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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 client 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. OVERVIEW LivePerson provides online engagement solutions that facilitate real-time assistance and expert advice. We are organized into two operating segments. The Business segment facilitates real-time online interactions - chat, voice/click-to-call, email and self-service/knowledgebase for global corporations of all sizes. The Consumer segment facilitates online transactions between independent service providers ("Experts") and individual consumers ("Users") seeking help on the Web. 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 sales agents, and we have recently established a midmarket sales group focused on adding new customers that are larger than our typical SMB customers, but smaller than our typical enterprise customers. 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 are investing in product marketing, R&D 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 are initially 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. · Creating and Supporting an Open Development Platform. We have recently introduced an open development platform capability, supported by a community and developer tools that enable third-party developers to create and deliver new applications that leverage our existing customer base and proactive engagement technology. By creating and supporting this platform, we expect to enable both independent developers and R&D personnel within our customer base to accelerate their product development and innovation, and to expand the value and usage of our current and future products and capabilities. · Expanding our international presence. We continue to increase our investment in sales and support personnel in the United Kingdom 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. 18--------------------------------------------------------------------------------SECOND QUARTER 2011 Financial overview of the three months ended June 30, 2011 compared to the three months ended June 30, 2010: · Revenue increased 21% to $31.9 million from $26.4 million. · Operating expenses increased 20% to $28.5 million from $23.8 million. · Net income increased 36% to $2.2 million from $1.6 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 client usage and website traffic, and in some cases, the number of orders placed via our online engagement solutions. For certain of our larger clients, we may provide call center labor through an arrangement with one or more of several qualified partners. For most of these clients, 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 arrangements, we recognize revenue net of the labor provider's fee in accordance with ASC 605-45, "Principal Agent Considerations," due to the fact that we perform as an agent without risk of loss for collection. The majority of our larger clients 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 client 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 or 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 client relationship. 19 -------------------------------------------------------------------------------- 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 to the fact that we perform as an agent without any risk of loss for collection. 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 June 30, 2011, there was approximately $20.9 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. 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. Though our concentration of credit risk is limited due to our large number of customers, 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 six months ended June 30, 2011 and 2010. One customer accounted for approximately 19% of accounts receivable as of June 30, 2011. One customer accounted for approximately 22% of accounts receivable at December 31, 2010. During the six months ended June 30, 2011, we increased our allowance for doubtful accounts by $120,000 to $681,000, 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 our receivables due from customers with greater credit risk. A larger proportion of receivables are due from larger corporate clients that typically have longer payment cycles. 20--------------------------------------------------------------------------------GOODWILL In accordance with ASC 350-10, "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. Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under 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. To assist in the process of determining goodwill impairment, we will obtain appraisals from an independent valuation firm. In addition to the use of an independent valuation firm, we will 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. 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. 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. 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 client relationship, accruals and other factors. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2011, the FASB issued Accounting Standards Update (ASU) 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income" which requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. This update, which should be applied retrospectively, is effective for annual periods beginning after December 15, 2011. We are still evaluating whether to present other comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive 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. Early application by public entities is not permitted. We are currently assessing the impact of this update on our consolidated financial statements. In December 2010, the FASB has issued ASU No. 2010-28, Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU reflects the decision reached in EITF Issue No. 10-A. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption was not permitted. This update will have an impact on our accounting in the future for any reporting units with zero or negative carrying amounts. 21 --------------------------------------------------------------------------------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 client usage. The majority of our larger clients also pay a professional services fee related to implementation. A large proportion of our revenue from new clients comes from large corporations. These companies typically have more significant implementation requirements and more stringent data security standards. Such clients 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 88% of total revenue for the three and six months ended June 30, 2011, respectively. Revenue attributable to our monthly hosted Business services accounted for 95% of total Business revenue for the three and six months ended June 30, 2011, respectively. Revenue from our Business segment accounted for 87% of total revenue for the three and six months ended June 30, 2010, respectively. Revenue attributable to our monthly hosted Business services accounted for 95% of total Business revenue for the three and six months ended June 30, 2010, 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 clients' operators and our clients' resource constraints, we have historically experienced a lag between signing a client contract and recognizing revenue from that client. 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 12% of total revenue for the three and six months ended June 30, 2011, respectively. Revenue generated from online transactions between Experts and Users accounted for approximately 13% of total revenue for the three and six months ended June 30, 2010, 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. 22 --------------------------------------------------------------------------------OPERATING EXPENSES Our cost of revenue consists of: · compensation costs relating to employees who provide customer support and implementation services to our clients; · 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 six months ended June 30, 2011, we increased our allowance for doubtful accounts by $120,000 to $681,000, 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 our receivables due from customers with greater credit risk. A larger proportion of receivables are due from larger corporate clients that typically have longer payment cycles. During 2010, we increased our allowance for doubtful accounts by $166,000 to approximately $561,000, principally due to an increase in accounts receivable as a result of increased sales. A larger proportion of receivables are due from larger corporate clients 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 six months ended June 30, 2011 and 2010 consist of: Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 Stock-based compensation expense related $ 1,679 $ 1,086 $ 3,214 $ 2,173 to ASC 718-10 Total $ 1,679 $ 1,086 $ 3,214 $ 2,173 RESULTS OF OPERATIONS The Company is organized into two operating segments. The Business segment facilitates real-time online interactions - chat, voice/click-to-call, email and self-service/knowledgebase for global corporations of all sizes. The Consumer segment facilitates online transactions between Experts and Users. 23 --------------------------------------------------------------------------------Comparison of Three and Six Months Ended June 30, 2011 and 2010 Revenue - Business. Revenue increased by 22% to $28.1 million and $54.8 million in the three and six months ended June 30, 2011, respectively, from $23.0 million and $44.8 million in the comparable periods in 2010. This increase is primarily attributable to revenue from new clients in the amount of approximately $2.5 million and $5.3 million, respectively, increased revenue from existing clients who increased their use of services in the amount of approximately $2.4 million and $4.3 million, respectively, net of cancellations, and to a lesser extent, to professional services revenue of approximately $233,000 and $436,000, respectively. Our revenue growth has typically been driven by a mix of revenue from new clients as well as expansion of existing clients. Revenue - Consumer. Revenue increased by 9% and 7% to $3.7 million and $7.4 million in the three and six months ended June 30, 2011, respectively, from $3.4 million and $6.9 million in the comparable periods in 2010. This increase is primarily attributable to an increase in gross revenue of approximately $243,000 and $346,000, respectively, as a result of an increase in the rates charged by Experts. In addition, net revenue also increased due to an increase in the fees we charge the Experts of approximately $64,000 and $161,000, respectively. Cost of Revenue - Business. Cost of revenue consists of compensation costs relating to employees who provide customer service to our clients, 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 23% and 25% to $7.7 million and $14.9 million in the three and six months ended June 30, 2011, respectively, from $6.3 million and $11.9 million in the comparable periods in 2010. The increase is primarily attributable to an increase in total compensation and related costs for additional and existing customer service and network operations personnel in the amount of approximately $721,000 and $1.5 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 $612,000 and $1.3 million, respectively. This increase in cost of revenue in excess of revenue growth was driven primarily by increased investment in more robust business continuity capabilities within our hosting facilities. In addition, costs related to data collection and storage has increased, as we have improved the scope and quality of the analytical reporting we provide to our larger customers. 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 increased by 8% to $997,000 in the three months ended June 30, 2011 from $928,000 in the comparable period in 2010. This increase is primarily attributable to an increase in credit card and transaction processing fees of approximately $26,000 and an increase in allocated occupancy costs and related overhead of approximately $22,000. Costs of revenue remained flat at $1.9 million in the six months ended June 30, 2011 compared to the comparable period in 2010. 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. Product development costs increased by 28% and 25% to $5.0 million and $9.4 million in the three and six months ended June 30, 2011, respectively, from $3.9 and $7.5 million in the comparable periods in 2010. This increase is primarily attributable to an increase in compensation and related costs for additional and existing product development personnel as a result of our increased efforts to expand our product offerings of approximately $1.1 million and $1.9 million, respectively. 24 -------------------------------------------------------------------------------- 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 17% and 19% to $7.8 million and $15.1 million in the three and six months ended June 30, 2011, respectively, from $6.7 million and $12.7 million in the comparable periods in 2010. This increase is primarily attributable to an increase in compensation and related costs for additional and existing sales and marketing personnel of approximately $1.0 million and $2.0 million, respectively, and an increase in allocated occupancy cost and related overhead in the amount of approximately $208,000 and $321,000, respectively. 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, trade show exhibit expenses and allocated occupancy costs and related overhead. Sales and marketing expenses decreased by 13% and 10% to $1.6 million and $3.1 million in the three and six months ended June 30, 2011, respectively, from $1.8 million and $3.5 million in the comparable periods in 2010. This decrease is primarily attributable to a decrease in compensation and related costs and allocated overhead for marketing personnel of approximately $167,000 and $274,000, respectively, and to decreased advertising and promotional expenses of approximately $40,000 and $75,000, respectively, driven by improved efficiency in search engine optimization. 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% and 17% to $5.4 and $9.3 million in the three and six months ended June 30, 2011, respectively, from $4.2 million and $8.0 million in the comparable periods in 2010.This increase is primarily attributable to increases in recruiting and related costs, rent, legal and other professional fees in the amount of approximately $539,000 and $722,00, respectively, and increases in costs related to additional and existing personnel in the amount of approximately $497,000 and $605,000, respectively. Amortization of Intangibles. Amortization expense was $11,000 and $22,000 in the three and six months ended June 30, 2011, respectively, and relates to the purchase of patents in August 2009. Amortization expense was $83,000 and $166,000 in the three and six months ended June 30, 2010, respectively, and relates primarily to acquisition costs recorded as a result of our acquisition of Kasamba in October 2007. This decrease is attributable to the fact that a portion of the intangible assets related to the Kasamba acquisition was fully amortized in 2010. Additional amortization expense in the amount of $306 and $613 are included in cost of revenue for the three and six months ended June 30, 2011, respectively. Amortization expense is expected to be approximately $1.0 million in the year ended December 31, 2011. Other Income (Expense). Financial income was $208,000 and $363,000 in the three and six months ended June 30, 2011, respectively, and relates to favorable currency rate movements of our NIS deposits. Financial expense was $41,000 and $90,000 in the three and six months ended June 30, 2010, respectively, and relates to unfavorable currency rate movements related of our NIS deposits. Interest income was $16,000 and $30,000 in the three and six months ended June 30, 2011, respectively, compared to $30,000 and $53,000 in the comparable periods in 2010, respectively, and consists of interest earned on cash and cash equivalents. These decreases are primarily attributable to decrease in short-term interest rates partially offset by increases in cash and cash equivalents. Provision for Income Taxes. Our effective tax rate was 39% for the three and six months ended June 30, 2011, resulting in a provision for income taxes of $1.4 million and $3.4 million in the three and six months ended June 30, 2011, respectively. Our effective tax rate was 38% for the three and six months ended June 30, 2010, respectively, resulting in a provision for income taxes of $975,000 and $2.3 million in the comparable periods in 2010, respectively. Net Income. We had net income of $2.2 million and $5.4 million in the three and six months ended June 30, 2011, as compared to net income of $1.6 million and $3.8 million for the comparable periods in 2010, respectively. Revenue increased by $5.5 million and $10.5 million, respectively, while operating expenses increased by $4.7 million and $8.2 million, respectively, other income increased $235,000 and $430,000, respectively, and provision for income taxes increased by approximately $427,000 and $1.1 million, contributing to a net increase in income from operations of approximately $580,000 and $1.7 million in the three and six months ended June 30, 2011, respectively. 25 --------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2011, we had approximately $74.4 million in cash and cash equivalents, an increase of approximately $13.0 million from December 31, 2010. Net cash provided by operating activities was $11.8 million for the six months ended June 30, 2011 and consisted primarily of net income, non-cash expenses related to ASC 718-10, amortization of intangibles and depreciation, increases in accounts payable and deferred revenue and decreases in prepaid expenses and other current assets partially offset by an increase in accounts receivable and a decrease in accrued expenses. Net cash provided by operating activities was $3.6 million for the six months ended June 30, 2010 and consisted primarily of net income, non-cash expenses related to ASC 718-10, amortization of intangibles and depreciation partially offset by an increase in accounts receivable and decreases in accounts payable and accrued expenses. Net cash used in investing activities was $4.4 million in the six months ended June 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 collocation facilities. Net cash used in investing activities was $3.1 million in the six months ended June 30, 2010, and was due primarily to the purchase of fixed assets for our collocation facilities and the acquisition of NuConomy in April 2010. Net cash provided by financing activities was $5.6 million for the six months ended June 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 the excess tax benefit from the exercise of employee stock options. Net cash provided by financing activities was $6.9 million for the six months ended June 30, 2010 and consisted primarily of the excess tax benefit from exercise of employee stock options and the proceeds from issuance of common stock in connection with the exercise of stock options by employees. 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 and negative cash flows from operations of $124,000 in the three month period ended March 31, 2004. As of June 30, 2011, we had an accumulated deficit of approximately $94.7 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. 26 -------------------------------------------------------------------------------- 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 six months ended June 30, 2011 was approximately $1.8 million and $3.5 million, respectively, and approximately $1.7 million and $3.2 million for the three and six months ended June 30, 2010, respectively. As of June 30, 2011, our principal commitments were approximately $20.9 million under various operating leases, of which approximately $3.6 million is due in 2011. We currently expect that our principal commitments for the year ending December 31, 2011 will not exceed $8.0 million in the aggregate. Our contractual obligations at June 30, 2011 are summarized as follows: Payments due by period (in thousands) Less than 1 More than 5 Total year 1-3 years 3-5 years years Contractual Obligations Operating leases $ 20,851 $ 3,560 $ 12,473 $ 2,816 $ 2,002 Total $ 20,851 $ 3,560 $ 12,473 $ 2,816 $ 2,002 |