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ACTIVE NETWORK INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our other public filings with the Securities and Exchange Commission ("SEC"). This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan," "project," "seek," "should," "target," "will," "would," and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in "Part II -Item 1A. Risk Factors" below, and those discussed in our other public filings with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We are the leading provider of organization-based cloud computing applications serving a wide range of customer groups including business events, community activities, outdoors and sports. We provide applications that form an online network connecting a fragmented and diverse group of activity and event organizers with a large base of potential participants. Our proprietary technology platform transforms the way organizers manage their activities and events by automating online registrations and streamlining other critical management functions, while also driving consumer participation to their events. We power a broad range of activities, such as reserving a campsite or tee time, signing up for a marathon or sports league, purchasing a fishing or hunting license, or participating in a community event or corporate conference. From the introduction of our platform in 1999, we have experienced significant growth and now have over 47,000 customer organizations and drive over 70 million annual consumer registrations. Based on the results of an online survey we commissioned through Survey.com, we believe the organizations we target produce or organize activities and events for the majority of U.S. households. Our business benefits from a powerful network effect. As more organizations use our platform, we increase the breadth and depth of activities and events offered through our platform. This more comprehensive offering of activities attracts more participants. As we attract more participants, we are able to drive increased demand for our customers' activities, thus increasing registrations and revenue for both organizers and us. This revenue growth enables us to develop enhanced functionality and services through ActiveWorks and our websites, further increasing participant engagement and attracting new organizers. In this way, we build increasing value for both organizations and participants. We serve a wide range of customers including community and sports organizations, large corporations, small and medium sized businesses, educational institutions, government agencies, non-profit organizations and other similar entities. We primarily generate revenue from technology fees paid by participants who register for our customers' activities through our cloud computing applications. During the six months ended June 30, 2011, we generated revenue of $171.7 million, as compared to $144.9 million in the six months ended June 30, 2010, an increase of 19%. 28 -------------------------------------------------------------------------------- Table of Contents Our technology revenue was 86% of our total revenue for the three months ended June 30, 2011 and 87% for the six months ended June 30, 2011. Net registration revenue was 82% of our technology revenue for the three and six months ended June 30, 2011. During the six months ended June 30, 2011, we processed approximately 36.9 million consumer registrations. Licensed software, maintenance, hosting and implementation revenue was 18% of our technology revenue for the three and six months ended June 30, 2011. Our marketing services revenue was 14% of our total revenue for the three months ended June 30, 2011 and 13% for the six months ended June 30, 2011. Key Business Metrics Net Registration Revenue. We calculate our net registration revenue by summing the technology fees generated by our registrations in a given period. Registrations. We define a registration as when a participant registers one or more people for an event being held by an organization who is using our technology to register that participant. We determine that a registration has taken place when a participant registers one or more people for an activity or an event being held by one of our customers. Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (Unaudited) (In thousands) (In thousands) Net registration revenue $ 69,741 $ 60,561 15 % $ 121,174 $ 106,241 14 % Registrations 22,926 21,464 7 % 36,857 34,385 7 % Net Registration Revenue and Registrations Registrations increased 1.5 million or 7% for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and 2.5 million, or 7%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010, mostly due to organic growth from sales to new organizations. The average revenue per registration increased 8% for the three months and 6% for the six months, mainly as a result of growth in our communities and events customer groups. Basis of Presentation General The consolidated financial statements include the accounts of The Active Network, Inc. and its wholly owned subsidiaries. All intercompany balances have been eliminated. Acquisitions that have been accounted for as purchase transactions are included in the consolidated results from their date of purchase. Revenue We report our revenue in two segments: • Technology • Marketing services The technology revenue segment is primarily composed of net registration revenue, which is made up of the technology fee we charge a participant when they register for one of our organization's events. The technology fee is recognized as revenue net of the organization registration fee which is collected on behalf of our customer and then remitted back to the organization typically on a two week basis. Net registration revenue is recognized when services are provided, net of estimated rebates and other chargebacks. Technology revenue also includes software licensing, installation, training, maintenance and hosting subscriptions. 29-------------------------------------------------------------------------------- Table of Contents The marketing services revenue segment includes online services, field marketing services and commerce. Registrations lead participants to our network of websites and create opportunities for us to sell our online commerce and other marketing services to participants. Our network of websites enables like-minded consumers to engage in our online communities. Costs and Expenses Cost of Revenue. Our cost of revenue consists of credit card processing fees for registrations, payroll and related costs including allocated facilities costs, stock-based compensation for employees associated with registration, subscription or software implementation, customer support and onsite event support including travel costs. Costs also include expenses related to our call center operations, amortization of capitalized software development costs and certain acquired intangibles including acquired technology, customer supply costs and internet hosting costs. Sales and Marketing. Our sales and marketing costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for our sales and marketing employees. Costs also include expenses for travel, trade shows and other promotional and marketing activities including direct and online marketing. Research and Development. Our research and development costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for employees and contractors engaged in the development and ongoing maintenance of our products and services. General and Administrative. Our general and administrative costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for employees engaged in support activities including executive, finance, accounting, human resources, legal and internal information technology support. Also included are professional fees and contractor costs for legal and accounting services. Software expenses and travel costs for support employees, taxes, fees and licenses are also included. Amortization of Intangibles. Intangible assets with finite lives are amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the asset over their estimated useful lives. This includes assets recorded in conjunction with certain acquisitions. Other Income (Expense), Net. Other income (expense), net consists primarily of the interest income earned on our cash and cash equivalents, interest paid on our debt, foreign exchange gains and losses and other one-time gains and losses. Provision for Income Taxes. Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions. Critical Accounting Policies In presenting our consolidated financial statements in conformity with U.S. generally accepting accounting principles, or GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Our future estimates may change if the underlying assumptions change. Actual results may differ significantly from these estimates. We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements. There have been no material changes to our critical accounting policies, estimates and judgments subsequent to March 31, 2011. 30-------------------------------------------------------------------------------- Table of Contents • Revenue recognition • Allowance for doubtful accounts • Software development costs • Business combinations • Impairment of Goodwill, indefinite-lived intangible assets and long-lived assets • Income taxes • Stock-based compensation For further information on our critical and other significant accounting policies, see Note 2 to our consolidated financial statements and Note 2 to our consolidated financial statements included in our final prospectus, dated May 25, 2011, related to our IPO. Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 (Unaudited) (In thousands) Net revenue: Technology revenue $ 85,553 $ 71,172 $ 148,661 $ 126,104 Marketing services revenue 13,452 10,490 23,056 18,780 Total net revenue 99,005 81,662 171,717 144,884 Cost of net revenue 40,187 34,066 74,337 62,120 Gross profit 58,818 47,596 97,380 82,764 Operating expenses: Sales and marketing 18,914 15,115 35,854 29,758 Research and development 16,377 16,310 32,553 31,352 General and administrative 12,308 11,533 22,896 22,857 Amortization of intangibles 3,718 4,073 7,421 8,120 Total operating expenses 51,317 47,031 98,724 92,087 Income (loss) from operations 7,501 565 (1,344 ) (9,323 ) Interest income 29 42 59 70 Interest expense (1,406 ) (1,450 ) (2,690 ) (2,764 ) Other income (expense), net 193 (244 ) 142 (621 ) Income (loss) before income taxes 6,317 (1,087 ) (3,833 ) (12,638 ) Income tax provision 788 853 1,580 1,708 Net income (loss) 5,529 (1,940 ) (5,413 ) (14,346 ) Accretion of redeemable convertible preferred stock (4,400 ) (6,900 ) (11,810 ) (13,773 ) Net income (loss) attributable to common stockholders $ 1,129 $ (8,840 ) $ (17,223 ) $ (28,119 ) 31 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 (As of percentage of net revenue) Cost of net revenue 41 % 42 % 43 % 43 % Gross profit 59 58 57 57 Operating expenses: Sales and marketing 19 19 21 21 Research and development 17 20 19 22 General and administrative 12 14 13 16 Amortization of intangibles 4 5 4 6 Total operating expenses 52 58 57 64 Income (loss) from operations 8 1 (1 ) (6 ) Interest income 0 0 0 0 Interest expense (1 ) (2 ) (2 ) (2 ) Other income (expense), net 0 (0 ) 0 (0 ) Income (loss) before income taxes 6 (1 ) (2 ) (9 ) Income tax provision 1 1 1 1 Net income (loss) 6 % (2 %) (3 %) (10 %) Three Months and Six Months Ended June 30, 2011 and 2010 Net Revenue Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (Unaudited) (In thousands) (In thousands) Net revenue: Technology revenue $ 85,553 $ 71,172 20 % $ 148,661 $ 126,104 18 % Marketing services revenue 13,452 10,490 28 % 23,056 18,780 23 % Net revenue $ 99,005 $ 81,662 21 % $ 171,717 $ 144,884 19 % Total revenue increased $17.3 million, or 21%, for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and $26.8 million, or 19%, for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 as discussed below. Technology revenue. Net registration revenue increased $9.2 million or 15% for the three months and $14.9 million or 14% for the six months. The increase was primarily due to a 7% growth in registrations and higher revenue per registration for the three and six months resulting from growth led by our communities and events customer groups. Software revenue increased $5.2 million or 49% for the three months and $7.6 million or 38% for the six months, as a result of higher license, maintenance and implementation revenue. In total, technology revenue increased $14.4 million or 20% for the three months and $22.6 million or 18% for the six months. Marketing services revenue. Revenue increased $3.0 million, or 28% for the three months and $4.3 million or 23% for the six months, resulting mainly from growth in online advertising and membership programs. 32-------------------------------------------------------------------------------- Table of Contents Costs and Expenses Employee related expenses. Headcount and its related expenses make up a significant portion of our total expenses. We define employee related expenses as salaries, fringe benefits, facilities costs, employee travel, commissions, bonuses and other employee expenses. Cost of Net Revenue Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (Dollars in thousands) Cost of net revenue $ 40,187 $ 34,066 18 % $ 74,337 $ 62,120 20 % Headcount (at period end) 1,435 1,416 1 % Cost of net revenue increased $6.1 million or 18% for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and $12.2 million or 20% for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The increase in cost of net revenue was due to increases in credit card fees of $2.0 million for the three months and $3.9 million for the six months, directly attributable to the increases in net registration revenue, higher employee related costs to support the increase in revenue of $1.0 million for the three months and $2.1 million for the six months, and higher depreciation for fixed assets and software that was capitalized in earlier periods of $2.0 million for the three months and $4.4 million for the six months. Headcount increased 1% as a result of additional headcount of higher compensated information technology and implementation support employees to support the revenue growth, partially offset by reduced headcount of lower compensated call center employees resulting from efficiencies in our call center operations. Sales and Marketing Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (Dollars in thousands) Sales and marketing $ 18,914 $ 15,115 25 % $ 35,854 $ 29,758 20 % Headcount (at period end) 491 449 9 % Sales and marketing expense increased $3.8 million or 25% for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and $6.1 million or 20% for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The increase was primarily due to increases in employee related costs of $2.3 million for the three months and $4.6 million for the six months, which resulted from a 9% increase in headcount as we invested in our sales and marketing staff to facilitate future business growth. Marketing expenses also increased $1.1 million for the three months and $1.4 million for the six months as we increased our marketing and trade show expenses. Research and Development Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (Dollars in thousands) Research and development $ 16,377 $ 16,310 0.4 % $ 32,553 $ 31,352 4 % Headcount (at period end) 913 798 14 % 33 -------------------------------------------------------------------------------- Table of Contents Research and development expense increased $0.1 million or less than 1% for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and $1.2 million or 4% for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The increase was primarily due to increases in employee related costs of $1.8 million for the three months and $4.1 million for the six months resulting from a 14% increase in headcount which allowed us to continue development of ActiveWorks and to implement new large state customers. The increase in employee related costs was mainly offset by additional capitalized software of $0.7 million for the three months and $1.0 million for the six months, declines in contractor expenses of $0.7 million for the three months and $1.2 million for the six months, as well as declines in depreciation expense of $0.4 million for the three months and $0.7 million for the six months. General and Administrative Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (Dollars in thousands)General and administrative $ 12,308 $ 11,533 7 % $ 22,896 $ 22,857 0.2 % Headcount (at period end) 258 213 21 % General and administrative expense increased $0.8 million or 7% for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and increased less than 1% for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Employee related expenses decreased $0.3 million for the three months and decreased $0.2 million for the six months as a result of higher salaries offset by a change in our annual incentive plan accrual. For the three months, other expenses to support the business increased $0.5 million. For the six months, contractor expenses declined $0.9 million and stock based compensation expenses declined $0.9 million, while other expenses to support the business increased $1.5 million mainly due to higher software expenses. For both the three and six months, expenses include $0.6 million to record a contingency from a prior period acquisition. Amortization of Intangibles Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (In thousands) Amortization of intangibles $ 3,718 $ 4,073 (9 %) $ 7,421 $ 8,120 (9 %) Amortization of intangibles decreased $0.4 million or 9% for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and $0.7 million or 9% for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Intangibles are amortized over their expected life. Amortization expense on acquisitions completed prior to 2009 decreased as useful lives on certain intangibles were met. This was slightly offset by higher amortization expense on acquisitions completed since 2009. 34-------------------------------------------------------------------------------- Table of Contents Interest and Other Income (Expense), Net Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (In thousands) Interest income $ 29 $ 42 (31 %) $ 59 $ 70 (16 %) Interest expense (1,406 ) (1,450 ) (3 %) (2,690 ) (2,764 ) (3 %) Other income (expense), net 193 (244 ) 179 % 142 (621 ) 123 % Interest and other income (expense), net $ (1,184 ) $ (1,652 ) (28 %) $ (2,489 ) $ (3,315 ) (25 %) Interest income decreased 31% for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and decreased 16% for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 due to our transition to bank Earnings Credit Rate. Interest expense decreased 3% for the three months and six months ended June 30, 2011 compared to the three months and six months ended June 30, 2010 due to a lower average debt balance. Other income (expense), net increased $0.4 million for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 and $0.8 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The increases are mainly due to foreign exchange losses in 2010. Income Taxes Three Months Ended June 30, Six Months Ended June 30, % % 2011 2010 Change 2011 2010 Change (Unaudited) (In thousands) Income tax expense $ 788 $ 853 (8 %) $ 1,580 $ 1,708 (7 %) Income tax expense decreased $0.1 million for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010. The provision for each period is primarily the result of increases in our deferred tax liabilities from the amortization of tax deductible goodwill. The effective tax rate of (41.2)% for the six months ended June 30, 2011 differs from the statutory rate primarily due to state taxes, foreign taxes, nondeductible stock option expenses, the increase in the deferred tax liability from the amortization of tax deductible goodwill, and the change in the valuation allowance. 35 -------------------------------------------------------------------------------- Table of Contents |