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XO GROUP INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this report.
Overview
XO Group Inc. is the premier media and technology company devoted to weddings,
pregnancy, and everything in between, providing young women with the trusted
information, products, and advice they need to guide them through the most
transformative events of their lives. Our family of premium brands began with
the number one wedding brand, The Knot, and has grown to include
WeddingChannel.com, The Nest, The Bump, and Ijie.com. XO Group Inc. is
recognized by the industry for innovation in all media - from the web to social
media and mobile, magazines and books, and video - and our groundbreaking social
platforms have ignited passionate communities across the world. XO Group has
leveraged its customer loyalty into successful businesses in online sponsorship
and advertising, registry services, e-commerce, and publishing.
In order to sustain growth within the customer groups we serve, we focus on our
key growth strategy, which is to expand our position as a leading lifestage
media company providing comprehensive information, services and products to
couples from engagement through pregnancy on multiple platforms that remain
relevant to the changing media landscape. To that end, we are focused on the
following objectives:
· Develop products and services to meet the needs of our audience members
during critical lifestages. We continuously build tools and create services
for our newly engaged, newlywed, and pregnant audiences in order to meet
their needs for information and services across multiple media streams. We
have built seven mobile apps in the last two years, including popular apps
such as The Knot Wedding Planner, The Wedding Dress Look Book, and
Pregnancy Buzz by The Bump. Tools such as our newly designed global wedding
planner present our lifestage content in innovative ways. We are one of the
first companies to stream live video on our Facebook page (as we did during
bridal fashion week in 2011), and we continue to look for ways to increase
our connection with our audience in innovative ways.
· Leverage our strong brand and engaged audience for scalable advertising
revenue growth. We have made significant investments in our infrastructure,
especially that which supports our local advertising business. For example,
we have launched a self-service platform that allows local vendors to
automatically select their advertising programs. We have improved our
ability to price display inventory dynamically, and we have launched a wedding vendor review site that enables brides to read reviews written by
other recent brides. We have launched partnerships to increase the reach
for our local vendors, including a microsite built for KleinfeldBridal.com
in November 2011. We partner with our national advertisers to design highly
targeted, integrated campaigns, which reach our engaged audience. Recent
campaigns have featured events organized by The Knot, The Knot Live TV,
sponsorships of our iPad apps, and other lifestage buys across our brands
and platforms.
· Improve transaction growth with innovative solutions for our membership
base. Our relationship with our audience also includes services that we
provide directly, including the recently upgraded e-commerce shops for
wedding and baby gift items, the WeddingChannel registry platform, and other books, products, and services that we may sell from time to time. We
are focused on connecting directly with our audience, presenting
hard-to-find items, tools specific to the lifestages we serve as well as
transactional opportunities.
· Increase awareness of our brands and products. We believe that we have
generally excelled at marketing to our consumers with compelling brands,
engaging content and products and a highly successful consumer public
relations program. We continue to garner attention for our brands via
editorial appearances on national television, presence on newsstands,
content syndication partnerships, and award-winning technology products.
Our editors appear frequently on national and local television and radio
programs, and attend industry trade shows around the country. In 2010, we
increased the publication frequency of The Knot Weddings national magazine
from semi-annually to quarterly. We also increased the publication
frequency of The Bump local market guides from annually to semi-annually.
Our content syndication and content distribution partnerships include MSN,
Sling Media, Sugar Inc., McClatchy Tribune, YouTube, Yahoo! and The
Huffington Post, among others, and we continue to release new products such
as The Knot Weddings magazine for the iPad, which won a 2011 Appy Award.
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· Expand our brands internationally. We are focused on identifying opportunities in large international markets where we can use our brand
recognition and editorial authority on the key lifestages of engagement,
newlywed and first-time pregnancy to drive further growth. In 2009, we
established a software development center in Guangzhou, China for the
purpose of increasing technology development productivity without
materially growing technology costs. The software development center also is serving as a development resource for expanding our business in China.
With a large number of weddings and an affinity for Western styles, we
believe there is a substantial opportunity to serve Chinese couples with information and services about Western-style weddings, through the offices
we opened in Beijing and Shanghai. In November 2010, we launched Ai Jie
(Ijie.com). The website provides Western inspiration and local resources
for weddings, newlyweds and pregnancy in China. There was immaterial
revenue generated by our operations in China during 2011 and the nine
months ended September 30, 2012. During 2011, we launched partnerships with
two of the largest portals in China, SINA and cn.msn.com, for which we
provide wedding and lifestyle content on cobranded "Wedding" channels. In
addition, we have established an exclusive licensing arrangement for a
major Australian media company to represent our brands in Australia.
Our quarterly revenue and operating results have fluctuated significantly in the
past and are expected to continue to fluctuate significantly in the future as a
result of a variety of factors, many of which are outside of our control. These
factors include the level of online usage and traffic on our websites, seasonal
demand for e-commerce, including sales of registry products and wedding-related
merchandise, seasonal frequency of weddings, the addition or loss of
advertisers, the advertising budgeting cycles of specific advertisers, the
regional and national magazines' publishing cycles, the amount and timing of
capital expenditures and other costs relating to the expansion of our
operations, including those related to acquisitions, the introduction of new
sites and services by us or our competitors, changes in our pricing policies or
the pricing policies of our competitors, and general economic conditions, such
as the current recession, as well as economic conditions specific to the
Internet, online and offline media and e-commerce.
The Internet advertising and online markets in which our brands operate are
rapidly evolving and intensely competitive, and we expect competition to
intensify in the future. There are many wedding-related and baby-related sites
on the Internet, which are developed and maintained by online content providers.
New media platforms such as blogs, microblogs, social networks, and publisher
networks are proliferating rapidly, including popular new sites like
WeddingWire, Project Wedding, Wedding Bee, BabyCenter (published by Johnson &
Johnson), Kaboose (published by Disney), and Café Mom. Retail stores,
manufacturers, wedding magazines and regional wedding directories also have
online sites that compete with us for online advertising and merchandise
revenue. We expect competition to increase because of the business opportunities
presented by the growth of the Internet and e-commerce. Competition may also
intensify as a result of industry consolidation and a lack of substantial
barriers to entry in our market. In the wedding market, we also face competition
for our services from bridal magazines. Brides magazine (published by Condé
Nast), Bridal Guide(published by RFP LLC), and Martha Stewart Weddings
(published by Martha Stewart Living Omnimedia) are dominant bridal publications
in terms of revenue and circulation. Leading publications for parents include
Parenting (published by Bonnier), Parents (published by Meredith), and American
Baby (published by Meredith). We believe that the principal competitive factors
in the wedding market are brand recognition, convenience, ease of use,
information, quality of service and products, member affinity and loyalty,
reliability and selection. As to these factors, we believe that we compete
favorably. Our dedicated editorial, sales and product staffs concentrate their
efforts on producing the most comprehensive wedding resources available.
Generally, many of our current and potential competitors have longer operating
histories, significantly greater financial, technical and marketing resources
and high name recognition. Therefore, these competitors have a significant
ability to attract advertisers and users. In addition, many independent or
start-up competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in Internet user requirements, and other
competitors may be able to devote greater resources than we do to the
development, promotion and sale of services. There can be no assurance that our
current or potential competitors will not develop products and services
comparable or superior to those developed by us or adapt more quickly than we do
to new technologies, evolving industry trends or changing Internet user
preferences. Any such developments or advantages of our competitors may have an
impact on our future operations and may cause our past financial results not to
be necessarily indicative of future operating results. Increased competition
could result in price reductions, reduced margins or loss of market share, any
of which would materially and adversely affect our business, results of
operations and financial condition.
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Third Quarter 2012
During the third quarter of 2012, both our net revenue and our net income
increased compared to the same period in 2011. The highlights of the third
quarter of 2012 were:
· Total net revenue increased 2.2% over the corresponding 2011 period to $31.7
million. This increase was driven by higher national and local online
advertising revenue and increased publishing and other revenue. These increases
were partially offset by lower registry and e-commerce revenue.
· National online advertising revenue increased 9.8% over the corresponding 2011
period to $6.5 million, driven by higher advertiser spending.
· Local online advertising revenue increased 12.5% over the corresponding 2011
period to $12.5 million, driven by increased vendor count and increased average
vendor spending.
· Publishing and other revenue increased 18% over the corresponding 2011 period
to $5.0 million. The increase was primarily due to increased advertising
revenue from both our national and regional publications.
· Registry services revenue decreased by 5.2% over the corresponding 2011 period
to $2.1 million, primarily due to decreased commissions from our registry
partners.
· Merchandise revenue decreased 25.4% over the corresponding 2011 period to $5.7
million, primarily due to lower traffic and conversion rates at our e-commerce
sites.
· We had operating income of $3.3 million compared to $1.9 million for the three
months ended September 30, 2012 and 2011, respectively. The year-over-year
increase in our operating income was driven by increased revenue and gross
profit, and was partially offset by increased operating expenses. Operating
expenses increased primarily due to intangible asset impairments and increased
compensation. We had net income for the three months ended September 30, 2012
of $2.1 million, or $0.08 per basic and diluted share compared to $1.3 million,
or $0.05 per basic and $0.04 per diluted share for the three months ended
September 30, 2011.
· At September 30, 2012, our total cash and cash equivalents decreased to $72.7
million from $77.4 million at December 31, 2011. The primary cause of the
decrease was our stock-repurchase activity. During the nine months ended
September 30, 2012, we repurchased 2.1 million shares at an aggregate cost of
$18.9 million. This was partially offset by cash from operations.
· On October 29, 2012, we (in particular, our headquarters located in downtown
Manhattan) were impacted by Hurricane Sandy. The storm caused widespread
flooding and electricity outages throughout New York City and its surrounding
areas. As a result, our headquarters remained closed for four days. Our
websites, however, remained fully operational during this time period, as the
hardware that operates these websites is located in a secure facility in
Austin, Texas. We may file business interruption or other damage claims with
our insurance agency to recover any potential lost revenues, additional costs
or damages associated with the storm. At this time, we cannot estimate the
range of losses or the amount or timing of any insurance proceeds that could
potentially be received. This event did not have an impact on our condensed
consolidated financial statements for the three and nine months ended September
30, 2012.
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Results of Operations
Three Months Ended September 30, 2012 Compared to Three Months Ended September
30, 2011
The following table summarizes results of operations for the three months ended
September 30, 2012 compared to the three months ended September 30, 2011:
Three Months Ended September 30,
2012 2011
% of Net % of Net
Amount Revenue Amount Revenue
(in thousands, except for per share data)
Net revenue $ 31,734 100.0 % $ 31,049 100.0 %
Cost of revenue 5,317 16.8 6,371 20.5
Gross profit 26,417 83.2 24,678 79.5
Operating expenses 23,150 73.0 22,801 73.4
Income from operations 3,267 10.2 1,877 6.1
Loss in equity interest (19 ) (0.0 ) (29 ) (0.1 )Interest and other income, net 82 0.3 423 1.4
Income before income taxes 3,330 10.5 2,271 7.4
Provision for income taxes 1,271 4.0 1,010 3.4
Net income 2,059 6.5 1,261 4.0
Plus: net loss attributable to
non-controlling interest - - 22 0.1
Net income attributable to XO Group Inc. $ 2,059 6.5 % $ 1,283 4.1 %
Net income per share attributable to XO
Group Inc. common shareholders:
Basic $ 0.08 $ 0.05
Diluted $ 0.08 $ 0.04
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Net Revenue
Net revenue of $31.7 million for the three months ended September 30, 2012 was
2.2% higher than the comparable period in the prior year. The following table
sets forth revenue by category for the three months ended September 30, 2012
compared to the three months ended September 30, 2011, the percentage increase
or decrease between those periods, and the percentage of total net revenue that
each category represented for those periods:
Three Months Ended September 30,
Percentage Percentage of
Net Revenue Increase/ Total Net Revenue
2012 2011 (Decrease) 2012 2011
(in thousands)
National online sponsorship and
advertising $ 6,479 $ 5,899 9.8 % 20.4 % 19.0 %
Local online sponsorship and
advertising 12,494 11,104 12.5 39.4 35.8
Total online sponsorship and
advertising 18,973 17,003 11.6 59.8 54.8
Registry services 2,054 2,166 (5.2 ) 6.5 7.0
Merchandise 5,703 7,647 (25.4 ) 18.0 24.6
Publishing and other 5,004 4,233 18.2 15.7 13.6
Total net revenue $ 31,734 $ 31,049 2.2 % 100.0 % 100.0 %
Online sponsorship and advertising - The increase of 11.6% was driven by
increased revenue from both national and local advertising programs. National
online sponsorship and advertising revenue increased 9.8%, driven by new
advertisers and campaigns. Local online sponsorship and advertising revenue
increased 12.5%, driven by an increased number of local vendors advertising with
us on our network of websites. As of September 30, 2012, we had over 22,000
local vendors displaying over 29,600 profiles compared to over 20,500 vendors
displaying over 26,900 profiles as of September 30, 2011.
Registry services - The decrease of 5.2% was driven by decreased registry sales
from registry partners and lower overall commission rates.
Merchandise- The decrease of 25.4% was driven by lower traffic and conversion
rates at our e-commerce sites.
Publishing and other - The increase of 18.2% was driven by increased print
advertising pages sold in The Knot national and regional magazines that
published during the quarter.
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Gross Profit/Gross Margin
Gross margin increased 3.7% to 83.2%, compared to 79.5% in the comparable
period in 2011. The following table presents the components of gross profit and
gross margin for the three months ended September 30, 2012 compared to the three
months ended September 30, 2011:
Three Months Ended September 30,
2012 2011 Increase/(Decrease)
Gross Gross Gross Gross Gross Gross
Profit Margin % Profit Margin % Profit Margin %
(in thousands)
Online sponsorship
and advertising
(national & local) $ 18,533 97.7 % $ 16,477 96.9 % $ 2,056 0.8 %
Registry services 2,054 100.0 2,166 100.0 (112 ) -
Merchandise 2,418 42.4 3,100 40.5 (682 ) 1.9
Publishing and other 3,412 68.2 2,935 69.3 477 (1.1 )
Total gross profit $ 26,417 83.2 % $ 24,678 79.5 % $ 1,739 3.7 %
The increase in gross margin was driven by the increase in online sponsorship
and advertising and merchandise gross margin. The increase in online sponsorship
and advertising gross margin was due to increased advertiser spending.
Merchandise has a lower gross margin compared to our other lines of business.
Therefore, the e-commerce business had lower revenue of $1.9 million and lower
gross profit of $682,000 compared to the comparable period in the prior year,
which positively impacted the overall gross margin of the Company. These
increases in gross margin were partially offset by the decrease in publishing
and other gross margin due to increased direct costs associated with other
revenue. Additionally, overall gross margin was negatively impacted by reduced
registry revenue, which has a 100% gross margin.
Operating Expenses
Operating expenses increased 1.5% to $23.2 million compared to $22.8 million in
2011. This was primarily due to increased stock-based compensation expense. As a
percentage of net revenue, operating expenses were 73.0% and 73.4% during 2012
and 2011, respectively.
The following table presents the components of operating expenses and the
percentage of revenue that each component represented for the three months ended
September 30, 2012 compared to the three months ended September 30, 2011:
Three Months Ended September 30,
Percentage Percentage of
Operating Expenses Increase/ Total Net Revenue
2012 2011 (Decrease) 2012 2011
(in thousands)
Product and content development $ 6,768 $ 5,827 16.2 % 21.3 % 18.8 %
Sales and marketing 9,096 9,468 (3.9 ) 28.7 30.5
General and administrative 5,461 5,898 (7.4 ) 17.3 19.0
Long-lived asset impairment charges 958 716 33.8 3.0 2.3
Depreciation and amortization 867 892 (2.8 ) 2.7 2.8
Total operating expenses $ 23,150 $ 22,801 1.5 % 73.0 % 73.4 %
Product and Content Development - The increase of 16.2% was due to increased
stock-based compensation expense, increased headcount in our U.S. offices and
software development center in Guangzhou, China, and increased computer hardware
and software expenses.
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Sales and Marketing - The decrease of 3.9% was due to lower sales bonus expense
partially offset by increased stock-based compensation expense and increased
costs associated with Ijie.com, including higher consulting costs, promotion
costs, and headcount related costs.
General and Administrative - The decrease of 7.4% was primarily due to a
potential employment tax liability related to temporary and contracted employees
in 2011. We also had higher rent and office expenses in 2011 due to the
commencement of the lease of our new corporate headquarters while leasing and
occupying our old facilities. These expenses did not re-occur in 2012. These
decreases were partially offset by higher stock-based compensation.
Long-lived asset impairment charges - Impairment charges were $958,000 and
$716,000 for the three months ended September 30, 2012 and 2011, respectively.
During the three months ended September 30, 2012, we concluded there were
impairment indicators with respect to the WeddingChannel tradename. The
impairment indicators included recent trending of lower overall e-commerce
sales, as well as lower advertising and registry sales attributable to this
tradename. Based primarily on future cash flow projections for the lines of
business most closely related to this tradename, we concluded that an impairment
charge of $736,000 was necessary in the third quarter of 2012.
In addition, during the three months ended September 30, 2012 and 2011, we
concluded that there were impairment indicators with respect to the tradename of
an e-commerce we acquired in May 2009. Changes in the search engine optimization
environment resulted in significantly lower website traffic. This reduction in
traffic resulted in reduced revenue year over year as well as lower projected
revenue in the future. These factors resulted in impairment charges of $222,000
and $318,000 against the e-commerce company's tradename during the three months
ended September 30, 2012 and 2011, respectively.
During the three months ended September 30, 2011, we concluded there were
impairment indicators with respect to the WedSnap tradename and technology
intangible assets. Facebook introduced changes to its application programming
interface for third party applications that made it impractical to continue
maintaining the WeddingBuzz message boards, which were the primary component of
WeddingBuzz (the WedSnap Facebook application). As a result, we decided to close
the WeddingBuzz service and redirect Facebook users to message boards and other
services on TheKnot.com and WeddingChannel.com. This resulted in the write-off
of the tradename and technology intangible assets associated with WedSnap. The
amount of the impairment charge was $398,000.
Depreciation and Amortization - The decrease of 2.8% was primarily driven by a
lower intangible asset base in 2012 compared to 2011.
Loss in Equity Interest
Loss in equity interest for the three months ended September 30, 2012 and 2011
was $19,000 and $29,000, respectively. On April 20, 2012, we purchased a 5%
equity investment in an entity and during the three months ended September 30,
2012, we recognized a $19,000 equity loss on their operating results. Our equity
loss of $29,000 for the three months ended September 30, 2011 represented our
50% share of the operating loss associated with another entity in which we held
an equity interest. On August 17, 2011, we entered into a capital contribution
agreement concerning this entity. Under the terms of the capital contribution
agreement, we contributed $1.0 million to fund operating expenses for the
entity. Prior to August 17, 2011, we and another investor each held a 50% equity
interest in the entity. Previously, we accounted for our equity interest using
the equity method of accounting. Under the equity method of accounting, we
recorded our investment in the entity as a component of other assets on the
balance sheet and our share of the operating results in the loss in equity
interest line of the statement of operations. Under the capital contribution
agreement, we held 75% of the equity interest in the entity and the other
investor held the remaining 25%. As a result of the change in our equity
interest in the entity, we controlled the entity and consolidated 100% of
financial results of the entity in our financial statements effective during the
second quarter of 2012. We recorded the other investor's share of equity as
non-controlling interest in subsidiary on the balance sheet and recorded its
share of the operating results as net loss attributable to non-controlling
interest on the statement of operations. On April 20, 2012, we contributed an
additional $500,000 of capital to the entity. At the same time, we purchased the
other investor's equity interest in the entity in exchange for an option to
repurchase a portion of our equity interest representing a maximum of 12% of the
entity's equity if exercised on or before October 13, 2013 or a maximum of 6% if
exercised between October 14, 2013 and April 13, 2015. We now own 100% of the
equity interest in the entity.
Interest and Other Income
Interest and other income, net was income of $82,000 for the three months ended
September 30, 2012, compared to income of $423,000 for the three months ended
September 30, 2011. The variance was primarily due to a decrease in foreign
currency exchange gains of $212,000 and a decrease in other income of $129,000,
compared to the prior period.
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Provision for Income Taxes
The effective tax rate for the three months ended September 30, 2012 was
approximately 38.2%, compared to 44.6% for the three months ended September 30,
2011.
Net Loss Attributable to Non-Controlling Interest
Net loss attributable to non-controlling interest was $0 and $22,000 for the
three months ended September 30, 2012 and 2011, respectively. Net loss
attributable to non-controlling interest represented the 25% equity interest in
one of our consolidated subsidiaries held by another investor prior to April 20,
2012, as described in the Loss in Equity Interest section above.
25
Results of Operations
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30,
2011
The following table summarizes results of operations for the nine months ended
September 30, 2012 compared to the nine months ended September 30, 2011:
Nine Months Ended September 30,
2012 2011
% of Net % of Net
Amount Revenue Amount Revenue
(in thousands, except for per share data)
Net revenue $ 96,950 100.0 % $ 93,312 100.0 %
Cost of revenue 16,946 17.5 19,391 20.8
Gross profit 80,004 82.5 73,921 79.2
Operating expenses 70,936 73.2 68,139 73.0
Income from operations 9,068 9.3 5,782 6.2
Loss in equity interest (29 ) (0.0 ) (269 ) (0.3 )Interest and other income, net 73 0.1 516 0.5
Income before income taxes 9,112 9.4 6,029 6.4
Provision for income taxes 3,584 3.7 2,557 2.7
Net income 5,528 5.7 3,472 3.7
Plus: net loss attributable to
non-controlling interest 65 0.1 22 -
Net income attributable to XO Group Inc. $ 5,593 5.8 % $ 3,494 3.7 %
Net income per share attributable to XO
Group Inc. common shareholders:
Basic $ 0.23 $ 0.12
Diluted $ 0.22 $ 0.11
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Net Revenue
Net revenue of $97.0 million for the nine months ended September 30, 2012 was
3.9% higher than the comparable period in the prior year. The following table
sets forth revenue by category for the nine months ended September 30, 2012
compared to the nine months ended September 30, 2011, the percentage increase or
decrease between those periods, and the percentage of total net revenue that
each category represented for those periods:
Nine Months Ended September 30,
Percentage Percentage of
Net Revenue Increase/ Total Net Revenue
2012 2011 (Decrease) 2012 2011
(in thousands)
National online sponsorship and
advertising $ 19,544 $ 19,574 (0.2 )% 20.2 % 21.0 %
Local online sponsorship and
advertising 37,030 31,851 16.3 38.2 34.1
Total online sponsorship and
advertising 56,574 51,425 10.0 58.4 55.1
Registry services 5,056 5,395 (6.3 ) 5.2 5.8
Merchandise 18,228 21,450 (15.0 ) 18.8 23.0
Publishing and other 17,092 15,042 13.6 17.6 16.1
Total net revenue $ 96,950 $ 93,312 3.9 % 100.0 % 100.0 %
Online sponsorship and advertising - The increase of 10.0% was driven by
increased revenue from local advertising programs, which was partially offset by
lower national online sponsorship and advertising revenue. Local online
sponsorship and advertising revenue increased 16.3%, driven by an increased
number of local vendors advertising with us on our network of websites. As of
September 30, 2012, we had over 22,000 local vendors displaying over 29,600
profiles, compared to over 20,500 vendors displaying nearly 26,900 profiles as
of September 30, 2011. National online sponsorship and advertising revenue
decreased 0.2% due to decreased spending from our national advertisers.
Registry services - The decrease of 6.3% was driven by decreased registry sales
from registry partners and lower overall commission rates.
Merchandise- The decrease of 15.0% was driven by lower traffic and conversion
rates at our e-commerce sites.
Publishing and other - The increase of 13.6% was driven by increased print
advertising pages sold in The Knot national and regional magazines as well as
The Bump magazines that published during the first nine months of the year.
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Gross Profit/Gross Margin
Gross margin increased 3.3% to 82.5%, compared to 79.2% in the comparable period
in 2011. The following table presents the components of gross profit and gross
margin for the nine months ended September 30, 2012 compared to the nine months
ended September 30, 2011:
Nine Months Ended September 30,
2012 2011 Increase/(Decrease)
Gross Gross Gross Gross Gross Gross
Profit Margin % Profit Margin % Profit Margin %
(in thousands)
Online sponsorship and
advertising (national
& local) $ 55,242 97.6 % $ 49,774 96.8 % $ 5,468 0.8 %
Registry 5,056 100.0 5,395 100.0 (339 ) -
Merchandise 7,973 43.7 8,633 40.3 (660 ) 3.4
Publishing and other 11,733 68.6 10,119 67.3 1,614 1.3
Total gross profit $ 80,004 82.5 % $ 73,921 79.2 % $ 6,083 3.3 %
The increase in gross margin was driven by the increase in online sponsorship
and advertising, publishing and other, and merchandise gross margin. The
increase in online sponsorship and advertising was due to increased revenue from
local advertising programs. The increase in publishing and other gross margin
was driven by increased advertising pages sold in both the national and regional
The Knot and The Bump magazines. Merchandise has a lower gross margin compared
to our other lines of business. Therefore, the e-commerce business had lower
revenue of $3.2 million and lower gross profit of $660,000 compared to the
comparable period in the prior year, which positively impacted the overall gross
margin of the Company. Additionally, overall gross margin was negatively
impacted by reduced registry revenue, which has a 100% gross margin.
Operating Expenses
Operating expenses increased 4.1% to $70.9 million compared to $68.1 million in
the comparable period in 2011. This was due in part to increased stock-based
compensation expense, increased sales commissions, and salary expense. There
were also increased costs associated with Ijie.com due to increased headcount
and promotion expenses. As a percentage of net revenue, operating expenses were
73.2% and 73.0% during the nine months ended September 30, 2012 and 2011,
respectively.
The following table presents the components of operating expenses and the
percentage of revenue that each component represented for the nine months ended
September 30, 2012 compared to the nine months ended September 30, 2011:
Nine Months Ended September 30,
Percentage Percentage of
Operating Expenses Increase/ Total Net Revenue
2012 2011 (Decrease) 2012 2011
(in thousands)
Product and content development $ 20,234 $ 18,662 8.4 % 20.9 % 20.0 %
Sales and marketing 30,507 29,631 3.0 31.5 31.8
General and administrative 16,497 15,713 5.0 17.0 16.8Long-lived asset impairment charges 958 716 33.8 1.0 0.8
Depreciation and amortization 2,740 3,417 (19.8 ) 2.8 3.6
Total operating expenses $ 70,936 $ 68,139 4.1 % 73.2 % 73.0 %
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Product and Content Development - The increase of 8.4% was due to increased
stock-based compensation expense, increased headcount and rent expense in our
software development center in Guangzhou, China, and increased computer hardware
and software expenses.
Sales and Marketing - The increase of 3.0% was due to increased stock-based
compensation expense and increased costs associated with Ijie.com due to
increased headcount to support our growth initiatives, consulting costs and
promotion costs.
General and Administrative - The increase of 5.0% was primarily due to increased
stock-based compensation expense, higher rent and occupancy costs and increased
bad debt expense. Rent and occupancy office costs increased when we entered into
a new lease effective August 2012 for our new corporate headquarters in New
York. Our bad debt expense increased due to an additional specific reserve for
potential non-payment of an invoice by a customer who recently filed for Chapter
11 bankruptcy protection.
Long-lived asset impairment charges - Impairment charges were $958,000 and
$716,000 for the nine months ended September 30, 2012 and 2011, respectively.
During the nine months ended September 30, 2012, we concluded there were
impairment indicators with respect to the WeddingChannel tradename. The
impairment indicators included recent trending of lower overall e-commerce
sales, as well as lower advertising and registry sales attributable to this
tradename. Based primarily on future cash flow projections for the lines of
business most closely related to this tradename, we concluded that an impairment
charge of $736,000 was necessary in the third quarter of 2012.
In addition, during the nine months ended September 30, 2012 and 2011, we
concluded that there were impairment indicators with respect to the tradename of
an e-commerce company we acquired in May 2009. Changes in the search engine
optimization environment resulted in significantly lower website traffic. This
reduction in traffic resulted in reduced revenue year over year as well as lower
projected revenue in the future. These factors resulted in impairment charges of
$222,000 and $318,000 against the e-commerce company's tradename during the nine
months ended September 30, 2012 and 2011, respectively.
During the nine months ended September 30, 2011, we concluded there were
impairment indicators with respect to the WedSnap tradename and technology
intangible assets. Facebook introduced changes to its application programming
interface for third party applications that made it impractical to continue
maintaining the WeddingBuzz message boards, which were the primary component of
WeddingBuzz (the WedSnap Facebook application). As a result, we decided to close
the WeddingBuzz service and redirect Facebook users to message boards and other
services on TheKnot.com and WeddingChannel.com. This resulted in the write-off
of the tradename and technology intangible assets associated with WedSnap. The
amount of the impairment charge was $398,000.
Depreciation and Amortization - The decrease of 19.8% was driven by a lower
intangible asset base in 2012 compared to 2011.
Loss in Equity Interest
Loss in equity interest for the nine months ended September 30, 2012 and 2011
was $29,000 and $269,000, respectively. On April 20, 2012, we purchased a 5%
equity investment in an entity and during the nine months ended September 30,
2012, we recognized a $10,000 equity loss on their operating results. Our equity
loss of $269,000 for the nine months ended September 30, 2011 represented our
50% share of the operating loss associated with another entity in which we held
an equity interest. On August 17, 2011, we entered into a capital contribution
agreement concerning this entity. Under the terms of the capital contribution
agreement, we contributed $1.0 million to fund operating expenses for the
entity. Prior to August 17, 2011, we and another investor each held a 50% equity
interest in the entity. Previously, we accounted for our equity interest using
the equity method of accounting. Under the equity method of accounting, we
recorded our investment in the entity as a component of other assets on the
balance sheet and our share of the operating results in the loss in equity
interest line of the statement of operations. Under the capital contribution
agreement, we held 75% of the equity interest in the entity and the other
investor held the remaining 25%. As a result of the change in our equity
interest in the entity, we controlled the entity and consolidated 100% of
financial results of the entity in our financial statements. We recorded the
other investor's share of equity as non-controlling interest in subsidiary on
the balance sheet and recorded its share of the operating results as net loss
attributable to non-controlling interest on the statement of operations. On
April 20, 2012, we contributed an additional $500,000 of capital to the entity.
At the same time, we purchased the other investor's equity interest in the
entity in exchange for an option to repurchase a portion of our equity interest
representing a maximum of 12% of the entity's equity if exercised on or before
October 13, 2013 or a maximum of 6% if exercised between October 14, 2013 and
April 13, 2015. We now own 100% of the equity interest in the entity.
Interest and Other Income, net
Interest and other income, net was income of $73,000 for the nine months ended
September 30, 2012 as compared to income of $516,000 for nine months ended
September 30, 2011. The variance was primarily due to a decrease in foreign
currency exchange gains of $310,000 and a decrease in other income of $133,000,
compared to the prior period.
29
Provision for Income Taxes
The effective tax rate for the nine months ended September 30, 2012, was 39.3%
as compared to 42.4% for the nine months ended September 30, 2011.
Net Loss Attributable to Non-Controlling Interest
Net loss attributable to non-controlling interest was $65,000 and $22,000 for
the nine months ended September 30, 2012 and 2011, respectively. Net loss
attributable to non-controlling interest represented the 25% equity interest in
one of our consolidated subsidiaries held by another investor prior to April 20,
2012, as described in the Loss in Equity Interest section above.
30
Liquidity and Capital Resources
Cash Flow
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of 90 days or less at the date of acquisition. At September 30, 2012,
we had $72.7 million in cash and cash equivalents, compared to $84.0 million at
September 30, 2011.
The following table sets forth our cash flows from operating activities,
investing activities and financing activities for the periods indicated:
For the Nine Months
Ended September 30,
2012 2011
(in thousands)
Net cash provided by operating activities $ 18,417 $ 12,212
Net cash used in investing activities (2,536 ) (6,383 )
Net cash used in financing activities (20,550 ) (61,429 )
Decrease in cash and cash equivalents $ (4,669 ) $ (55,600 )
Operating Activities
Net cash provided by operating activities was $18.4 million for the nine months
ended September 30, 2012. This was driven by our net income of $5.5 million
adjusted for non-cash items. Non-cash items included depreciation, amortization,
stock-based compensation, reserve for returns and other non-cash items of $13.7
million. Also driving the increase in cash was a decrease in inventory of $1.4
million due to efforts to reduce high inventory levels from last year by
decreasing stock replenishments, as well as an increase in deferred revenue of
$1.2 million due to advanced billings of our 2012 Winter national The Knot
magazine and 2013 Spring and Summer local The Knot magazines. Deferred
production and marketing costs and other assets decreased due to our normal
amortization of prepaid expenses and publication of our national and local
magazines. We experienced an increase in other liabilities of $885,000
associated with the contractual obligations of our New York and Austin leased
locations. Partially offsetting these increases were decreases to cash
associated with a decrease in accounts payable and accrued expenses of $3.1
million, higher accounts receivable of $824,000, and an increase in other
current assets of $558,000.
Net cash provided by operating activities was $12.2 million for the nine months
ended September 30, 2011. This was driven by our net income of $3.5 million
adjusted for non-cash items. Non-cash items included depreciation, amortization,
stock-based compensation, reserve for returns and other non-cash items of $12.4
million. These increases were offset by a $3.6 million decrease in working
capital. We experienced an increase in trade accounts receivable of $7.0 million
driven by our national and local advertising businesses. We experienced
increased inventory of $1.1 million in anticipation of higher seasonal sales of
merchandise from our e-commerce business in the second and third quarters. We
also experienced decreased accounts payable and accrued expenses of $1.6 million
driven by payments on magazine production-related invoices. These uses of cash
were offset by increased deferred revenue of $2.4 million due to advanced
billings and increased other liabilities of $2.2 million driven by rent and
other costs incurred in connection with our new lease on office space in New
York.
Investing Activities
Net cash used in investing activities was $2.5 million for the nine months ended
September 30, 2012. Capital expenditures of $2.0 million included purchases of
fixed assets and capitalized software hours. The $2.6 million in short-term U.S.
Treasury Bills purchased on May 13, 2011, matured on May 12, 2012. We purchased
another $2.6 million in U.S. Treasury Bills to collateralize the irrevocable
letter of credit we entered into with Union Bank of Switzerland. For further
information, refer to Note 6 of the Condensed Consolidated Financial Statements
included herein. We also made an equity investment in the amount of $500,000 and
purchased URLs in the amount of $27,000.
Net cash used in investing activities was $6.4 million for the nine months ended
September 30, 2011. Capitalized expenditures of $3.4 million consisted of
purchases of fixed assets, including $1.6 million on construction for our new
corporate headquarters in New York. We also purchased $2.6 million in short-term
U.S. Treasury Bills to collateralize the irrevocable letter of credit we entered
into with Union Bank of Switzerland, as required under the terms of an agreement
entered into on May 13, 2011 with 195 Broadway LLC in respect of our lease of
office space in New York. For further information, refer to Note 6 of the
Condensed Consolidated Financial Statements included herein.
31
Financing Activities
Net cash used in financing activities was $20.6 million for the nine months
ended September 30, 2012. On December 19, 2011, the Board of Directors
authorized a stock repurchase program of $20.0 million of our common stock.
Under this program, we repurchased 2.1 million shares of our stock in the open
market at an average price of $8.96 per share, for a total price of $18.9
million, during the six months ended June 30, 2012. All shares were retired upon
repurchase. On June 12, 2012 we completed the program. We also had repurchases
of common stock in connection with the surrender of these shares by employees to
satisfy tax withholding obligations related to the vesting of restricted stock
awards of $1.9 million. These uses of cash were partially offset by the proceeds
from the issuance of common stock under our restricted stock and employee stock
purchase plan of $295,000.
Net cash used in financing activities was $61.4 million for the nine months
ended September 30, 2011. This was driven by repurchases of our common stock
under our Board-approved stock repurchase programs. On February 25, 2011, we
entered into a stock purchase agreement with Macy's, pursuant to which we agreed
to repurchase 3.7 million shares of our common stock held by Macy's. The
aggregate purchase price of the transaction was $37.7 million, based on the
closing price of $10.26 per share for our common stock on the date of the
agreement. The shares repurchased represent 10.7% of our outstanding common
stock. We also repurchased 2.4 million shares of our stock on the open market at
an average price of $9.22 per share, for a total price of $22.5 million. The
shares repurchased on the open market represent 7.1% of our outstanding common
stock. All shares were retired upon repurchase. We also had repurchases of
common stock in connection with the surrender of these shares by employees to
satisfy tax withholding obligations related to the vesting of restricted stock
awards of $1.5 million. We also made a loan to an equity method investee of
$125,000. These uses of cash were offset by the proceeds from the issuance of
common stock in connection with the exercise of stock options and warrants and
the employee stock purchase plan of $346,000.
32
Off-Balance Sheet Arrangements
As of September 30, 2012, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Seasonality
We believe that the impact of the frequency of weddings varying from quarter to
quarter results in lower registry services and merchandise revenues in thefirst
and fourth quarters.
Critical Accounting Policies
Our discussion of results of operations and financial condition relies on our
consolidated financial statements, which are prepared based on certain critical
accounting policies that require management to make judgments and estimates that
are subject to varying degrees of uncertainty. We believe that investors need to
be aware of these policies and how they impact our financial statements as a
whole, as well as our related discussion and analysis presented herein. While we
believe that these accounting policies are based on sound measurement criteria,
actual future events can result in outcomes that may be materially different
from these estimates or forecasts.
The accounting policies and related risks described in our Annual Report on Form
10-K for the year ended December 31, 2011 are those that depend most heavily on
these judgments and estimates. As of September 30, 2012, there have been no
material changes to any of the critical accounting policies contained therein
except for the assets held for sale described in Note 1 of the Condensed
Consolidated Financial Statements included herein.
Recently Adopted Accounting Pronouncements
In May 2011, the accounting standard relating to fair value measurements was
amended to develop common requirements and comparability for fair value
measurements between U.S. GAAP and the International Financial Reporting
Standards. Additional disclosures required by this updated standard include
additional information about transfers in and out of Levels 1 and 2, additional
information surrounding the sensitivity of Level 3 items, and the categorization
by level of the fair value hierarchy for items not measured at fair value. This
updated standard is effective for all interim and annual periods beginning after
December 15, 2011. The adoption of this updated standard did not result in a
material impact on our condensed consolidated financial statements.
In June 2011, the accounting standard relating to the presentation of
comprehensive income was amended to eliminate the option to present other
comprehensive income and its components in the statement of stockholders'
equity. We can elect to present the items of net income and other comprehensive
income in a continuous statement of comprehensive income or in two separate, but
consecutive, single statements. Under either method, the statement would need to
be presented with equal prominence as the other primary financial statements.
The amended guidance, which must be applied retroactively, is effective for the
interim and annual periods in 2012. We adopted this guidance effective January
1, 2012 and have included the presentation of comprehensive income in a separate
statement that immediately follows the Condensed Consolidated Statements of
Operations in this Quarterly Report on Form 10-Q.
In September 2011, the accounting standard relating to intangibles and goodwill
was updated to address the cost and complexity of performing the two-step
goodwill impairment test required under Topic 350. The amendments to this
standard allow an entity to perform a qualitative approach to test goodwill in
order to determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. This updated standard is effective for
annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. The adoption of this update did not result
in a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In July 2012, the accounting standard relating to indefinite-lived intangible
assets was updated to reduce the cost and complexity of performing an impairment
test on such assets required under Topic 350. The amendment to the standard
allows an entity to first assess the qualitative factors to determine if the
indefinite-lived intangible asset is impaired as a basis to determine whether or
not to perform the quantitative impairment test. This updated standard is
effective for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012. This is not expected to have a material
impact on our financial statements.
33
In October 2012, the accounting standard relating to entertainment films was
updated to require that if there is evidence of a potential write-down of
unamortized film costs, which occurs after the date of the balance sheet, but
before the financial statements are issued, there is a potential write-off as of
the balance sheet date. This updated standard is effective for impairment
assessments performed on or after December 15, 2012. This is not expected to
have a material impact on our financial statements.
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