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RESPONSYS INC - 10-K - 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 the financial statements and
related notes in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. These forward-looking
statements are based on our current expectations, estimates and projections
about our industry, management's beliefs and certain assumptions made by us, all
of which are subject to change. Forward-looking statements can often be
identified by words such as "anticipates," "expects," "intends," "plans,"
"predicts," "believes," "seeks," "estimates," "may," "will," "should," "would,"
"could," "potential," "continue," "ongoing," similar expressions and variations
or negatives of these words and include, but are not limited to, statements
regarding projected results of operations and management's future strategic
plans. Our actual results could differ significantly from those projected in the
forward-looking statements as a result of factors, including those discussed
under "Risk Factors" and elsewhere in this report. We assume no obligation to
update the forward-looking statements or such risk factors.
Overview
We are a leading provider of on-demand software that enables companies to engage
in relationship marketing across the interactive channels that consumers are
embracing today-email, mobile, social and the web. The Responsys Interact Suite,
the core element of our solution, provides marketers with a set of integrated
applications to create, execute, optimize and automate marketing campaigns. Our
solution is comprised of our on-demand software and our professional services,
all focused on enabling the marketing success of our customers.
The following is a timeline of significant milestones in our corporate history:
• We were founded in 1998 to provide on-demand software designed to enable marketers to design, execute and manage email campaigns. Our core product,
Interact Campaign, was commercially released in 1999.
• In 2004, under a new management team, we broadened our strategy from solely an email campaign management platform to a set of integrated
applications for creating, executing, optimizing and automating email
marketing campaigns.
• In 2006, we acquired Inbox Marketing, Inc., a professional services firm,
to increase the size and breadth of our professional services
organization.
• In 2007, we launched Interact Team to help marketers manage the campaign
creation and deployment process by automating the design and tracking of
campaign materials, communications, handoffs and approvals.
• In 2008, we launched Interact Connect, which enables marketers to automate
the transfer of data to and from our on-demand software platform and their
customer data management systems and those of third parties.
• In 2009, we achieved a key technology milestone by releasing our next-generation on-demand software platform, which integrated all of our
core applications into one platform, the Responsys Interact Suite.
Substantially all of our new customers added since this time are on this
platform and we are migrating our other existing customers to this
platform over time. This suite includes a new application, Interact
Program, for visually designing, managing and automating complex marketing
programs with multiple stages across multiple channels. In 2009, we also
acquired Smith-Harmon, Inc. to increase the size and breadth of our
professional services organization.
• In April 2010, we added mobile and social functionality to Interact
Campaign to coordinate the creation, scheduling, automation and tracking
of short message service, or text message, marketing campaigns and
promotions to consumers who engage with our customers' brands as Facebook
fans or Twitter followers.
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• In July 2010, we acquired a non-controlling, fifty-percent equity interest
in Eservices Group Pty Ltd, or Eservices, a privately-held company
headquartered in Melbourne, Australia, and in January 2011 we acquired the
remaining equity interests in Eservices. Following the acquisition, the
company was renamed Responsys Pty Ltd. As of and for the year ended
December 31, 2010, the investment is reflected in our consolidated
financial statements using the equity method. We have consolidated our results with those of Eservices beginning in January 2011. We acquired
Eservices to expand the scope of our business internationally, increase
our customer base and grow our professional services and sales teams.
We derive revenue from subscriptions to our on-demand software and related
professional services. As part of a subscription, a customer commits to a
minimum monthly or quarterly fee that permits the customer to send up to a
specified number of email messages. If a customer sends additional messages
above the contracted level, the customer is required to pay additional
per-message fees. No refunds or credits are given if a customer sends fewer
messages than the contracted level. Customer agreements are non-cancellable for
a minimum period, generally one year but ranging up to three years. Revenue from
messages sent above contracted levels during the last three years has
historically ranged from approximately 20% to 25% of our subscription revenue in
any given 12-month period but varies from quarter to quarter due to seasonal,
macroeconomic and other factors. We have historically had higher subscription
revenue in our fourth quarter than other quarters in a given 12-month period,
primarily due to revenue from messages sent above contracted levels.
Subscription revenue accounted for 70.0%, 73.7% and 79.6% of our total revenue
during the years ended December 31, 2011, 2010 and 2009, respectively.
Subscription revenue is driven primarily by the number of customers, demand from
existing customers, contracted value of the subscription agreements and number
of messages sent above contracted levels. To date, our customers have primarily
used email messages for their marketing campaigns, and email will continue to be
the primary driver of our subscription revenue in the foreseeable future.
However, if customers increase their use of other interactive channels in the
future, we anticipate that revenue associated with email campaigns will decrease
as a percentage of subscription revenue. Although revenue associated with our
mobile, social and web channels has not been material to date, we believe that
our cross-channel capabilities have been important factors in our new customers'
purchasing decisions.
Deferred revenue primarily consists of the unearned portion of billed
professional services fees or fees for our on-demand software. As we bill nearly
all our customers on a monthly or quarterly basis, our deferred revenue balance
does not serve as a primary source of our future subscription revenue.
We sell subscriptions to our on-demand software and professional services
primarily through a direct sales force. We target enterprise and larger
mid-market companies that seek to implement more advanced marketing programs
across interactive channels. Our customers are of varied size across a wide
variety of industries, including retail and consumer, travel, financial services
and technology. Our revenue from outside the United States as a percentage of
total revenue was 20.9%, 10.8% and 13.5% for the years ended December 31, 2011,
2010 and 2009, respectively. Revenue from outside the United States as a
percentage of total revenue increased during the year ended December 31, 2011 as
a result of our acquisition of Eservices, located in Australia.
Our revenue growth over these periods has been driven by an increased number of
customers with higher subscription fees. Over the past three years, we have
added larger enterprise customers with higher subscription commitments, higher
messaging volumes and greater professional services demands. Our subscription
revenue fluctuates as a result of seasonal variations in our business,
principally due to timing of our customers' sales and marketing cycles. We have
historically had higher subscription revenue in our fourth quarter than in other
quarters during a given 12-month period, primarily due to revenue from messages
sent above contracted levels by our retail and consumer customers. Our cost of
revenue and operating expenses have increased in absolute dollars over this
period due to our need to increase bandwidth and capacity to support larger
messaging volumes and the overall increased size of our business. We expect that
our cost of revenue and operating expenses will continue to increase in absolute
dollars as we continue to invest in our growth and incur additional costs as a
public company.
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Key Metrics
We regularly review a number of metrics to evaluate growth trends, measure our
performance, establish budgets and make strategic decisions. We discuss revenue,
gross margin, and the components of operating income and margin below under
Basis of Presentation, and we discuss other key metrics below.
Subscription Dollar Retention Rate.
We believe that our ability to retain our customers and expand their use of our
software over time is an indicator of the stability of our revenue base and the
long-term value of our customer relationships. We assess our performance in this
area using a metric we refer to as our Subscription Dollar Retention Rate. Our
Subscription Dollar Retention Rate metric is calculated by dividing (a) Retained
Subscription Revenue by (b) Retention Base Revenue. We define Retention Base
Revenue as subscription revenue from all customers in the prior period, and we
define Retained Subscription Revenue as subscription revenue from that same
group of customers in the current period. Our Subscription Dollar Retention Rate
has averaged above 100% over the four quarters in each of the last three years.
Number of Customers.
We believe that our ability to expand our customer base is an indicator of our
market penetration and the growth of our business as we continue to invest in
our direct sales force and marketing initiatives. We define our number of
customers as of the end of a particular quarter as the number of direct-billed
subscription customers with $3,000 or more in committed subscription revenue for
that quarter. We had 346, 277 and 246 customers as of December 31, 2011, 2010
and 2009, respectively. For more information about our customers, see Item 1,
Business-Customers above.
Basis of Presentation
Revenue.
Subscription Revenue.
We derive our subscription revenue from subscriptions to our on-demand software.
Subscription revenue primarily consists of revenue from contractually committed
messaging and other fees and revenue from messages sent above contracted levels.
Customer agreements are non-cancellable for a minimum period, generally one year
but ranging up to three years. Our contracts provide our customers with access
to our on-demand software and the ability to send up to a specified number of
messages during each month or quarter in the contract term. If customers exceed
the specified messaging volume, per-message fees are billed for the excess
volume, generally at rates equal to or greater than the contracted minimum
per-message fee. If customers send less than the specified number of messages,
no rollover credit or refunds are given.
We recognize the aggregate minimum subscription fee payable ratably on a
straight-line basis over the subscription term, provided that an enforceable
contract has been signed by both parties, access to our software has been
granted to the customer, the fee for the subscription is fixed or determinable
and collection is reasonably assured. We do not recognize revenue in excess of
the amount we have the right to invoice. Revenue for messages sent above
contracted levels is recognized in the period in which the messages are sent. We
also derive revenue from setup fees when the services are first activated. The
setup fees are recorded as deferred revenue and recognized as revenue ratably
over the estimated life of the customer relationship.
For a discussion of how we expect seasonal factors to affect our subscription
revenue, see Results of Operations below.
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Professional Services Revenue.
Professional services revenue consists primarily of fees associated with
campaign services, creative and strategic marketing services, technical services
and education services. For more information about our professional services,
see Item 1, Business-Our Services above. Our professional services are not
required for customers to begin using our on-demand software. Our professional
services engagements are typically billed on a fixed fee, time and materials or
unit basis.
Cost of Revenue.
Cost of Subscription Revenue.
Cost of subscription revenue primarily consists of hosting costs, data
communications expenses, personnel and related costs, including salaries and
employee benefits, allocated overhead, software license fees, costs associated
with website development activities, amortization expenses associated with
capitalized software, and depreciation and amortization expenses associated with
computer equipment. To date, the expenses associated with capitalized software
have not been material to our cost of subscription revenue. Expenses related to
hosting and data communications are affected by the number of customers using
our on-demand software, the complexity and frequency of their use, the volume of
messages sent and the amount of data processed and stored. We plan to continue
to significantly expand our capacity to support our growth, which will result in
higher cost of subscription revenue in absolute dollars.
Cost of Professional Services Revenue.
Cost of professional services revenue primarily consists of personnel and
related costs and allocated overhead. Our cost associated with providing
professional services is significantly higher as a percentage of revenue than
our cost of subscription revenue due to the labor costs associated with
providing professional services. As it takes several months to ramp up a
productive professional consultant, we generally increase our professional
services capacity ahead of associated professional services revenue, which can
result in lower margins in the given investment period. We expect the number of
professional services personnel to increase in the future, which will result in
higher cost of professional services revenue in absolute dollars.
Operating Expenses.
Research and Development.
Research and development expenses primarily consist of personnel and related
costs for our product development and product management personnel and allocated
overhead. Our research and development efforts have been devoted primarily to
increasing the functionality and enhancing the ease of use of our on-demand
software and to improving scalability and performance. We expect that in the
future, research and development expenses will increase as we extend our
on-demand software offerings and develop new technologies and capabilities.
Sales and Marketing.
Sales and marketing expenses primarily consist of personnel and related costs
for our sales and marketing employees, including bonuses and commissions, the
cost of marketing programs, promotional events and webinars, amortization of our
acquired customer lists and allocated overhead. We expense sales commissions
when the customer contract is signed because our obligation to pay a sales
commission arises at that time. We plan to continue to invest in sales and
marketing by increasing the number of direct sales personnel in order to add new
customers and increase penetration within our existing customer base, expanding
our domestic and international sales and marketing activities, building brand
awareness and sponsoring additional marketing events. We expect that in the
future, sales and marketing expenses will increase and continue to be our
largest functional cost.
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General and Administrative.
General and administrative expenses consist primarily of personnel and related
costs, and allocated overhead. In addition, general and administrative expenses
include professional fees, bad debt expenses, sales and use tax expense and
other corporate expenses. We anticipate that we will incur additional costs for
personnel, systems and external professional services as we grow and operate as
a public company, including higher legal, insurance and financial reporting
expenses, and the additional costs to achieve and maintain compliance with
Section 404 of the Sarbanes-Oxley Act. Accordingly, we expect that in the
future, general and administrative expenses will increase.
Gain on Acquisition.
Gain on acquisition represents the fair value adjustments of our initial
investment in Eservices upon the acquisition of the remaining equity interests.
Other Income (Expense).
Other income (expense) primarily consists of interest income, interest expense
and foreign exchange gains (losses). Other income (expense) for the year ended
December 31, 2010 includes fair value adjustments of our call and put options to
purchase the remaining equity interests in Eservices,and for the year ended
December 31, 2009 includes fair value adjustments of our preferred stock warrant
liability, which was settled upon exercise of the related warrant in 2009.
Interest income represents interest received on our cash, cash equivalents and
short-term investments. Interest expense is associated with our outstanding
capital leases. Foreign exchange gains (losses) relate to expenses and
transactions denominated in currencies other than our functional currency.
Equity in Net Loss of Unconsolidated Affiliates.
Equity in net loss of unconsolidated affiliates represents our proportionate
share of operating results from our non-controlling equity investment in
Responsys Denmark A/S for the year ended December 31, 2011 and in Eservices and
Responsys Denmark A/S for the year ended December 31, 2010.
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Results of Operations
The following tables set forth selected consolidated statements of income data
for each of the periods indicated.
Year Ended December 31,
2011 2010 2009
(in thousands)
Revenue:
Subscription $ 94,501 $ 69,284 $ 53,044
Professional services 40,438 24,787 13,599
Total revenue 134,939 94,071 66,643
Cost of revenue: (1)
Subscription 27,918 20,221 15,109
Professional services 36,747 20,697 12,478
Total cost of revenue 64,665 40,918 27,587
Gross profit 70,274 53,153 39,056
Operating expenses:
Research and development (1) 13,544 10,597 8,052
Sales and marketing (1) 33,300 20,849 15,494
General and administrative (1) 11,463 8,225 5,746
Gain on acquisition (2,220 ) - -
Total operating expenses 56,087 39,671 29,292
Operating income 14,187 13,482 9,764
Other income (expense), net (268 ) 1,171 185
Income before provision for income taxes 13,919 14,653 9,949
Provision for income taxes (5,824 ) (5,821 ) (4,063 )
Equity in net loss of unconsolidated affiliates (124 ) (234 ) -
Net income $ 7,971 $ 8,598 $ 5,886
(1) Total cost of revenue and operating expenses include the following amounts
related to stock-based compensation:
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Year Ended December 31,
2011 2010 2009
(in thousands)
Cost of revenue $ 1,004 $ 523 $ 332
Research and development 610 331 280
Sales and marketing 861 694 461
General and administrative 1,238 958 563
Year Ended December 31,
2011 2010 2009
Revenue:
Subscription 70.0 % 73.7 % 79.6 %
Professional services 30.0 26.3 20.4
Total revenue 100.0 100.0 100.0
Cost of revenue:
Subscription 20.7 21.5 22.7
Professional services 27.2 22.0 18.7
Total cost of revenue 47.9 43.5 41.4
Gross profit 52.1 56.5 58.6
Operating expenses:
Research and development 10.0 11.3 12.1
Sales and marketing 24.7 22.2 23.2
General and administrative 8.5 8.7 8.6
Gain on acquisition (1.6 ) - -
Total operating expenses 41.6 42.2 43.9
Operating income 10.5 14.3 14.7
Other income (expense), net (0.2 ) 1.2 0.3
Income before provision for income taxes 10.3 15.5 15.0
Provision for income taxes (4.3 ) (6.2 ) (6.1 )
Equity in net loss of unconsolidated affiliates (0.1 ) (0.2 ) -
Net income 5.9 % 9.1 % 8.9 %
Comparison of Years Ended December 31, 2011, 2010 and 2009
Revenue.
Year Ended December 31, Year Ended December 31,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)
Subscription revenue $ 94,501 $ 69,284 $ 25,217 36.4 % $ 69,284 $ 53,044 $ 16,240 30.6 %
Percentage of total revenue 70.0 % 73.7 %
73.7 % 79.6 %
Professional services revenue $ 40,438 $ 24,787 $ 15,651
63.1 % $ 24,787 $ 13,599 $ 11,188 82.3 %
Percentage of total revenue 30.0 % 26.3 %
26.3 % 20.4 %
Subscription revenue.
Subscription revenue for the year ended December 31, 2011 increased by $25.2
million over the year ended December 31, 2010. The increase was primarily due to
an increase in contractually committed messaging of $11.5 million from new
customers, including $5.1 million of revenue from customers acquired through our
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acquisition of Eservices, and a net increase of $10.3 million from existing
customers. In addition, revenue from messages sent above contracted levels
increased in absolute dollars to $19.3 million from $15.9 million, but decreased
to 20.4% of subscription revenue from 22.9% of subscription revenue, for the
years ended December 31, 2011 and 2010, respectively.
Subscription revenue for the year ended December 31, 2010 increased by $16.2
million over the year ended December 31, 2009. The increase was primarily due to
an increase in contractually committed messaging of $7.4 million from new
customers and a net increase of $5.4 million from existing customers. In
addition, revenue from messages sent above contracted levels increased in
absolute dollars to $15.9 million from $12.8 million, but decreased to 22.9% of
subscription revenue from 24.0% of subscription revenue, for the years ended
December 31, 2010 and 2009, respectively.
Professional services revenue.
Professional services revenue for the year ended December 31, 2011 increased by
$15.7 million over the year ended December 31, 2010. The increase was primarily
due to a $9.1 million increase from new customers, including $6.3 million of
revenue from customers acquired through our acquisition of Eservices, and a net
increase of $6.5 million from existing customers.
Professional services revenue for the year ended December 31, 2010 increased by
$11.2 million over the year ended December 31, 2009. The increase was primarily
due to an $8.0 million increase from existing customers and a $2.8 million
increase from new customers.
Cost of Revenue.
Year Ended December 31, Year Ended December 31,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)Cost of subscription revenue $ 27,918 $ 20,221 $ 7,697
38.1 % $ 20,221 $ 15,109 $ 5,112 33.8 %
Percentage of subscription
revenue 29.5 % 29.2 % 29.2 % 28.5 %
Gross margin 70.5 % 70.8 % 70.8 % 71.5 %
Cost of professional services
revenue $ 36,747 $ 20,697 $ 16,050 77.5 % $ 20,697 $ 12,478 $ 8,219 65.9 %
Percentage of professional
services revenue 90.9 % 83.5 % 83.5 % 91.8 %
Gross margin 9.1 % 16.5 % 16.5 % 8.2 %
Cost of subscription revenue.
Cost of subscription revenue for the year ended December 31, 2011 increased by
$7.7 million over the year ended December 31, 2010. The increase was primarily
due to a $4.2 million increase in personnel expenses due to the addition of
employees, a $2.1 million increase in depreciation and maintenance expenses
associated with equipment for our data centers and a $1.0 million increase in
bandwidth expenses due to an expansion of our capacity in order to accommodate
growth.
Cost of subscription revenue for the year ended December 31, 2010 increased by
$5.1 million over the year ended December 31, 2009. The increase was primarily
due to a $2.5 million increase in personnel expenses due to the addition of
employees, a $1.2 million increase in bandwidth expenses due to an expansion of
our capacity in order to accommodate growth, a $1.0 million increase in
depreciation and maintenance expenses associated with equipment for our data
centers and a $0.3 million increase in information technology expenses to
support our higher headcount.
Cost of professional services revenue.
Cost of professional services revenue for the year ended December 31, 2011
increased by $16.1 million over the year ended December 31, 2010. The increase
was primarily due to a $12.4 million increase in personnel
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expenses due to the addition of employees, a $0.7 million increase in facility
expenses, a $0.6 million increase in outside consulting expenses due to an
increased demand for our services, a $0.6 million increase in information
technology expenses to support our larger professional services team, a $0.6
million increase in travel and entertainment expenses, a $0.4 million increase
in stock-based compensation and a $0.3 million increase in depreciation and
maintenance expenses. Professional services gross margin declined for the year
ended December 31, 2011 compared to the year ended December 31, 2010 as we
increased our professional services capacity in anticipation of growing demand
for those services. In addition, the gross margin on professional services
provided by Eservices was lower than that of other professional services.
Cost of professional services revenue for the year ended December 31, 2010
increased by $8.2 million over the year ended December 31, 2009. The increase
was primarily due to a $5.8 million increase in personnel expenses due to the
addition of employees, a $0.8 million increase in outside consulting expenses
due to an increased demand for our services, a $0.7 million increase in
information technology expenses to support our larger professional services team
and a $0.5 million increase in travel and entertainment expenses.
Operating Expenses.
Research and Development.
Year Ended December 31, Year Ended December 31,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)Research and development $ 13,544 $ 10,597 $ 2,947 27.8 % $ 10,597 $ 8,052 $ 2,545 31.6 %
Percentage of total revenue 10.0 % 11.3 %
11.3 % 12.1 %
Research and development expenses for the year ended December 31, 2011 increased
by $2.9 million over the year ended December 31, 2010. The increase was
primarily due to a $2.9 million increase in personnel expenses due to the
addition of employees and a $0.3 million increase in stock-based compensation
expenses, partially offset by a $0.4 million decrease in consulting services
expenses as we brought more software development related to items not eligible
for capitalization in-house.
Research and development expenses for the year ended December 31, 2010 increased
by $2.5 million over the year ended December 31, 2009. The increase was
primarily due to a $1.7 million increase in personnel expenses due to the
addition of employees, a $0.3 million increase in hardware and software expenses
and a $0.2 million increase in outside consulting services expenses.
Sales and Marketing.
Year Ended December 31, Year Ended December 31,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)
Sales and marketing $ 33,300 $ 20,849 $ 12,451 59.7 % $ 20,849 $ 15,494 $ 5,355 34.6 %
Percentage of total revenue 24.7 % 22.2 %
22.2 % 23.2 %
Sales and marketing expenses for the year ended December 31, 2011 increased by
$12.5 million over the year ended December 31, 2010. The increase was primarily
due to a $4.7 million increase in personnel expenses due to the addition of
employees, a $2.1 million increase in amortization expense related to intangible
assets acquired through the acquisition of Eservices, a $1.5 million increase in
commission expense as a result of an increase in new customers and increased
revenue from existing customers, a $1.3 million increase in advertising and
promotion expenses primarily due to our user conference that was held in
February 2011, a $1.3 million increase in travel and entertainment expenses, a
$0.8 million increase in bonus expense and a $0.2 million increase in facility
and telephone expenses.
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Sales and marketing expenses for the year ended December 31, 2010 increased by
$5.4 million over the year ended December 31, 2009. The increase was primarily
due to a $2.4 million increase in personnel expenses due to the addition of
employees, a $0.7 million increase in travel and entertainment expenses, a $0.5
million increase in commission expense as a result of an increase in new
customers and increased revenue from existing customers, a $0.5 million increase
in advertising and promotion expenses due to expansion of our domestic and
international sales and marketing activities, a $0.3 increase in bonus expense,
a $0.2 million increase in information technology expenses and a $0.2 million
increase in stock-based compensation.
General and Administrative.
Year Ended December 31, Year Ended December 31,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)General and administrative $ 11,463 $ 8,225 $ 3,238 39.4 % $ 8,225 $ 5,746 $ 2,479 43.1 %
Percentage of total revenue
8.5 % 8.7 % 8.7 % 8.6 %
General and administrative expenses for the year ended December 31, 2011
increased by $3.2 million over the year ended December 31, 2010. The increase
was primarily due to a $2.0 million increase in personnel expenses due to the
addition of employees, a $0.5 million increase in consulting expenses and a $0.3
million increase in stock-based compensation.
General and administrative expenses for the year ended December 31, 2010
increased by $2.5 million over the year ended December 31, 2009. The increase
was primarily due to a $1.4 million increase in legal and accounting expenses as
a result of a multi-year audit and legal activity to support company growth, a
$0.5 million increase in personnel expenses due to the addition of employees, a
$0.4 million increase in expenses due to the acquisition of a non-controlling
interest in Eservices, a $0.4 million increase in stock-based compensation and a
$0.5 million increase in outside consulting expenses, partially offset by a $0.9
million decrease in sales and use tax liability.
Gain on Acquisition.
Year Ended December 31, Year Ended December 31,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)
Gain on acquisition $ (2,220 ) $ - $ (2,220 ) * $ -
$ - $ - *
*- Not meaningful
Gain on acquisition for the year ended December 31, 2011 consisted of
approximately $1.0 million for the fair value adjustment of our initial
investment in Eservices and $1.2 million for the recognition of foreign exchange
gains upon the acquisition of the remaining equity interests in January 2011.
Total Other Income (Expense), Net.
Year Ended December 31, Year Ended December 31,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)Other income (expense), net $ (268 ) $ 1,171 $ (1,439 ) (122.9 )% $ 1,171 $ 185 $ 986 533.0 %
Other income (expense), net for the year ended December 31, 2011 decreased by
$1.4 million over the year ended December 31, 2010. The decrease was primarily
due to the $1.5 million adjustment in the fair value of our call and put options
to purchase the remaining equity interest in Eservices that occurred in 2010 for
which there was no corresponding amount in 2011.
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Other income (expense), net for the year ended December 31, 2010 increased by
$1.0 million over the year ended December 31, 2009. The increase was primarily
due to a $1.5 million adjustment in the fair value of our call and put options
to purchase the remaining equity interest in Eservices and partially offset by
unfavorable Euro and British Pound Sterling currency exchange rate fluctuations.
Provision for Income Taxes.
Year Ended December 31, Nine Months Ended September 30,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)Provision for income taxes $ (5,824 ) $ (5,821 ) $ (3 ) 0.1 % $ (5,821 ) $ (4,063 ) $ (1,758 ) 43.3 %
Effective tax rate 41.8 % 39.7 % 39.7 % 40.8 %
Our effective tax rate for the years ended December 31, 2011, 2010, and 2009 was
41.8%, 39.7% and 40.8%, respectively. Our tax rate is affected by recurring
items, such as tax rates in foreign jurisdictions and the relative amount of
income we earn in jurisdictions, which we expect to be fairly consistent in the
near term. It is also affected by discrete items that may occur in any given
year, but are not consistent from year to year. In addition, state income taxes,
research tax credits and non-deductible stock-based compensation expenses had
the most significant impact on the difference between our statutory U.S. federal
income tax rate of 34% and our effective tax rate during the years ended
December 31, 2011, 2010 and 2009.
Equity in Net Loss of Unconsolidated Affiliates.
Year Ended December 31, Nine Months Ended September 30,
Change in Change in
2011 2010 $ % 2010 2009 $ %
(dollars in thousands) (dollars in thousands)Equity in net loss of
unconsolidated affiliates $ (124 ) $ (234 ) $ 110 (47.0 )% $ (234 ) $ - $ (234 ) *
*-Not meaningful
Equity in net loss of unconsolidated affiliates for the year ended December 31,
2011 decreased by $0.1 million over the year ended December 31, 2010. We
recognized a loss in unconsolidated affiliates for the year ended December 31,
2011 as a result of our non-controlling equity investment in Responsys Denmark
A/S and for the year ended December 31, 2010 as a result of our non-controlling
equity investments in Eservices and Responsys Denmark A/S.
Liquidity and Capital Resources
Year Ended December 31,
2011 2010 2009
(in thousands)Net cash provided by operating activities $ 23,000 $ 19,420
$ 12,902
Net cash used in investing activities (35,837 ) (15,685 ) (3,960 )
Net cash provided by (used in) financing
activities 72,485 (5,715 ) (341 )
Effect of foreign exchange rate changes on
cash and cash equivalents (76 ) 114 19
Net increase (decrease) in cash and cash
equivalents $ 59,572 $ (1,866 ) $ 8,620
To date, we have financed our operations primarily through private placements of
preferred stock and common stock, our initial public offering of our common
stock and cash from operating activities. As of December 31, 2011, we had $73.5
million of cash and cash equivalents and $104.6 million of working capital.
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Net cash provided by operating activities.
Cash provided by operating activities is significantly influenced by the amount
of cash we invest in personnel and infrastructure to support the anticipated
growth of our business, the increase in the number of customers using our
on-demand software and professional services and the amount and timing of
customer payments. Cash provided by operations has historically resulted from
net income driven by sales of subscriptions to our on-demand software and
professional services, and adjusted for non-cash expense items such as
depreciation and amortization of property and equipment, stock-based
compensation and changes in our deferred tax assets.
For the year ended December 31, 2011, net cash provided by operating activities
was the result of $8.0 million of net income primarily due to the increased
growth of our revenue derived from sales of subscriptions to our on-demand
software and professional services, increased by non-cash items such as
depreciation and amortization of $9.7 million, including $2.1 million related to
the amortization of Eservices intangibles, deferred tax assets of $4.4 million,
stock-based compensation of $3.7 million, which was partially offset by $2.2
million resulting from a gain on acquisition related to our acquisition of
Eservices and $1.4 million of excess tax benefits from our stock-based
compensation. Changes in operating assets and liabilities provided $0.7 million
in cash. Sources of cash totaled $4.0 million and were primarily related to a
$2.9 million increase in accrued compensation resulting from an increase in
accrued commission and bonus amounts and a $1.1 million increase in other
accrued liabilities. Uses of cash totaled $3.3 million and were primarily
related to a $1.7 million decrease in deferred revenue, a $0.7 million increase
in other assets as we made payments for additional maintenance and support for
our data center equipment and an increase of $0.5 million in accounts
receivable.
For the year ended December 31, 2010, net cash provided by operating activities
was a result of $8.6 million of net income primarily due to the increased growth
of our revenue derived from sales of subscriptions to our on-demand software and
professional services, increased by non-cash items such as depreciation and
amortization of $5.8 million, stock-based compensation of $2.5 million, deferred
tax assets of $4.6 million which was partially offset by $1.5 million resulting
from a gain from the fair value adjustment of our call and put options related
to our investment in Eservices. Changes in operating assets and liabilities used
$0.7 million in cash. Sources of cash totaled $5.3 million and were primarily
related to a $3.4 million increase in deferred revenue, a $0.6 million increase
in our accounts payable balance and a $0.5 million increase in other long term
liabilities primarily due to an increase in our deferred tax liability. Uses of
cash totaled $6.0 million and were primarily related to a $4.4 million increase
in our accounts receivable balance and a $1.6 million increase in prepaid
expenses.
For the year ended December 31, 2009, net cash provided by operating activities
was the result of $5.9 million of net income primarily due to the increased
growth of our revenue derived from sales of subscriptions to our on-demand
software and professional services, increased by $9.6 million for non-cash
items. In addition, we had a decrease in net cash provided by operating
activities due to changes in our operating assets and liabilities in the amount
of $2.6 million, which was primarily the result of an increase in our accounts
receivable balance in the amount of $4.0 million due to our growth, partially
offset by an increase of $0.5 million in deferred revenue, and an increase in
accrued compensation in the amount of $1.3 million, which resulted from an
increase in employee bonuses and sales commissions.
Net cash used in investing activities.
For the year ended December 31, 2011, cash used in investing activities
consisted of $21.4 million in net purchases of U.S. Treasury and Agency bonds,
$7.5 million for purchases of property and equipment, $6.1 million in payments,
net of $0.9 million cash acquired, to complete the acquisition of Eservices, a
$0.4 million payment related to our initial investment in Eservices and $0.4
million of capitalized software costs. In general, our purchases of property and
equipment are primarily for data center equipment and network infrastructure to
support the operation of our on-demand software, as well as computer equipment
for our increasing employee headcount.
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For the year ended December 31, 2010, cash used in investing activities
consisted of $7.9 million for purchases of property and equipment, $7.0 million
used to make equity investments in unconsolidated affiliates, $0.4 million of
capitalized software costs and $0.3 million for an additional payment related to
the Smith-Harmon acquisition.
For the year ended December 31, 2009, cash used in investing activities
consisted of $2.2 million for purchases of property and equipment, $0.8 million
of capitalized software costs and $0.9 million for the initial payment for the
Smith-Harmon acquisition.
Net cash provided by (used in) financing activities.
For the year ended December 31, 2011, cash provided by financing activities
consisted of net proceeds of $72.2 million received from the issuance of our
common stock in connection with our initial public offering, $1.4 million in
excess tax benefits from our stock-based compensation, $1.2 million in proceeds
from the issuance of our common stock in connection with stock option exercises
and $0.2 million in proceeds from the early exercise of stock options. Cash used
in financing activities consisted of $1.7 million in payments for direct costs
incurred in connection with the preparation of our registration statement and
$0.8 million in payments in connection with our capital lease obligations.
For the year ended December 31, 2010, cash used in financing activities
consisted of $5.7 million in payments for the repurchase of our common stock,
$0.7 million in payments for direct costs incurred in connection with the
preparation of our registration statement and $0.4 million in payments in
connection with our capital lease obligations, partially offset by $0.3 million
in proceeds from the issuance of our common stock in connection with stock
option exercises, $0.6 million in proceeds from the early exercise of stock
options and $0.2 million in excess tax benefits from our stock-based
compensation.
For the year ended December 31, 2009, cash used in financing activities
consisted of $0.5 million in payments on our capital lease obligations, which
was partially offset by $0.2 million in proceeds from the issuance of our common
stock in connection with stock option exercises.
Capital resources
As of December 31, 2011, we have not provided for U.S. federal and state income
taxes on approximately $2.5 million of undistributed earnings of our foreign
subsidiaries, since such earnings are considered indefinitely reinvested outside
the United States. If we decide to repatriate such foreign earnings in the
future, we would incur incremental U.S. federal and state income tax, reduced by
the current amount of our U.S. federal and state net operating loss and tax
credit carryforwards. However, our intent is to keep these funds indefinitely
reinvested outside of the United States and our current plans do not contemplate
a need to repatriate them to fund our U.S. operations.
In March 2012, we used $1.7 million of cash to acquire a 19.9% interest in PM
Comunicação LTDA. See Note 17 of the notes to our consolidated financial
statements for more information.
We believe that our existing sources of liquidity will be sufficient to fund our
operations for at least the next 12 months. Our future capital requirements will
depend on many factors, including our rate of revenue growth; the expansion of
our sales and marketing activities; the timing and extent of spending to support
product development efforts and expansion into new territories; the timing of
introductions of new features and enhancements to our on-demand software; and
expenditures related to occupying and equiping new facilities. To the extent
that existing cash and cash equivalents and cash from operations are
insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financing. We may also seek to
invest in, or acquire complementary businesses, applications or technologies,
any of which could also require us to seek additional equity or debt financing.
Additional funds may not be available on terms favorable to us or at all.
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Commitments
We generally do not enter into long-term minimum purchase commitments. Our
principal commitments consist of obligations under operating leases for our
facilities and capital leases. The following table includes information about
our contractual obligations that impact our short- and long-term liquidity and
capital needs. The table includes information about payments due under specified
contractual obligations and is aggregated by type of contractual obligation as
of December 31, 2011:
Payment Due by Period
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
Operating lease obligations $ 15,058 $ 3,331 $ 5,375 $ 3,802 $ 2,550
Capital lease obligations 2,116 934 1,182 - -
Total contractual obligations $ 17,174 $ 4,265 $ 6,557 $ 3,802 $ 2,550
Purchase orders are not included in the table above. Our purchase orders
represent authorizations to purchase rather than binding agreements. The
contractual commitment amounts in the table above are associated with agreements
that are enforceable and legally binding and that specify all significant terms,
including: fixed or minimum services to be used; fixed, minimum or variable
price provisions; and the approximate timing of the transaction. Obligations
under contracts that we can cancel without a significant penalty are not
included in the table above.
Other noncurrent liabilities consist primarily of deferred tax liabilities,
gross unrecognized tax benefits and the related gross interest and penalties. As
of December 31, 2011, we had noncurrent deferred tax liabilities of $4.1
million, gross unrecognized tax benefits of $1.6 million and an immaterial
amount of gross interest and penalties classified as noncurrent liabilities. At
this time, we are unable to make a reasonably reliable estimate of the timing of
payments in individual years in connection with these tax liabilities;
therefore, such amounts are not included in the above contractual obligations
table.
From time to time, in the normal course of business, we indemnify third parties
with whom we enter into contractual relationships, including customers, lessors
and parties to other transactions, with respect to certain matters. We have
agreed, under certain conditions, to hold these third parties harmless against
specified losses, such as those arising from a breach of representations or
covenants, other third-party claims that our on-demand software when used for
its intended purpose infringes the intellectual property rights of such other
third parties, or other claims made against certain parties. It is not possible
to determine the maximum potential amount of liability under these
indemnification obligations due to our limited history of prior indemnification
claims and the unique facts and circumstances that are likely to be involved in
each particular claim. Historically, payments made under these obligations have
not been material.
Off-Balance Sheet Arrangements
During the periods presented, 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.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue, costs and
expenses, and related disclosures. On an ongoing basis, we evaluate our
estimates and assumptions. Our actual results may differ from these estimates
under different assumptions or conditions.
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We believe that of our significant accounting policies, which are described in
Note 2 of the notes to our consolidated financial statements, the following
accounting policies involve a greater degree of judgment and complexity.
Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and
results of operations.
Revenue Recognition.
We recognize revenue in accordance with Accounting Standards Codification, or
ASC, 605-25, Revenue Recognition. Our revenue is primarily derived from sales of
subscriptions to our on-demand software. Subscription revenue primarily consists
of revenue from contractually committed messaging and revenue from messages sent
above contracted levels. Customers do not have the contractual right to take
possession of our on-demand software. Accordingly, we recognize subscription
revenue equal to the lesser of (1) the cumulative amount of the aggregate
contractually committed subscription fee on a straight-line basis over the
subscription term less amounts previously recognized or (2) the cumulative
amount we have the right to invoice our customer less amounts previously
recognized, provided that an enforceable contract has been signed by both
parties, access to our software has been granted to the customer, the fee for
the subscription is fixed or determinable and collection is reasonably assured.
Should a customer exceed the contractually committed messaging volume,
per-message fees are billed for the excess volume. Revenue for messages sent
above contractually committed messaging levels is recognized in the period in
which the messages are sent. We also derive revenue from setup fees when the
services are first activated. The setup fees are initially recorded as deferred
revenue and recognized as revenue ratably over the estimated life of the
customer relationship.
We also derive revenue from professional services. Professional services revenue
consists primarily of fees associated with campaign services, creative and
strategic marketing services, technical services and education services. Revenue
from professional services is recognized as services are rendered for time and
material engagements or using a proportional performance model based on services
performed for fixed fee consulting engagements. Education services revenue is
recognized after the services are performed. Except for the setup fees described
above, professional services sold with on-demand software subscriptions are
accounted for separately as they have value to the customer on a standalone
basis.
At the inception of a customer contract, we make an assessment as to that
customer's ability to pay for the services provided. We base our assessment on a
combination of factors, including a financial review or a credit check and our
collection experience with the customer. If we subsequently determine that
collection from the customer is not reasonably assured, we cease recognizing
revenue until cash is received from the customer. Changes in our estimates and
judgments about whether collection is reasonably assured would change the timing
of the revenue we recognize and/or the amount of bad debt expense that we
record.
Deferred revenue represents amounts billed to customers for which revenue has
not been recognized. Deferred revenue primarily consists of the unearned portion
of professional services fees or the unearned portion of fees from subscriptions
to our on-demand software.
Revenue recognition for arrangements with multiple deliverables.
A multiple-element arrangement includes the sale of a subscription to our
on-demand software with one or more associated professional service offerings,
each of which are individually considered separate units of accounting. In
determining whether professional services represent a separate unit of
accounting we consider the availability of the services from other vendors. We
allocate revenue to each element in a multiple-element arrangement based upon
the relative selling price of each deliverable.
We are not able to demonstrate vendor-specific objective evidence, or VSOE,
because we do not have sufficient instances of standalone subscription sales of
our on-demand software nor are we able to demonstrate sufficient pricing
consistency with respect to such sales. In addition, we do not have third-party
evidence, or
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TPE, of selling price with respect to subscription sales of our on-demand
software because we were unable to identify another vendor that sells similar
subscriptions due to the unique nature and functionality of our service
offering. Therefore, we have determined our best estimate of selling price, or
BESP, of subscriptions to our on-demand software based on the following:
• The list price, which represents a component of our current go-to-market
strategy, as established by senior management taking into consideration
factors such as the competitive and economic environment.
• An analysis of the historical pricing with respect to both our bundled and
standalone arrangements for subscriptions to our on-demand software.
We have established VSOE of selling price for those professional services for
which we are able to demonstrate sufficient pricing consistency. For all other
professional services, we have determinined BESP based on an analysis of
separate sales of such professional services.
Accounting for Income Taxes.
Our income tax expense, deferred tax assets and liabilities, and reserves for
unrecognized tax benefits reflect management's best assessment of estimated
future taxes to be paid. We are subject to income taxes in both the United
States and various foreign jurisdictions. Significant judgments and estimates
are required in determining the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and
financial statement recognition of revenue and expense. In evaluating our
ability to recover our deferred tax assets within the jurisdiction from which
they arise, we consider all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable
income, tax-planning strategies and results of recent operations. In projecting
future taxable income, we begin with historical results adjusted for changes in
accounting policies and incorporate assumptions including the amount of future
state, federal and foreign pretax operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax-planning
strategies. These assumptions require significant judgment about the forecasts
of future taxable income and are consistent with the plans and estimates we are
using to manage the underlying business. In evaluating the objective evidence
that historical results provide, we consider our results of operations.
As of December 31, 2011, we had federal and state net operating loss
carryforwards for financial reporting purposes of approximately $20.2 million
and $22.8 million, respectively. The net operating loss carryforwards will
expire beginning in 2021 and 2014, respectively, if not utilized. Changes in tax
laws and rates could also affect recorded deferred tax assets and liabilities in
the future. Management is not aware of any such changes that would have a
material effect on our results of operations, cash flows, or financial position.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax laws and regulations in a multitude of
jurisdictions across our global operations. ASC 740, Income Taxes, provides that
a tax benefit from an uncertain tax position may be recognized when it is more
likely than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, on the basis of the
technical merits. ASC 740 also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
We recognize tax liabilities in accordance with ASC 740 and we adjust these
liabilities when our judgment changes as a result of the evaluation of new
information not previously available. Because of the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is
materially different from our current estimate of the tax liabilities. These
differences will be reflected as increases or decreases to income tax expense in
the period in which new information is available.
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As of December 31, 2011, we had federal research tax credit carryforwards of
approximately $1.8 million that will expire beginning in 2012. We have recorded
unrecognized tax benefits under ASC 740-10 related to federal research tax
credit carryforwards of $0.8 million. We have also recorded unrecognized tax
benefits under ASC 740-10 related to state research tax credits utilized of $0.7
million, of which $0.6 were utilized. We believe that our unrecognized tax
benefits related to research credits could change within the coming year as
additional information becomes available. The direction and magnitude of any
change is uncertain. We will update the unrecognized tax benefits of research
tax credits as new information becomes available.
We consider the earnings of our non-U.S. subsidiaries to be indefinitely
invested outside the United States on the basis of estimates that future
domestic cash generation will be sufficient to meet future domestic cash needs.
We have recorded $0.8 million of deferred tax liability for certain
acquisition-related basis differences. We have not recorded a deferred tax
liability of approximately $0.2 million related to the U.S. federal and state
income taxes and foreign withholding taxes on approximately $2.5 million of
undistributed earnings of foreign subsidiaries indefinitely invested outside the
United States. Should we decide to repatriate the foreign earnings, we would
have to adjust the income tax provision in the period we determined that the
earnings will no longer be indefinitely invested outside the United States.
Goodwill.
Goodwill represents the excess of the aggregate purchase price paid over the
fair value of the net tangible and identifiable intangible assets acquired. In
accordance with ASC 350-10, Intangibles-Goodwill and Other, goodwill is not
amortized and is tested for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. We have determined that we operate in one reporting unit and have
selected November 30 as the date to perform our annual impairment test. In the
valuation of our goodwill, we must make assumptions regarding estimated future
cash flows to be derived from our reporting unit. If these estimates or their
related assumptions change in the future, we may be required to record
impairment for these assets. We have the option to assess qualitative factors to
determine whether it is more likely than not that the fair value of the
reporting unit is less than its carrying amount. In 2011, we elected to bypass
the qualitative assessment and perform an impairment test that involves a
two-step process. The first step of the impairment test involves comparing the
fair value of our reporting unit to its net book value, including goodwill. If
the net book value exceeds the reporting unit's fair value, then we would
perform the second step of the goodwill impairment test to determine the amount
of the impairment loss. The impairment loss would be calculated by comparing the
implied fair value of our company to its net book value. In calculating the
implied fair value of our goodwill, the fair value of our company would be
allocated to all of the other assets and liabilities based on their fair values.
The excess of the fair value of our company over the amount assigned to its
other assets and liabilities is the implied fair value of goodwill. An
impairment loss would be recognized when the carrying amount of goodwill exceeds
its implied fair value. We were not required to perform the second step of the
goodwill impairment test in 2011. We did not record any charges related to
goodwill impairment during the years ended December 31, 2011, 2010 and 2009.
Long-lived Assets, Purchased Intangible Assets and Equity Method Investments.
Purchased intangible assets with a determinable economic life and long-lived
assets are carried at cost, less accumulated amortization and depreciation.
Amortization and depreciation is computed over the estimated useful life of each
asset on a straight-line basis. Equity method investments are carried at cost
and are adjusted for our share of the equity method investment earnings. We
review our long-lived assets, purchased intangible assets and equity method
investments for impairment in accordance with ASC 360-10, Property, Plant and
Equipment, whenever events or changes in circumstances indicate that the
carrying amount of an asset may no longer be recoverable. When these events
occur, we measure impairment by comparing the carrying value of the assets to
the estimated undiscounted future cash flows expected to result from the use of
the assets and their eventual disposition. If the sum of the expected
undiscounted cash flows is less than the carrying amount of the assets, we would
recognize an impairment loss based on the fair value of our assets.
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Accounting for Stock-based Awards.
We record stock-based compensation expense in accordance with ASC 718-20,
Compensation-Stock Compensation, which requires us to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant date fair value of the award. We recognize stock-based compensation
expense over the requisite service period of the individual grant, generally,
equal to the vesting period. As of December 31, 2011, we had approximately $24.3
million and $3.9 million of unrecognized stock-based compensation expense
related to non-vested stock option awards and restricted stock units,
respectively, that we expect to be recognized over a weighted-average period of
4.45 years and 3.67 years, respectively.
To date, we have generally granted stock options to employees that vest 25% one
year from the vesting commencement date and 1/48th each month thereafter;
however, during 2011 we granted certain stock options to employees that vest 20%
one year from the vesting commencement date and 1/60th each month thereafter.
Stock options have a contractual term of 10 years.
Restricted stock units vest 25% on each anniversary of the grant date.
The Black-Scholes pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable; these characteristics are not present in our option grants.
Existing valuation models, including the Black-Scholes model, may not provide
reliable measures of the fair value of our stock-based compensation.
Consequently, there is a risk that our estimates of the fair value of our
stock-based compensation awards on the grant dates may bear little resemblance
to the actual values realized upon exercise. Stock options may expire or result
in zero intrinsic value as compared to the fair values originally estimated on
the grant date and reported in our financial statements. Alternatively, values
may be realized from these instruments that are significantly higher than the
fair values originally estimated on the grant date and reported in our financial
statements.
We calculated the fair value of options granted using the Black-Scholes pricing
model with the following assumptions:
Year Ended December 31,
2011 2010 2009
Dividend yield (1) - % - % - %
Risk-free rate (2) 1.22-2.61% 2.12-2.52% 2.94-3.48% Expected volatility (3) 50.00-53.00% 50.00-51.02% 48.89-50.94%
Expected term-in years (4) 5.27-6.53 6.06 3.77-6.06
(1) We have not declared or paid dividends to date and do not anticipate
declaring dividends.
(2) The risk-free interest rate is based on the implied yield currently available
on U.S. Treasury zero coupon issues with an equivalent remaining term at the
grant date.
(3) Prior to our initial public offering ("IPO") in April 2011, there was no
market for our common stock. Therefore, we estimated volatility for option
grants by evaluating the average historical volatility of a peer group of
companies for the period immediately preceding the option grant for a term
that is approximately equal to the options' expected life. We have continued
to use this method subsequent to our IPO because of the limited trading
history of our common stock.
(4) The expected term of our options represents the period that the stock-based
awards are expected to be outstanding. We have elected to use the simplified
method described in SAB No. 107 to compute the expected term. Our stock plan
provides for options that have a 10-year term.
We determine the fair value of restricted stock units to be the fair market
value of the shares of common stock underlying the restricted stock units at the
date of grant.
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New Accounting Pronouncements
Accounting Standards Adopted During 2011.
In December 2010, the Financial Accounting Standards Board, or FASB, issued
Accounting Standards Update, or ASU, 2010-29, Business Combinations Topic (805):
Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU
2010-29 provides clarification on the presentation of pro forma information for
business combinations and applies to public entities. ASU 2010-29 specifies that
the pro forma disclosure should include revenue and earnings of the combined
entity as though the business combination(s) during the current year had
occurred as of the beginning of the comparable prior annual reporting period
only if comparative financial statements are presented. ASU 2010-29 also expands
the supplemental pro forma disclosures to include a description of the nature
and amount of the material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments are effective on a prospective basis for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2010. We adopted this update as of January 1, 2011, and its
adoption resulted in additional disclosures related to our business combination
acquisition of Eservices that was completed in January 2011.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment,
to simplify how entities test goodwill for impairment. The guidance in this
update is effective for fiscal years and interim periods beginning after
December 15, 2011. Early application is permitted. We early adopted this
pronouncement in the fourth quarter of 2011 and its adoption did not have a
material effect on our financial position or results of operations.
Recently Issued Accounting Standards.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income,
which will require companies to present the components of net income and other
comprehensive income either in a single continuous statement or in two separate
but consecutive statements. ASU 2011-05 eliminates the option to present
components of other comprehensive income as part of the statement of changes in
stockholders' equity. ASU 2011-05 does not change the items which must be
reported in other comprehensive income, how such items are measured or when they
must be reclassified to net income. Additionally, ASU 2011-05 does not affect
the calculation or reporting of earnings per share. ASU 2011-05 is effective for
reporting periods beginning after December 15, 2011. Early application is
permitted. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income
(Topic 220): Deferral of the Effective Date for Amendments to the Presentation
of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05. ASU 2011-12 defers the changes in ASU
2011-05 that pertain to how, when and where reclassification adjustments are
presented. We will adopt these ASUs in the first quarter of 2012, which will
have no effect on our financial position or results of operations but will
affect the way we present comprehensive income.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which is
intended to result in convergence between U.S. GAAP and International Financial
Reporting Standards requirements for measurement of, and disclosures about, fair
value. ASU 2011-04 clarifies or changes certain fair value measurement
principles and enhances the disclosure requirements particularly for Level 3
fair value measurements. This pronouncement is effective for reporting periods
beginning after December 15, 2011, with early adoption prohibited. The new
guidance will require prospective application. We will adopt this ASU in the
first quarter of 2012, and we do not expect its adoption to have a material
effect on our financial position or results of operations.
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