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VALUECLICK INC/CA - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY STATEMENT This report contains forward-looking statements based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" in this Form 10-Q and similar discussions in our Annual Report on Form 10-K for the year ended December 31, 2012, and in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition. OVERVIEW ValueClick, Inc. and its subsidiaries (collectively "ValueClick" or the "Company" or in the first person, "we", "us" and "our") is one of the world's largest and most comprehensive digital marketing services companies. We offer a suite of products and services that enable marketers to engage with their current and potential customers online and through mobile devices to increase brand awareness and generate leads and sales. We also offer technology infrastructure tools and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. The broad range of products and services that we provide enables our customers to address all aspects of the digital marketing process, including strategic planning, ad creation and optimization, media sourcing, and sophisticated reporting and analytics. Our customers are primarily direct marketers, brand advertisers and the advertising agencies that service these groups. The proposition we offer our customers includes: one of the industry's broadest online marketing services portfolios-including performance-based campaigns and programs where marketers only pay for advertising when it generates a customer lead or product sale; our ability to target campaigns to reach the online consumers our customers are most interested in; and the scale at which we can deliver results for online advertising campaigns. We generate the audiences for our advertisers' campaigns through a unique combination of: proprietary networks of third-party websites, ad exchanges, ad network optimization providers, spot buys with large publishers, search engines, and websites that we own and operate in several key verticals. Our sophisticated data management platform harnesses the large amount of anonymous data that is generated by our businesses, and we utilize this data, along with our technology platforms and marketing expertise, to deliver measurable performance for our customers. Our publisher partners enjoy efficient and effective monetization of their online advertising inventory through representation by our direct sales teams in major U.S. and European media markets, participation in large-scale advertiser and advertising agency campaigns they may not have access to on their own, enhanced monetization through our proprietary campaign optimization and targeting technology, and settlement services to facilitate payments to publishers for the online inventory utilized by the advertisers. As we do not primarily compete directly with our publisher partners for online consumers, we act as a trusted partner in helping online publishers monetize their online audience and advertising inventory. In previous reporting periods, we reported four business segments: Affiliate Marketing, Media, Owned & Operated Websites, and Technology. However, with the continued evolution of our products and services (including elements of shared computing infrastructure and overlapping services) and recent changes to our internal reporting structure, we reassessed our operating and reportable segments in the second quarter of 2012. We determined that our Mediaplex business, which previously comprised the Technology segment, no longer met the definition of an operating segment. As such, our Mediaplex business is now included in the Media operating segment. With this change, we now derive our revenue from three business segments: 17 -------------------------------------------------------------------------------- Table of Contents Affiliate Marketing, Media and Owned & Operated Websites, which are described in more detail below. All prior period segment information contained herein has been recast to conform to this presentation. AFFILIATE MARKETING ValueClick's Affiliate Marketing segment, which operates under the "Commission Junction" brand name, provides the technology, network and customer service that, in combination, enable advertisers to create their own fully-commissioned online sales force comprised of third-party website publishers, also known as affiliates. Advertisers that utilize the Commission Junction platform generally are only obligated to pay affiliates when the affiliate delivers a consumer who achieves the desired result, which is typically a closed e-commerce transaction or a new customer lead. By joining the Commission Junction network, advertisers gain access to: a) our proprietary technology platform that has been developed over the past decade and is completely focused on the unique needs of the affiliate marketing channel; b) a proprietary network of tens of thousands of high-quality website publishers; and c) our digital marketing expertise and campaign management teams who ensure advertisers' campaigns are optimized for maximum performance. Commission Junction's revenues are driven primarily by variable compensation that is generally based on either a percentage of commissions paid by our customers to affiliates or on a percentage of transaction revenue generated by our customers from the programs managed with our affiliate marketing platforms. MEDIA ValueClick's Media segment, which began as a leading display ad network operating primarily under the "ValueClick Media" brand name, provides a comprehensive suite of digital marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors and generate leads and sales through the Internet and mobile applications. In August 2011, we acquired Dotomi, Inc. ("Dotomi"), a leading provider of data-driven, intelligent display media for major retailers, and in April 2011, we acquired Greystripe, Inc. ("Greystripe"), the largest brand-focused mobile advertising network. Also, as discussed above, beginning in the second quarter of 2012, the Media segment also includes our Mediaplex business, which was previously reported as a separate business segment. Mediaplex offers technology products and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. Through these various media-focused products, our Media segment is able to access its customers' target audiences through the unique combination of: its ability to acquire inventory by bidding on a real-time basis through ad exchanges and other channels; its proprietary broad-based network of thousands of high-quality online publishers; relationships with leading mobile application developers; vertically-focused networks in the areas of pharma/healthcare (AdRx Media), home and garden (Modern Living Media) and motherhood (Mom's Media); and its ability to access inventory from ValueClick's owned and operated websites, as described below. Our Media segment applies its proprietary data and targeting and optimization technologies to these inventory sources to ensure that the metrics that are most important to our customers are achieved. Our services in the Media segment are sold on a variety of pricing models, including cost-per-thousand-impression ("CPM"), cost-per-action ("CPA"), and cost-per-click ("CPC"). OWNED & OPERATED WEBSITES ValueClick's Owned & Operated Websites segment services are offered through a number of branded websites, including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com, and a limited number of content websites in key online verticals such as healthcare, finance, travel, home and garden, education, and business services. The Pricerunner comparison shopping destination websites operate in the United Kingdom, Sweden, Germany, France, Denmark, and Austria. The Smarter.com and Couponmountain.com websites operate primarily in the United States and, to a lesser extent, Japan, Korea and China. The Pricerunner and Smarter.com websites enable consumers to research and compare products from among thousands of online and/or offline merchants using their proprietary technologies. We gather product and merchant data and organize it into comprehensive catalogs on its destination websites, along with relevant consumer and professional reviews. The Couponmountain.com website allows consumers to locate coupons and deals related to products and services that may be of interest to them. Our Investopedia.com website, which we acquired in August 2010, provides information on a broad range of financial and investment topics, including a proprietary dictionary of financial terms, and our other vertical content websites offer consumers information and reference material across a variety of topics. Our services in these areas are free for consumers, and revenue is generated in one of three ways: on a CPC basis for traffic delivered to the customers' websites from listings on our websites; on a CPA basis when a consumer completes a purchase or other specific event; and on a CPM basis for display advertising shown on our websites. 18 -------------------------------------------------------------------------------- Table of Contents On September 30, 2012, we sold our self-service paid search offering business, Search123, which was previously included in the Owned & Operated Websites segment. We have reported the results of operations of Search123 as discontinued operations for all periods presented. See Note 4 to our condensed consolidated financial statements contained in this quarterly report on Form 10-Q for additional information on this divestiture. SEGMENT OPERATING RESULTS The following table provides revenue, cost of revenue, gross profit, operating expenses, and income from operations information for each of our three business segments. Segment income from operations, as shown below, is the performance measure used by management to assess segment performance and excludes the effects of: stock-based compensation, amortization of intangible assets and corporate expenses. Corporate expenses consist of those costs not directly attributable to a business segment, and include: salaries and benefits for our executive, finance, legal, corporate governance, human resources, and facilities organizations; fees for professional service providers including audit, tax, Sarbanes-Oxley compliance, acquisition related costs, and certain legal matters; insurance; and, other corporate expenses. A reconciliation of segment income from operations to consolidated income from operations and a reconciliation of segment revenue to consolidated revenue are also provided in the following table. Three-month Period Ended March 31, 2013 2012 (in thousands) Affiliate Marketing Revenue $ 38,311 $ 37,107 Cost of revenue 4,562 4,176 Gross profit 33,749 32,931 Operating expenses 10,824 9,993 Segment income from operations $ 22,925 $ 22,938 Media Revenue $ 96,256 $ 80,749 Cost of revenue 35,839 30,603 Gross profit 60,417 50,146 Operating expenses 29,094 27,742 Segment income from operations $ 31,323 $ 22,404 Owned & Operated Websites Revenue $ 30,955 $ 28,675 Cost of revenue 19,516 17,457 Gross profit 11,439 11,218 Operating expenses 5,819 5,885 Segment income from operations $ 5,620 $ 5,333 Reconciliation of segment income from operations to consolidated income from operations: Total segment income from operations $ 59,868 $ 50,675 Corporate expenses (6,872 ) (6,928 ) Stock-based compensation (4,797 ) (6,086 ) Amortization of acquired developed technology and websites included in consolidated cost of revenue (2,494 ) (2,493 ) Amortization of intangible assets included in consolidated operating expenses (3,923 ) (6,324 ) Consolidated income from operations $ 41,782 $ 28,844 Reconciliation of segment revenue to consolidated revenue: Affiliate Marketing $ 38,311 $ 37,107 Media 96,256 80,749 Owned & Operated Websites 30,955 28,675 Inter-segment eliminations (84 ) (99 ) Consolidated revenue $ 165,438 $ 146,432 19-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS-THREE-MONTH PERIOD ENDED MARCH 31, 2013 COMPARED TO MARCH 31, 2012 Revenue. Consolidated revenue for the three-month period ended March 31, 2013 was $165.4 million compared to $146.4 million for the same period in 2012, representing a 13.0% increase. Affiliate Marketing segment revenue increased 3.2% to $38.3 million for the three-month period ended March 31, 2013 compared to $37.1 million in the same period in 2012. This revenue increase was lower than what we have experienced in recent quarters due to a year-over-year decrease in revenue generated in the current year period from the tax software vertical. Media segment revenue increased to $96.3 million for the three-month period ended March 31, 2013 compared to $80.7 million for the same period in 2012, an increase of 19.2%. This increase was attributable to growth across all of our domestic media businesses, offset partially by a decrease in our European media businesses. Owned & Operated Websites segment revenue increased to $31.0 million for the three-month period ended March 31, 2013 compared to $28.7 million in the same period in 2012, an increase of 8.0%. This increase was driven by growth across most of our content properties. Owned & Operated Websites segment revenue is concentrated with one major customer, Google. A loss of revenue from this customer could have a significant negative impact on the revenue of this segment and the Company. Cost of Revenue and Gross Profit. Cost of revenue includes payments to website publishers, payments to search engines and other partners for driving consumer traffic to our owned and operated websites, certain labor costs that are directly related to revenue-producing activities, Internet access costs, amortization of developed technology and websites acquired in business combinations, and depreciation on revenue-producing technologies. Our consolidated cost of revenue was $62.4 million for the three-month period ended March 31, 2013 compared to $54.7 million for the same period in 2012, an increase of 14.0%. Our consolidated gross margin remained relatively consistent at 62.3% and 62.7% for the three-month periods ended March 31, 2013 and 2012, respectively. Cost of revenue for the Affiliate Marketing segment increased to $4.6 million for the three-month period ended March 31, 2013 compared to $4.2 million for the same period in 2012. Our Affiliate Marketing gross margin remained relatively consistent at 88.1% for the three-month period ended March 31, 2013 compared to 88.7% for the same period in 2012. Cost of revenue for the Media segment increased $5.2 million, or 17.1%, to $35.8 million for the three-month period ended March 31, 2013 compared to $30.6 million for the same period in 2012. Our Media segment gross margin remained relatively consistent at 62.8% for the three-month period ended March 31, 2013 compared to 62.1% for the same period in 2012. Cost of revenue for the Owned & Operated Websites segment increased $2.1 million to $19.5 million for the three-month period ended March 31, 2013 compared to $17.5 million for the same period in 2012. Our Owned & Operated Websites segment gross margin decreased to 37.0% for the three-month period ended March 31, 2013 from 39.1% for the same period in 2012. The decrease in gross margin is a result of lower aver age CPC rates from the revenue generated from our Google sponsored listings. Operating Expenses: Sales and Marketing. Sales and marketing expenses consist primarily of compensation and employee benefits of sales and marketing and related support teams, certain advertising costs, travel, trade shows, and marketing materials. Total sales and marketing expenses for the three-month period ended March 31, 2013 were $22.5 million compared to $20.9 million for the same period in 2012, an increase of 7.3%. The increase was primarily due to increases in salaries and wages as a result of increased headcount in our sales and marketing organizations. Our sales and marketing expenses as a percentage of revenue remained relatively consistent at 13.6% for the three-month period ended March 31, 2013 compared to 14.3% for the same period in 2012. 20 -------------------------------------------------------------------------------- Table of Contents General and Administrative. General and administrative expenses consist primarily of facilities costs, executive and administrative compensation and employee benefits, depreciation, professional services fees, insurance costs, bad debt expense, and other general overhead costs. General and administrative expenses decreased to $18.2 million for the three-month period ended March 31, 2013 compared to $19.6 million for the same period in 2012, a decrease of $1.4 million. The decrease was primarily due to lower stock-based compensation as described below. As a percentage of revenue, general and administrative expenses decreased to 11.0% for the three-month period ended March 31, 2013 compared to 13.4% for the year-ago period. Technology. Technology expenses include costs associated with the maintenance and ongoing development of our technology platforms, including compensation and employee benefits for our engineering and network operations departments, as well as costs for contracted services and supplies. Technology expenses for the three-month period ended March 31, 2013 were $16.7 million, or 10.1% of revenue, compared to $16.1 million, or 11.0% of revenue, for the same period in 2012, an increase of 3.9%. Segment Income from Operations. Affiliate Marketing segment income from operations for the three-month periods ended March 31, 2013 and 2012 was consistent at $22.9 million, and represented 59.8% and 61.8% of Affiliate Marketing segment revenue for the three-month periods ended March 31, 2013 and 2012, respectively. The decrease in this segment's operating income margin from the year ago period is primarily due to higher operating expense (primarily higher bad debt expense) in the current year period. Media segment income from operations for the three-month period ended March 31, 2013 increased 39.8% to $31.3 million, from $22.4 million in the same period of the prior year, and represented 32.5% and 27.7% of Media segment revenue in these respective periods. Media segment operating income margin increased from the prior year as Media segment operating expenses grew at a slower rate (5%) than its revenue growth (19%, as described above). Owned & Operated Websites segment income from operations for the three-month period ended March 31, 2013 increased to $5.6 million from $5.3 million in the same period of the prior year. The operating margin for this segment remained relatively consistent at 18.2% in the current period compared to 18.6% in the year ago period. Stock-Based Compensation. Stock-based compensation for the three-month period ended March 31, 2013 decreased to $4.8 million compared to $6.1 million for the same period in 2012. The decrease in stock-based compensation is primarily due to assumed equity awards from the Dotomi acquisition in August 2011 that became fully vested in the third quarter of 2012. We currently anticipate stock-based compensation in the range of $21 million to $23 million for the year ending December 31, 2013. Such amounts may change as a result of higher or lower than anticipated equity award grants to new and existing employees, differences between actual and estimated forfeitures of stock awards, fluctuations in the market value of our common stock, modifications to our existing stock award programs, additions of new stock-based compensation programs, or other factors. Amortization of Intangible Assets. Amortization of developed technologies and websites acquired in business combinations, included in Cost of revenue, for the three-month periods ended March 31, 2013 and 2012, was $2.5 million. Amortization of all remaining intangible assets, included in Amortization of intangible assets acquired in business combinations, decreased to $3.9 million for the three-month period ended March 31, 2013 compared to $6.3 million for the same period in 2012. The decrease in amortization of intangible assets is primarily due to certain intangible assets being fully amortized by late 2012. We currently anticipate total amortization expense of approximately $25 million for the year ending December 31, 2013. Interest and Other Income, Net. Interest and other income, net decreased to an expense of $0.6 million for the three-month period ended March 31, 2013 compared to income of $0.2 million for the same period in 2012, a decrease of $0.8 million. The decrease was primarily due to foreign currency exchange losses recognized in the current period. Income Tax Expense. For the three-month period ended March 31, 2013, we recorded income tax expense of $14.9 million compared to $8.9 million for the same period in 2012. The increase in the effective income tax rate for the three-month period ended March 31, 2013 to 36.2% from 30.5% in the same period of the prior year was primarily due to the first quarter 2012 recognition of certain state tax law changes and tax benefits recorded related to the reversal of contingency reserves associated with the expiration of certain statutes of limitations. We currently anticipate an effective income tax rate for the year ending December 31, 2013 of approximately 40% . 21 -------------------------------------------------------------------------------- Table of Contents Adjusted-EBITDA as a Non-GAAP Financial Performance Measure In evaluating our business, we consider earnings from continuing operations before interest, income taxes, depreciation, amortization, and stock-based compensation ("Adjusted-EBITDA"), a non-GAAP financial measure, as a key indicator of financial operating performance and as a measure of the ability to generate cash for operational activities and future capital expenditures. We use Adjusted EBITDA in evaluating the overall performance of our business operations. We believe that this measure may also be useful to investors because it eliminates the effects of period-to-period changes in income from interest on our cash and cash equivalents, note receivable, and borrowings, and the costs associated with income tax expense, capital investments, acquisitions, and stock based compensation expense which are not directly attributable to the underlying performance of our continuing business operations. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under U.S. Generally Accepted Accounting Principles ("GAAP"), or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is a non-GAAP measure, it may not necessarily be comparable to similarly titled measures employed by other companies. The following is a reconciliation of net income from continuing operations to Adjusted EBITDA for the three-month periods ended March 31, 2013 and 2012 (in thousands): Three-month Period Ended March 31, 2013 2012 Net income from continuing operations $ 26,283 $ 20,198 Interest and other expense (income), net 595 (229 ) Income tax expense 14,904 8,875 Amortization of acquired developed technology and websites included in cost of revenue 2,494 2,493 Amortization of acquired intangible assets included in operating expenses 3,923 6,324 Depreciation and leasehold amortization 3,292 2,614 Stock-based compensation 4,797 6,086 Adjusted-EBITDA $ 56,288 $ 46,361 Adjusted-EBITDA for the three-month period ended March 31, 2013 increased to $56.3 million from $46.4 million for the same period in 2012, representing an increase of $9.9 million, or 21.4%. The increase is primarily due to increased operating income in our Media segment as described above. Liquidity and Capital Resources We have financed our operations, our stock repurchases and our cash acquisitions primarily through working capital generated from operations and borrowings under our credit facility. At March 31, 2013, our cash and cash equivalents balances totaled $129.1 million, of which $81.9 million was denominated in foreign currencies and held by our foreign subsidiaries. A majority of the cash held abroad could be repatriated to the U.S. but, under current law, may be subject to U.S. federal income taxes (subject to an adjustment for foreign tax credits). Net cash provided by operating activities decreased to $49.5 million for the three months ended March 31, 2013 compared to $50.2 million in the same period of 2012. The decrease in cash provided by operations was due primarily to the impact of net working capital changes on cash, principally due to slower collections on our accounts receivable in the current year as compared to the same period in the prior year. Net cash used in investing activities totaled $0.4 million for the three-month period ended March 31, 2013 was due primarily to the use of $1.4 million for property and equipment purchases offset by proceeds from principal payments received on our note receivable of $1.0 million. Net cash used in investing activities of $3.0 million in the three-month period ended March 31, 2012 was due to the use of $3.9 million for equipment purchases, offset partially by payments received on our note receivable of $1.1 million. 22 -------------------------------------------------------------------------------- Table of Contents Net cash used in financing activities of $54.3 million for the three months ended March 31, 2013 was primarily due to repayments under our credit facility of $62.5 million, offset partially by $5.8 million in proceeds received from shares issued under our employee stock programs and $2.4 million in excess tax benefits from exercises of stock-based awards during the quarter. Net cash used in financing activities of $58.5 million for the three months ended March 31, 2012 was primarily due to repayments under our credit facility of $62.5 million offset partially by proceeds received from shares issued under our employee stock programs of $3.3 million. Credit Facility On August 19, 2011, we entered into an Amended and Restated Credit Agreement (the "Credit Facility"), which replaced our previous line of credit. The Credit Facility originally consisted of a revolving loan commitment of $150.0 million and a term loan of $50.0 million, with an option to increase the total revolving loan commitment to $200.0 million subject to certain conditions. On June 29, 2012, we entered into a Commitment Increase Agreement to increase the total revolving loan commitment under the Credit Facility to $200.0 million. The term loan is payable in quarterly installments of $2.5 million per quarter. The Credit Facility expires on August 19, 2016. Availability under the Credit Facility is subject to our meeting certain financial and non-financial covenants, as more fully described in Note 14 to our Condensed Consolidated Financial Statements included herein. The revolving loan commitment provides us with additional financial flexibility for pursuing acquisitions, repurchasing our common stock and general corporate purposes. At March 31, 2013, there was $45.0 million outstanding under the revolving loan commitment, and $35.0 million was outstanding under the term loan. Stock Repurchase Program In September 2001, our board of directors authorized a stock repurchase program (the "Program") to allow for the repurchase of shares of our common stock at prevailing market prices in the open market or through unsolicited negotiated transactions. Since the inception of the Program and through March 31, 2013, our board of directors authorized a total of $792.5 million for repurchases under the Program and we repurchased a total of 70.9 million shares of our common stock for approximately $703.2 million. As of March 31, 2013, up to an additional $89.3 million of our capital may be used to repurchase shares of our outstanding common stock under the Program. Repurchases have been funded from available working capital and borrowings under our credit facility, and all shares have been retired subsequent to their repurchase. There is no guarantee as to the exact number of shares that will be repurchased by us, and we may discontinue repurchases at any time that management or our board of directors determines additional repurchases are not warranted. The amounts authorized by our board of directors exclude broker commissions. Commitments and Contingencies There were no significant changes to our commitments and contingencies during the three-month period ended March 31, 2013. In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. We have also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and certain of our officers, employees and former officers, directors and employees of acquired companies, in certain circumstances. It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Capital Resources We believe that the combination of our existing cash and cash equivalents, the revolving portion of our Credit Facility and our expected future cash flows from operations will provide us with sufficient liquidity to fund our operations and capital requirements for at least the next twelve months. 23 -------------------------------------------------------------------------------- Table of Contents However, it is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to consummate acquisitions of other businesses, products or technologies. We could raise such funds by selling more stock to the public or to selected investors, or by borrowing under the current or any replacement line of credit, or through other debt instruments. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities for other reasons. We cannot assure you that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders may be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock. Although we believe we have sufficient capital to fund our activities for at least the next twelve months, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including: • the macroeconomic environment; • the market acceptance of our products and services; • the levels of promotion and advertising that will be required to launch our new products and services and achieve and maintain a competitive position in the marketplace; • our business, product, capital expenditures and technology plans, and product and technology roadmaps; • capital improvements to new and existing facilities; • technological advances; • our competitors' responses to our products and services; • our pursuit of strategic transactions, including mergers and acquisitions; • the extent of dislocations in the credit markets in the United States; • the timing and outcome of examinations by tax authorities; • our stock repurchase program; and • our relationships with our advertiser customers and publisher partners. Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including, but not limited to, those related to revenue recognition, allowance for doubtful accounts and sales credits, stock-based compensation, income taxes, goodwill and other intangible assets, debt, derivatives, and contingencies and litigation. We base our estimates and assumptions on historical experience and on various other estimates and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Recently Issued Accounting Standards In February 2013, the Financial Accounting Standards Board ("FASB") issued a final rule related to the reporting of amounts reclassified out of accumulated other comprehensive income that requires entities to report, either on the face of their financial statements or in a footnote to their financial statements, the effects on earnings from items that are reclassified out of other comprehensive income. The new accounting rules were effective for us on January 1, 2013. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows. 24 -------------------------------------------------------------------------------- Table of Contents In January 2013, the FASB issued new accounting guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We do not anticipate that the adoption of this guidance will have a significant impact on our financial position, results of operations or cash flows. |