 3,101 $ 5,419 $ 8,862 Free cash flow $ 6,346 $ 3,926 $ 7,580 $ 10,693 Cash and cash equivalents at September 30 $ 85,683 $ 86,217 $ 85,683 $ 86,217 Total employees at September 30 721 694 721 694 Non-GAAP Financial Measures This Form 10-Q includes information about certain financial measures that are not prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), including adjusted EBITDA, adjusted net income, adjusted net income per diluted share and free cash flow. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Our use of these terms may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Management defines its non-GAAP financial measures as follows: • Adjusted EBITDA represents U.S. GAAP net income (loss) adjusted to exclude, if applicable: (1) provision (benefit) for income taxes, (2) depreciation and amortization, (3) stock-based compensation expense, (4) impairment charges and asset write-offs, (5) loss in equity interests, (6) interest and other income, net, (7) net loss attributable to non-controlling interest and (8) other items impacting comparability incurred in the period. • Adjusted net income represents U.S. GAAP net income (loss), adjusted for incremental or unusual costs incurred in the current period, which may include: (1) impairment charges and asset write-offs, (2) executive severance and other restructuring charges and (3) the impact of certain foreign taxes, interest and penalties. • Adjusted net income per diluted share represents adjusted net income (as defined above), divided by the diluted weighted-average number of shares outstanding for the period. • Free cash flow represents U.S. GAAP net cash provided by operations, less capital expenditures. Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance. In addition, free cash flow provides management with useful information for managing the cash needs of our business. However, adjusted EBITDA, adjusted net income, adjusted net income per diluted share and free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered substitutes for or superior to net income (loss) and net income (loss) per diluted share and net cash provided by operating activities as indicators of operating performance. 13-------------------------------------------------------------------------------- Table of Contents The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 (In Thousands, Except for Per Share Data) Net income $ 2,084 $ 3,101 $ 4,455 $ 8,862 Provision for income taxes 2,234 2,137 3,551 5,456 Depreciation and amortization 1,868 1,075 5,393 3,324 Stock-based compensation expense 1,449 1,665 4,447 4,552 Loss in equity interests 68 55 243 174 Interest and other income, net (57 ) (41 ) (55 ) (70 ) Severance charges(a) - - 1,354 - Foreign VAT, interest and penalties(b) (592 ) - (592 ) - Adjusted EBITDA $ 7,054 $ 7,992 $ 18,796 $ 22,298 Depreciation and amortization (1,868 ) (1,075 ) (5,393 ) (3,324 ) Stock-based compensation expense (1,449 ) (1,665 ) (4,447 ) (4,552 ) Loss in equity interests (68 ) (55 ) (243 ) (174 ) Interest and other income, net 57 41 55 70 Adjusted income before income taxes 3,726 5,238 8,768 14,318 Adjusted provision for income taxes(c) 1,423 2,137 3,349 5,456 Adjusted net income $ 2,303 $ 3,101 $ 5,419 $ 8,862 Adjusted net income per diluted share $ 0.09 $ 0.12 $ 0.21 $ 0.35 Diluted weighted average number of shares outstanding 25,670 25,879 25,547 25,579 Net cash provided by operating activities $ 7,675 $ 5,788 $ 11,553 $ 15,354 Less: Capital expenditures (1,329 ) (1,862 ) (3,973 ) (4,661 ) Free cash flow $ 6,346 $ 3,926 $ 7,580 $ 10,693 (a) Costs impacting comparability included in Operating expenses on the condensed consolidated statements of operations for the nine months ended September 30, 2014 include severance of approximately $1.4 million, representing (i) severance charges for certain executive officers and (ii) severance charges for the employees in our Los Angeles office. Of the total severance charges, $70,000 was recorded in Product and content development, $506,000 in Sales and marketing and $778,000 in General and administrative. (b) Included in "General and administrative" expenses on the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 include a favorable adjustment for foreign value-added tax ("VAT"), interest and penalties of $592,000. (c) Adjusted provision for income taxes was calculated using the annual effective tax rate for each respective period, excluding discrete items. 14-------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 The following table summarizes results of operations for the three months ended September 30, 2014 compared to the three months ended September 30, 2013: Three Months Ended September 30, 2014 2013 Increase/(Decrease) % of Net % of Net Amount Revenue Amount Revenue Amount % (In Thousands, Except for Per Share Data) Net revenue $ 35,858 100.0 % $ 33,968 100.0 % $ 1,890 5.6 % Cost of revenue 4,861 13.6 5,260 15.5 (399 ) (7.6 ) Gross profit 30,997 86.4 28,708 84.5 2,289 8.0 Operating expenses 26,668 74.3 23,456 69.0 3,212 13.7 Income from operations 4,329 12.1 5,252 15.5 (923 ) (17.6 ) Loss in equity interest (68 ) (0.2 ) (55 ) (0.2 ) (13 ) (23.6 ) Interest and other income, net 57 0.1 41 0.1 16 39.0 Income before income taxes 4,318 12.0 5,238 15.4 (920 ) (17.6 ) Provision for income taxes 2,234 6.2 2,137 6.3 97 4.5 Net income $ 2,084 5.8 % $ 3,101 9.1 % $ (1,017 ) (32.8 )% Net income per share: Basic $ 0.08 $ 0.13 $ (0.05 ) (38.5 )% Diluted $ 0.08 $ 0.12 $ (0.04 ) (33.3 )% Net Revenue Net revenue increased to $35.9 million for the three months ended September 30, 2014, from $34.0 million for the three months ended September 30, 2013. The following table sets forth revenue by category for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods: Three Months Ended September 30, Percentage Percentage of Net Revenue Increase/ Total Net Revenue 2014 2013 (Decrease) 2014 2013 (In Thousands) National online sponsorship and advertising $ 7,326 $ 6,932 5.7 % 20.4 % 20.4 % Local online sponsorship and advertising 14,796 13,688 8.1 41.3 40.3 Total online sponsorship and advertising 22,122 20,620 7.3 61.7 60.7 Registry services 3,289 2,790 17.9 9.2 8.2 Merchandise 4,539 5,232 (13.2 ) 12.6 15.4 Publishing and other 5,908 5,326 10.9 16.5 15.7 Total net revenue $ 35,858 $ 33,968 5.6 % 100.0 % 100.0 % Online sponsorship and advertising - The 7.3% increase in total online sponsorship and advertising revenue was primarily driven by an increase in revenue from local advertising programs. Local online sponsorship and advertising revenue increased by 8.1%, primarily attributable to an increase in the number of local vendors advertising with us on our network of websites. As of September 30, 2014, we had 24,304 local vendors displaying 32,602 profiles, compared to 22,562 vendors displaying 30,186 profiles as of September 30, 2013. The increase in national online sponsorship and advertising revenue was primarily attributable to an increase in revenue related to TheBump.com. 15-------------------------------------------------------------------------------- Table of Contents Registry services - The increase of 17.9% was primarily driven by an increase in total gross sales from our registry retail partners, as well as the favorable impact of several product enhancements completed in the prior year, which significantly improved user experience with our registry services and resulted in a higher conversion rate to purchase. Merchandise - The decrease of 13.2% was primarily driven by a decrease in shipping revenue due to free shipping and other promotions, lower revenue generated from our ancillary sites due to reduced site traffic, as well as an overall lower average order value. Publishing and other - The increase of 10.9% was driven by an increase in advertising revenue related to The Knot national and regional magazines, specifically higher revenue per advertising page sold for the national magazines, as well as an increase in the number of ad pages for the regional magazines. Gross Profit/Gross Margin Cost of revenues consists of the cost of merchandise sold, which includes outbound shipping and personalization costs, costs related to the production of national and regional magazines, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of internet and hosting services. Gross margin improved 1.9% to 86.4% for the three months ended September 30, 2014, compared to 84.5% for the three months ended September 30, 2013. The following table presents the components of gross profit and gross margin for the three months ended September 30, 2014 compared to the three months ended September 30, 2013: Three Months Ended September 30, 2014 2013 Increase/(Decrease) Gross Gross Gross Gross Gross Gross Profit Margin % Profit Margin % Profit Margin % (In Thousands) Online sponsorship and advertising (national and local) $ 21,757 98.4 % $ 20,190 97.9 % $ 1,567 0.5 % Registry 3,289 100.0 2,790 100.0 499 - Merchandise 1,706 37.6 2,227 42.6 (521 ) (5.0 ) Publishing and other 4,245 71.9 3,501 65.7 744 6.2 Total gross profit $ 30,997 86.4 % $ 28,708 84.5 % $ 2,289 1.9 % The increase in the total gross margin percentage for the three months ended September 30, 2014 compared to the prior year was driven primarily by higher revenue growth for our registry services business and improved margins within our publishing business. The improved margin for publishing resulted from cost savings under a contract with a new printer commencing in early 2014. Operating Expenses Operating expenses increased 13.7% to $26.7 million for the three months ended September 30, 2014, compared to $23.5 million for the three months ended September 30, 2013. The following table presents the components of operating expenses and the percentage of revenue that each component represented for the three months ended September 30, 2014 compared to the three months ended September 30, 2013: 16-------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, Percentage Percentage of Operating Expenses Increase/ Total Net Revenue 2014 2013 (Decrease) 2014 2013 (In Thousands)Product and content development $ 8,569 $ 7,108 20.6 % 23.9 % 20.9 % Sales and marketing 10,842 9,528 13.8 30.2 28.0 General and administrative 5,389 5,745 (6.2 ) 15.1 16.9 Depreciation and amortization 1,868 1,075 73.8 5.2 3.2 Total operating expenses $ 26,668 $ 23,456 13.7 % 74.4 % 69.0 % Product and Content Development - The increase of 20.6% was primarily attributable to an increase in employee headcount, as well as a net increase in non-capitalizable expenditures to support our initiatives in product and technology development. Sales and Marketing - The increase of 13.8% was primarily attributable to an increase in compensation costs, as well as increased promotions to generate revenue for our ecommerce business. General and Administrative - The decrease of 6.2% was primarily attributable to a favorable adjustment recorded for value-added taxes of $0.6 million, which was partially offset by an increase in compensation costs. Depreciation and Amortization - The increase of 73.8% was primarily attributable to the increase in additions of capitalizable software projects being placed into service and additional purchases of various computer equipment and third-party software in order to support our product and technology development. During the three months ended September 30, 2014, we recorded additional amortization expense of $0.3 million related to the Weddingchannel.com tradename, which is now being amortized through December 31, 2014, a shorter estimated useful life as compared to the prior year quarter. Loss in Equity Interests Loss in equity interests for the three months ended September 30, 2014 and 2013 was $68,000 and $55,000, respectively. During the three months ended September 30, 2014, we recognized a loss on our equity investment in GigMasters.com, Inc. of $67,000, representing our share of this entity's losses for the three months ended September 30, 2014. Interest and Other Income, net Interest and other income, net was $57,000 for the three months ended September 30, 2014, compared to $41,000 for the three months ended September 30, 2013. The variance was primarily attributable to fluctuations in foreign currency, resulting in foreign exchange gains and losses incurred during each period. Provision for Income Taxes We had an income tax expense of $2.2 million for the three months ended September 30, 2014, compared to $2.1 million for the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 was 51.7%, compared to 40.8% for the three months ended September 30, 2013. The increase in our effective tax rate was a result of finalizing our prior year U.S. income tax returns and the resolution of certain prior year foreign tax matters. These incremental tax expenses increased our effective tax rate by 10.9%. 17-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 The following table summarizes results of operations for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013: Nine Months Ended September 30, 2014 2013 Increase/(Decrease) % of Net % of Net Amount Revenue Amount Revenue Amount % (In Thousands, Except for Per Share Data) Net revenue $ 106,608 100.0 % $ 101,229 100.0 % $ 5,379 5.3 % Cost of revenue 15,363 14.4 16,962 16.8 (1,599 ) (9.4 ) Gross profit 91,245 85.6 84,267 83.2 6,978 8.3 Operating expenses 83,051 77.9 69,845 69.0 13,206 18.9 Income from operations 8,194 7.7 14,422 14.2 (6,228 ) (43.2 ) Loss in equity interest (243 ) (0.2 ) (174 ) (0.2 ) (69 ) (39.7 ) Interest and other income (expense), net 55 - 70 0.1 (15 ) (21.4 ) Income before income taxes 8,006 7.5 14,318 14.1 (6,312 ) (44.1 ) Provision for income taxes 3,551 3.3 5,456 5.3 (1,905 ) (34.9 ) Net income attributable to XO Group Inc. $ 4,455 4.2 % $ 8,862 8.8 % $ (4,407 ) (49.7 )% Net income per share attributable to XO Group Inc. common stockholders: Basic $ 0.18 $ 0.36 $ (0.18 ) (50.0 )% Diluted $ 0.17 $ 0.35 $ (0.18 ) (51.4 )% Net Revenue Net revenue increased to $106.6 million for the nine months ended September 30, 2014, from $101.2 million for the nine months ended September 30, 2013. The following table sets forth revenue by category for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods: Nine Months Ended September 30, Percentage Percentage of Net Revenue Increase/ Total Net Revenue 2014 2013 (Decrease) 2014 2013 (In Thousands) National online sponsorship and advertising $ 21,777 $ 20,875 4.3 % 20.4 % 20.6 % Local online sponsorship and advertising 43,745 40,652 7.6 41.1 40.2 Total online sponsorship and advertising 65,522 61,527 6.5 61.5 60.8 Registry services 7,954 6,373 24.8 7.5 6.3 Merchandise 13,159 15,411 (14.6 ) 12.3 15.2 Publishing and other 19,973 17,918 11.5 18.7 17.7 Total net revenue $ 106,608 $ 101,229 5.3 % 100.0 % 100.0 % Online sponsorship and advertising - The 6.5% increase in total online sponsorship and advertising revenue was primarily driven by an increase in revenue from local advertising programs. Local online sponsorship and advertising revenue increased by 7.6%, primarily attributable to an increase in the number of local vendors advertising with us on our network of websites. As of September 30, 2014, we had 24,304 local vendors displaying 32,602 profiles, compared to 22,562 vendors displaying 30,186 profiles as of September 30, 2013. The increase in national online sponsorship and advertising revenue was primarily attributable to an increase in revenue related to TheBump.com. 18-------------------------------------------------------------------------------- Table of Contents Registry services - The increase of 24.8% was primarily driven by an increase in total gross sales from our registry retail partners, as well as the favorable impact of several product enhancements completed in the prior year, which significantly improved user experience with our registry services and resulted in a higher conversion rate to purchase. Merchandise - The decrease of 14.6% was primarily driven by a decrease in shipping revenue due to free shipping and other promotions, lower revenue generated from our ancillary sites due to reduced site traffic, as well as an overall lower average order value. Publishing and other - The increase of 11.5% was driven by an increase in advertising revenue related to The Knot national and regional magazines, specifically higher revenue per advertising page sold for the national magazines, as well as an increase in the number of ad pages for the regional magazines. Gross Profit/Gross Margin Cost of revenues consists of the cost of merchandise sold, which includes outbound shipping and personalization costs, costs related to the production of national and regional magazines, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of internet and hosting services. Gross margin improved 2.4% to 85.6% for the nine months ended September 30, 2014, compared to 83.2% for the nine months ended September 30, 2013. The following table presents the components of gross profit and gross margin for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013: Nine Months Ended September 30, 2014 2013 Increase/(Decrease) Gross Gross Gross Gross Gross Gross Profit Margin % Profit Margin % Profit Margin % (In Thousands) Online sponsorship and advertising (national and local) $ 64,185 98.0 % $ 60,021 97.6 % $ 4,164 0.4 % Registry 7,954 100.0 6,373 100.0 1,581 - Merchandise 5,053 38.4 6,222 40.4 (1,169 ) (2.0 ) Publishing and other 14,053 70.4 11,651 65.0 2,402 5.4 Total gross profit $ 91,245 85.6 % $ 84,267 83.2 % $ 6,978 2.4 % The increase in the total gross margin percentage for the nine months ended September 30, 2014 compared to the prior year was driven primarily by higher revenue growth for our registry services business and improved margins within our publishing business. The improved margin for publishing resulted from cost savings under a contract with a new printer commencing in early 2014. Operating Expenses Operating expenses increased 18.9% to $83.1 million for the nine months ended September 30, 2014, compared to $69.8 million for the nine months ended September 30, 2013. The following table presents the components of operating expenses and the percentage of revenue that each component represented for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013: 19-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, Percentage Percentage of Operating Expenses Increase/ Total Net Revenue 2014 2013 (Decrease) 2014 2013 (In Thousands)Product and content development $ 26,274 $ 21,116 24.4 % 24.6 % 20.9 % Sales and marketing 32,606 29,574 10.3 30.6 29.2 General and administrative 18,778 15,831 18.6 17.6 15.6 Depreciation and amortization 5,393 3,324 62.2 5.1 3.3 Total operating expenses $ 83,051 $ 69,845 18.9 % 77.9 % 69.0 % Product and Content Development - The increase of 24.4% was primarily attributable to an increase in employee headcount, as well as an increase in non-capitalizable expenditures to support our initiatives in product and technology development. Sales and Marketing - The increase of 10.3% was primarily attributable to an increase in compensation costs, primarily severance related to changes on the executive team, as well as the closure of our Los Angeles office. Increased costs related to custom publishing initiatives, as well as investments in technology to support our growing advertising business, also contributed to the increase in sales and marketing expense compared to the prior year. General and Administrative - The increase of 18.6% was primarily attributable to an increase in compensation costs resulting from changes to the executive team, including executive severance charges, as well as increases in consulting and legal fees, which was partially offset by a favorable adjustment related to value-added taxes of $0.6 million. Depreciation and Amortization - The increase of 62.2% was primarily attributable to the increase in additions of capitalizable software projects being placed into service and additional purchases of various computer equipment and third-party software in order to support our product and technology development. During the nine months ended September 30, 2014, we recorded additional amortization expense of $0.9 million related to the Weddingchannel.com tradename, which is now being amortized through December 31, 2014, a shorter estimated useful life as compared to the prior year period. Loss in Equity Interests Loss in equity interests for the nine months ended September 30, 2014 and 2013 was $243,000 and $174,000, respectively. During the nine months ended September 30, 2014, we recognized a loss on our equity investment in GigMasters.com, Inc. of $223,000, representing our share of this entity's losses for the nine months ended September 30, 2014. Interest and Other Income, net Interest and other income, net was $55,000 for the nine months ended September 30, 2014, compared to income of $70,000 for the nine months ended September 30, 2013. The variance was primarily attributable to fluctuations in foreign currency, resulting in foreign exchange gains and losses incurred during each period. Provision for Income Taxes We had an income tax expense of $3.6 million for the nine months ended September 30, 2014, compared to $5.5 million for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014 was 44.4%, compared to 38.1% for the nine months ended September 30, 2013. The increase in our effective tax rate was a result of finalizing our prior year U.S. income tax returns and the resolution of certain prior year foreign tax matters. These incremental tax expenses increased our effective tax rate by 6.2%. 20-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash Flow Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of acquisition. At September 30, 2014, we had $85.7 million in cash and cash equivalents, compared to $90.7 million at December 31, 2013. At September 30, 2013, we had $86.2 million in cash and cash equivalents, compared to $77.4 million at December 31, 2012. The following table sets forth our cash flows from operating activities, investing activities and financing activities for the periods indicated: Nine Months Ended September 30, 2014 2013 (In Thousands) Net cash provided by operating activities $ 11,553 $ 15,354 Net cash used in investing activities (13,743 ) (5,264 ) Net cash used in financing activities (2,824 ) (1,280 ) (Decrease) increase in cash and cash equivalents $ (5,014 ) $ 8,810 Operating Activities Net cash provided by operating activities was $11.6 million for the nine months ended September 30, 2014. This was driven by our net income of $4.5 million, plus adjustments of $10.3 million for non-cash items including depreciation, amortization and stock-based compensation, partially offset by a net increase in operating assets and liabilities of $3.2 million. The net increase in operating assets and liabilities of $3.2 million was mainly driven by a $3.3 million increase in trade accounts receivable net of deferred revenue, primarily due to increased receivables related to national online advertising campaigns and registry services, as well as a decrease in accounts payable and accrued expenses of $1.3 million. Partially offsetting the net increase in operating assets and liabilities was a decrease of $1.1 million in prepaid expenses and other current assets. Net cash provided by operating activities was $15.4 million for the nine months ended September 30, 2013. This was driven by our net income of $8.9 million, plus adjustments of $8.6 million for non-cash items including depreciation, amortization and stock-based compensation, partially offset by a net increase in operating assets and liabilities of $2.1 million. The net increase in operating assets and liabilities was mainly driven by a $1.5 million increase in prepaid expenses and other current assets, primarily due to the renewal of licenses for computer software and prepaid business insurance for the remainder of the 2013 policy year, a $0.6 million increase in inventory in anticipation of the 2014 peak season for e-commerce sales and a $0.5 million increase in deferred production and marketing costs and other assets. Also contributing to the net increase in operating assets and liabilities were decreases in accounts payable and accrued expenses of $0.5 million, mainly due to a decrease in the number of publications related to The Knot regional magazines in the third quarter, and a decrease in deferred rent associated with our New York and Austin leased locations of $0.5 million, which were partially offset by an increase in deferred revenue of $1.0 million. Investing Activities Net cash used in investing activities was $13.7 million for the nine months ended September 30, 2014, which primarily related to acquisitions totaling $5.7 million, as well as an investment in a company with an interactive in-taxi advertising and media platform with operations in China of $4.0 million for a minority equity interest of approximately 3%. Also contributing to the net cash used in investing activities were capitalized expenditures of $4.0 million, which primarily related to capitalized software. Net cash used in investing activities was $5.3 million for the nine months ended September 30, 2013, primarily consisting of capitalized expenditures of $4.7 million, of which $3.2 million related to capitalized software. Also included in the net cash used in investing activities for the nine months ended September 30, 2013 was $0.6 million related to the acquisition of a mobile development company. Financing Activities Net cash used in financing activities was $2.8 million for the nine months ended September 30, 2014, primarily driven by cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $4.4 million, 21-------------------------------------------------------------------------------- Table of Contents partially offset by excess tax benefits related to these stock awards of $1.3 million. We also repurchased shares totaling $0.6 million, which was offset by the proceeds from the issuances of common stock in connection with our employee stock purchase plan and the exercise of stock options of $0.9 million. Net cash used in financing activities was $1.3 million for the nine months ended September 30, 2013, primarily driven by cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $1.8 million, partially offset by the proceeds from the issuances of common stock in connection with our employee stock purchase plan and the exercise of stock options of $0.5 million. Off-Balance Sheet Arrangements As of September 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Seasonality We believe that the impact of the frequency of weddings varying from quarter to quarter generally results in lower registry services and merchandise revenues in the first and fourth quarters. Our publishing business typically experiences a quarter to quarter revenue decline in the first and third quarters due to the cyclical pattern of our regional publishing schedule. Critical Accounting Policies and Estimates Our discussion of our results of operations and financial condition relies on our consolidated financial statements, which are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are based on sound measurement criteria, actual future events can result in outcomes that may be materially different from these estimates or forecasts. The accounting policies and related risks described in our Annual Report on Form 10-K for the year ended December 31, 2013 are those that depend most heavily on these judgments and estimates. During the nine months ended September 30, 2014, there were no material changes to the critical accounting policies contained therein. The total reserve balances that require management's judgment and estimates were $3.4 million and $2.6 million as of September 30, 2014 and December 31, 2013, respectively. Recently Issued Accounting Pronouncements Reference is made to Note 1 of Notes to Condensed Consolidated Financial Statements for information concerning recent accounting pronouncements since the filing of the Company's Annual Report on Form 10-K, filed with the Securities Exchange Commission on March 17, 2014. |